Credit

CREDIT DEFINITIONS Credit Trust given to another person for future payment of a loan, credit card balance, etc. Creditor A person or company to whom a debt is owed. Slide 1 – Credit Definitions Lesson Reference: Credit, Activity 1 – Handout 1 2

The c’s of credit character—will you repay the debt? From your credit history, does it look like you possess the honesty and reliability to pay credit debts? ■ Have you used credit before? ■ Do you pay your bills on time? ■ Do you have a good credit report? ■ Can you provide character references? ■ How long have you lived at your present address? ■ How long have you been at your present job?

capital—what if you don’t repay the debt? Do you have any valuable assets such as real estate, savings, or investments that could be used to repay credit debts if income is unavailable? ■ What property do you own that can secure the loan? ■ Do you have a savings account? ■ Do you have investments to use as collateral?

capacity—can you repay the debt? ◦ Have you been working regularly in an occupation that is likely to provide enough income to support your credit use? ◦ Do you have a steady job? What is your salary? ◦ How many other loan payments do you have? ◦ What are your current living expenses? What are your current debts? ◦ How many dependents do you have?

WHEN TO USE CREDIT Can you describe a situation when it is a good time to use credit and when it is NOT a good time to use credit? Slide 3 – When to Use Credit Lesson Reference: Credit, Activity 1 – Handout 2 6

QUESTIONS TO ASK BEFORE USING CREDIT Slide 4 – Questions to Ask Lesson Reference: Credit, Activity 1 – Handout 3 7

Advantages and disadvantages What are some advantages of credit? What are some disadvantages of credit?

Consolidating debt If you have high interest credit card or loan debt, it can make sense to take out a consolidation loan at a lower interest rate.

Good Debt vs. Bad debt Don’t write this Good debt is a loan to buy something that will usually grow in value such as your home, cottage or investments. Bad debt is a loan for a depreciating asset such as an SUV, a motorcycle or a trip.

WHAT IS A CREDIT SCORE?

A credit score is a number that helps a lender predict how likely an individual is to repay a loan, or make credit payments on time. A credit score is a number that changes as the elements in a credit report change. FICO ® scores, one of the most common credit scoring systems, vary between 350 and 850. VantageScore SM, a new credit scoring system developed by the three credit bureaus, ranges from Slide 1 – What Is a Credit Score? Lesson Reference: Credit, Activity 2 – Overhead 1 12

WHAT MAKES UP A TYPICAL CREDIT SCORE? Slide 2 – What Makes Up a Typical Credit Score? Lesson Reference: Credit, Activity 2 – Overhead 2 13 Source: Fair Isaac and Consumer Federation of America, 2005

IMPROVING YOUR CREDIT SCORE Pay bills on time. Get current and stay current. Don’t open a lot of new accounts too rapidly. Correct mistakes. Shop for loan rates within a focused period of time. Keep balances low on revolving credit. Pay off debt. Check your credit report. Slide 3 – Improving Your Credit Score Lesson Reference: Credit, Activity 2 – Handout 2 14

Slide 1 – Types of Credit Lesson Reference: Credit, Activity 3 – Handout 1 TYPES OF CREDIT Cash Credit Sales Credit Secured Credit Revolving Credit Retail stores Financial institutions that issue credit cards 15 Single Payment Credit- Utility companies, medical services Some retail businesses Installment Credit- appliance dealers

Slide 2 - Sources of Credit Lesson Reference: Credit, Activity 3 – Overhead 1 SOURCES OF CREDIT What are other sources of credit? What sources of credit should be avoided? Why? Banks Mortgage & Loan Companies Retail Stores Finance Companies Credit Unions & Caisses Populaires Internet Stores 16

QUESTIONS TO ASK WHEN APPLYING FOR CREDIT

QUESTIONS TO ASK WHEN APPLYING FOR CREDIT 1.What is the annual fee? Amount charged to use the card or credit 2.What is the annual percentage rate (APR)?ex. 10% APR, you will pay $10 per $100 you borrow. 3.When are payments due? 4.What is the minimum payment required each month? 5.Is there a grace period? 6.Are there other fees associated with the credit, such as minimum finance charges? 7.What is the credit limit? 8.What are the penalties for late or missed payments? 9.What are the terms and conditions of the credit? What else is included in the fine print? Slide 6 – Questions to Ask Lesson Reference: Credit, Activity 3 – Handout 5 18

handout Should they use credit?

Slide 1 – Debt-to-Income Thermometer Lesson Reference: Credit, Activity 4 – Overhead 1 DEBT-TO-INCOME THERMOMETER 20

Rule never borrow more than 20% of your yearly net income ■ If you earn $400 a month after taxes, then your net income in one year is: 12 x $400 = $4,800 ■ Calculate 20% of your annual net income to find your safe debt load. $4,800 x 20% = $960

Handout How much can they safely carry?

Credit report Request Your Free Credit Report Once Every 12 Months Consumers are entitled to a free copy of their credit report by mail every 12 months from Equifax and TransUnion.EquifaxTransUnion Review Your Credit Report Check the last page of your report for instructions for claim disputes. Contact the credit bureau and report the error immediately. Put it in writing – if the issue remains unresolved, provide a letter of explanation and request that it become part of your report.

How to read a credit report? Credit report Credit reports activity – pg. 19

Jan Smith is considering a loan to finance her college education. She currently owes money on several charge accounts and credit cards. What actions would you recommend?

Slide 5 - Things to Establish Good Credit Lesson Reference: Credit, Activity 4 – Overhead 3 THINGS TO DO TO ESTABLISH AND MAINTAIN GOOD CREDIT What can everyone do to establish and maintain good credit? 1. Pay all bills on time. 2. Avoid late fees