Chapter 6 Assessing, Managing, and Securing Your Credit Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb, Thompson Rivers University 6-1

Chapter Objectives Provide a background on credit Describe the role of credit bureaus Explain the key characteristics of credit cards Explain how to manage debt Provide a background on identity theft Describe identity theft tactics, explain how to avoid it, and how to deal with it. Copyright © 2012 Pearson Canada Inc. 1-2

Background on Credit What is Credit? funds provided by a creditor to a borrower that the borrower will repay with interest or fees in the future Copyright © 2012 Pearson Canada Inc. 6-3

Background on Credit Types of Credit Instalment Loan: a loan provided for specific purchases, with interest charged on the amount borrowed Copyright © 2012 Pearson Canada Inc. 6-4

Background on Credit (cont’d) Revolving Open-End Credit: credit provided up to a specified maximum amount based on income, debt level, and credit history; interest is charged each month on the outstanding balance Copyright © 2012 Pearson Canada Inc. 6-5

Background on Credit (cont’d) What are the advantages of using Credit? What are the disadvantages of using Credit? Copyright © 2012 Pearson Canada Inc. 6-6

Background on Credit (cont’d) Credit History Represents your history with credit instruments such as credit cards, retail credit cards, lines of credit, and personal loans and leases A favourable credit history is established by paying bills in a timely manner Copyright © 2012 Pearson Canada Inc. 6-7

Background on Credit (cont’d) What is Credit Insurance? Why might you want it? Copyright © 2012 Pearson Canada Inc.6-8

Credit Bureaus Credit Bureaus: reports provided by credit bureaus that document a person’s credit payment history Copyright © 2012 Pearson Canada Inc. 6-9

Credit Bureaus (cont’d) What information is on a credit report? Copyright © 2012 Pearson Canada Inc. 6-10

Credit Bureaus (cont’d) What is a credit score? A rating that indicates a person’s creditworthiness Creditors rely on this score to help determine whether or not to extend a loan Can affect the interest rate quoted on the loan you request What factors affect your credit score? Copyright © 2012 Pearson Canada Inc. 6-11

Credit Bureaus (cont’d) Copyright © 2012 Pearson Canada Inc. 6-12

Credit Bureaus (cont’d) Copyright © 2012 Pearson Canada Inc. 6-13

Credit Bureaus (cont’d) Interpreting Credit Scores Range from 300 to 900, with 600 or higher being considered a good score Each financial institution sets its own criteria to determine whether to extend credit Acceptable credit score may vary with the type of credit Copyright © 2012 Pearson Canada Inc. 6-14

Credit Bureaus (cont’d) Copyright © 2012 Pearson Canada Inc. 6-15

Credit Bureaus (cont’d) Why might you want to review your credit report? Copyright © 2012 Pearson Canada Inc. 6-16

Credit Cards The easiest way to establish credit is to get a credit card. Why? 1.Establish a good credit history 2.Create credit capacity 3.Eliminate the need for carrying cash 4.Provide a method for payment when cash is not an option Copyright © 2012 Pearson Canada Inc. 6-17

Credit Cards (cont’d) 5.Earn additional benefits 6.Receive free financing until the due date on your credit card statement 7.Keep track of your spending by providing you with a consolidated list of the purchases you made Copyright © 2012 Pearson Canada Inc. 6-18

Credit Cards (cont’d) Types of Credit Cards MasterCard, Visa, and American Express are the most popular Credit card company receives a percentage of the payments made to merchants Copyright © 2012 Pearson Canada Inc. 6-19

Credit Cards (cont’d) Prestige Credit Cards Prestige Cards: credit cards, such as gold cards or platinum cards, issued by a financial institution to individuals who have an exceptional credit standing Provide extra benefits Travel insurance, insurance on rental cars, special warranties on purchases Usually charge an annual fee Copyright © 2012 Pearson Canada Inc. 6-20

Credit Cards (cont’d) Specialized Credit Cards Retail (or proprietary) Credit Card: a credit card that is honored only by a specific retail establishment Interest rate charged is normally higher than that charged on standard or prestige cards Copyright © 2012 Pearson Canada Inc. 6-21

Credit Cards (cont’d) Characteristics of credit cards: Credit Limit Specifies the maximum amount of credit allowed Overdraft Protection option Copyright © 2012 Pearson Canada Inc. 6-22

Credit Cards (cont’d) Annual Fee Incentives to Use the Card (e.g., points) Grace Period period between time of purchase and when payment is due (usually about 20 days) Copyright © 2012 Pearson Canada Inc. 6-23

Credit Cards (cont’d) Cash Advances/Convenience Cheques Usually charge high interest plus a transaction fee at the time of the transaction (i.e. no grace period) Extremely costly source of financing and should be used only as a last resort Copyright © 2012 Pearson Canada Inc. 6-24

Credit Cards (cont’d) Financing Paying only a portion of the credit card bill monthly 20 and 30% interest Finance Charge: the interest and fees you must pay as a result of using credit Copyright © 2012 Pearson Canada Inc. 6-25

Credit Cards (cont’d) Copyright © 2012 Pearson Canada Inc. 6-26

Credit Cards (cont’d) Comparing Credit Cards Factors to consider: Acceptance by Merchants Annual Fee Interest Rate Watch for “teaser rates” Copyright © 2012 Pearson Canada Inc. 6-27

Credit Cards (cont’d) Copyright © 2012 Pearson Canada Inc. 6-28

Debt Management (cont’d) Copyright © 2012 Pearson Canada Inc. 6-29

Debt Management (cont’d) Review personal financial statements Personal balance sheet Personal cash flow statement Copyright © 2012 Pearson Canada Inc. 6-30

Debt Management(cont’d) Copyright © 2012 Pearson Canada Inc Consumer Proposal Consumer proposal: an offer made by a debtor to his or her creditors to modify his or her payments Creditors have up to 45 days to object Proposal can be made in cases where individual debt is less than $ , not including your home mortgage Removed from your credit bureau report once the consumer proposal terms have been met

Debt Management(cont’d) Copyright © 2012 Pearson Canada Inc Bankruptcy Individuals can file for bankruptcy when they become insolvent Insolvent: a person who owes at least $1000 and is unable to pay his or her debts as they come due Property is given to a trustee in bankruptcy Trustee in bankruptcy: a person licensed to administer consumer proposals and bankruptcies and manage assets held in trust

Debt Management(cont’d) Copyright © 2012 Pearson Canada Inc Unsecured creditors will not be able to take legal steps to recover their debts from you Trustee in bankruptcy will sell your assets and distribute the money obtained to your creditors on a pro rata basis Certain assets are exempt from bankruptcy Spouse or common-law partner is not affected by your personal bankruptcy Bankruptcy is a last option

Debt Management(cont’d) Copyright © 2012 Pearson Canada Inc Avoid Credit Repair Services You can often fix any credit mistakes yourself, without paying for the services of a credit repair agency

Identity Theft: A Threat to Your Credit Identity theft: occurs when an individual uses personal, identifying information unique to you (e.g., your Social Insurance Number) without your permission for their personal gain Goal may be to acquire money or goods or to establish a new identity for criminal purposes Copyright © 2012 Pearson Canada Inc. 6-35

Identity Theft: A Threat to Your Credit (cont’d) The Scope of Identity Theft Go to What is the Cost of Identity Theft? Difficult to measure Average individual loss due to identity theft is $1868 Copyright © 2012 Pearson Canada Inc. 6-36

Identity Theft Tactics Shoulder surfing Dumpster diving Skimming Pretexting, Phishing, and Pharming Copyright © 2012 Pearson Canada Inc. 6-37

Protecting Against Identity Theft Only give personal information over the phone, through , or over the internet if you have initiated contact Keep the amount of identification that you carry with you to a minimum Invest in a paper shredder Do not give out your SIN and do not carry it with you Change your passwords regularly Copyright © 2012 Pearson Canada Inc. 6-38

Protecting Against Identity Theft (cont’d) Look for a closed-lock or unbroken-key icon in your web browser before entering sensitive data Clear the cache of you browser after visiting secure sites Be familiar with the encryption level of your web browser Install and maintain a firewall Copyright © 2012 Pearson Canada Inc. 6-39

Protecting Against Identity Theft (cont’d) Be suspicious of s that request personal information Be cautious about downloading files and installing programs from the internet Copyright © 2012 Pearson Canada Inc. 6-40

Responses to Identity Theft Take immediate action Take steps to undo the damage Document the steps you take to re-establish credit Cancel and obtain new credit cards Have the identity theft noted on your credit report Copyright © 2012 Pearson Canada Inc. 6-41

Responses to Identity Theft (cont’d) Obtain new ABM cards Advise the passport office if your passport has been stolen Advise Canada Post if you feel that your mail may be being diverted Advise you telephone, cable, and utility providers about the identity theft Obtain a new driver’s license Copyright © 2012 Pearson Canada Inc. 6-42

Responses to Identity Theft (cont’d) Request that a fraud alert be placed in your file Will enable the credit bureau to contact you if there is any attempt to establish credit in your name Copyright © 2012 Pearson Canada Inc. 6-43