Using Credit

Terms to know Credit Creditor Revolving Charge Account Installment Account Vehicle leasing Cash loan Collateral Cosigner Home equity loan Equity Credit rating Credit bureau Credit agreement Finance charges Interest Annual percentage rate (APR) Grace period Bankruptcy

Understanding Credit Credit: allows you to buy goods and services now and pay for them later. Credit is based on trust between the creditor and you

Understanding Credit Creditor: may be a business or a person who gives you goods or services and expects you to pay later.

Pros and Cons of Credit PROS: Credit allows the use of goods Credit allows you to buy an expensive item right away Credit provides a record of purchases CONS: Using credit reduces future income Using credit is expensive Using credit can cause impulse buying Misusing credit can cause serious financial problems

Types of Credit Credit card accounts Charge accounts Installment accounts Vehicle leasing Cash loans Home equity loans

Credit Card Many department stores (Sears, Macys, etc) and companies (Amex, Chase, Capital 1) give credit cards so consumers (you) can use credit to buy their goods and services.

Credit Card The cost of using a credit card is often high! Most bank card companies charge and annual fee (a fee each year) Interest on credit cards can be high as well

Credit Card Most credit card accounts are known as a revolving charge account: allows customers the choice of paying for purchases in full each month or spreading payments over a period of time. Charge $150, you pay $150 next month or Charge $150, you pay $15 for the next 12 months (including interest = $180)

Types of Credit Some businesses allow customers to charge goods and services on a charge account. An installment account is often used to charge expensive items like a major appliance or furniture. Usually the customer puts down a cash payment & pays the rest monthly for a set schedule.

Types of Credit Vehicle Leasing: a credit transaction by which a person rents a car according to certain restrictions Must put down a down payment Held to same standards as buying a car

Types of Credit Cash loans: If you need $$$ to buy something, you get a loan on credit & it must be repaid Banks, Savings & loans associations, Credit Unions, Loan companies and some life insurance companies.

Types of Credit To get most cash loans, a borrower is required to pledge collateral. Collateral: is something of value held by the creditor in case you are unable to repay the loan

Type of Credit Although a person may have nothing to pledge as collateral, getting a loan is still possible. A cosigner: is a responsible person who signs a loan agreement with the borrower

Types of Credit Home equity loan: type of loan that provides automatic access to a sum of money separate from the amount the homeowner borrowed to purchase the house. Equity: is determined by subtracting how much is owed on a house from the amt the house is worth

Types of Credit For example, if you house is worth $90,000 and you still owe $70,000, the amount of equity in your home is $20,000. With excellent credit, you may borrow this amount of money off of your home for whatever you may need

Establishing Credit When you first try to establish credit, you may have a hard time. You will have to begin by completing credit applications to establish a credit rating. Credit rating: the creditor’s evaluation of a person’s willingness and ability to pay debts.

Establishing Credit In evaluating a credit rating, creditors look for a person who is a good credit risk, that is people who will pay their bills!

Establishing Credit Making regular, on-time payments on credit purchases, loans, or fixed expenses such as rent, utilities Owning a car, home, stocks, or bonds Living in the same community for a period of time.

Building your credit rating Get a job and stay employed Open a checking account Open a savings account Buy an item on a layaway plan Apply to a gasoline company or a local store for a credit card

What’s in a credit record? Once you use credit, you automatically establish a credit record at a local or national credit reporting agency Credit Bureau: an agency that collects and keeps files of financial information on individual consumers Transunion, Equifax and Experian

What’s in a credit record? Information on your credit record (report) shows only the facts collected by the credit bureau You have the right to check your credit record and the right to dispute any credit misunderstandings Generally, negative information stays in the report for 7 years

Credit Ratings

Credit Report

Q & A What types of credit are available to consumers? Why is it important to establish credit? How do creditors use credit bureaus? How can a person maintain a good credit rating? What should a person do when a credit bill cannot be paid?