C Credit Fundamentals

2 Objectives To understand vocabulary and language used in credit card offers, agreements and statements. To understand the advantages and disadvantages associated with credit cards To compare and contrast rights and responsibilities of using credit for the creditor as well as the consumer.

What is Credit? Credit-is money borrowed to buy something now, with the agreement to pay for it later.

Americans and Credit Nearly all Americans go into debt. Debt comes from obtaining credit. Credit has a cost. Interest. –Mortgages- to buy home. –Installment – to buy durable goods paid back in small amounts. –Credit Cards

Using Credit Credit-Is the privilege of using someone else’s money for a period of time. Debtor-anyone who buys on credit or receives a loan. Creditor—one who sells on credit or makes a loan. Trust is the key.

The Vocabulary of Credit Debtor-The person or company who borrows money or uses credit. Creditor-The person or company who loans money or extends credit. Capital-Property you possess that is worth more than your debts. Collateral-Property pledged to assure the repayment of a loan. (repossessed) Principal-The amount borrowed. Interest-the cost associated with utilizing credit. Balance Due-The principal plus interest for the time you have the loan

The Vocabulary of Credit Cont…  Finance Charge-The total dollar amount of all interest & fees you pay for the use of credit. Annual Percentage Rate (APR)-the cost of credit expressed as a yearly percentage. Open-ended credit-an agreement to lend the borrower an amount up to a stated limit and to allow borrowing up to that limit again, whenever the balance falls below the limit. (revolving accounts) Closed-end credit-A loan for a specific amount that must be paid in full, including all finance charges by a stated due date. (Doesn’t allow continuous borrowing) Ex: Installment Loans

Using Credit Cont… When borrowing a large amount of money or buying on credit from a business a signed written agreement must exist. –This written agreement contains the loan amount & other terms of the loan. For example, the time frame that the debt has to be paid in full.

Types of Credit Business Use Trade Credit –Occurs when a company receives goods from a supplier & pays for them later. Business –Long Term loans for land, equipment, & buildings. –Short Term days loans

Types of Credit Cont… The Local, state,& federal government often use credit to provide goods & services for the benefit of the public –Cars –Aircrafts –Police Uniforms –Hospitals –Parks –Highways

Types of Credit Consumers & Credit –Various purposes Purchase expensive products Convenience Loans-Money borrowed for a special purpose –A written contract exists –Payments usually made in installments over a specified period of time.

Types of Credit If you charge a purchase at the time you buy a good or service you are using SALES CREDIT. –This involves the use of charge accounts & credit cards by consumers.

3 Types of Charge Accounts Regular – pay off every 30 days (American Express-Open-ended) Revolving – pay a portion of the bill every month (Visa/MasterCard-Open- ended) Installment – Set amount paid over time. (Wickes Furniture-Closed-end)

Charge Accounts Revolving Accounts (Charge Account) Most popular –Charge any time, but only part of the debt has to be paid off each month Maximum amount is called the credit limit Payments made once a month Finance charges added if not paid on time Convenient, but makes over spending easy –1.5% each month-finance charge

Charge Accounts Budget Account (Charge Account) Requires that customers make payments of a fixed amount over several months. Ex-90 day/three payment plan Utility company budget plan. You agree to pay a certain amount each month to avoid large charges.

Credit Cards Multipurpose cards –Hotels, airlines, stores, & other businesses Bank Cards –Master Card & Visa (Best Known) Travel & Entertainment Cards –American Express –Pay yearly membership fee –No spending limit, but you must pay the full balance each month. Business Travels like to use these because they give detailed records. Oil Company Cards –Some have their own credit cards. Retail store Cards –Only can be used at the issuing store.

Finance Charges and Annual % Rates Finance Charge – Cost paid to borrow money. Annual Percentage Rate (APR) - the cost of credit expressed as a yearly percentage. It is determined by: –Balance of loan. –Percent charged. –Whether the charge is past due.

Installment Credit Contract issued by the seller that requires periodic payments at specified times. Features of Installment –Signing sales contract –Receiving item at time of purchase –Down Payment –Paying finance charges on the amount owed –Making regular payments at stated times

Consumer loans Installment Loan-one in which you agree to make monthly payments in specified amounts over a period of time. Single Payment Loan-with this type of credit, you do not pay anything until the end of the loan period, possibly days. At that time you pay the full amount borrowed plus any finance charges.

Consumer loans Promissory Note-Written promise to repay based on the debtors excellent credit history. Collateral-Property that is used as security. Cosigner-Someone whom is responsible for the payment of the loan if you fail to pay as promised.

Benefits of Credit Convenience Immediate Possession Savings Credit Rating-a person’s reputation for paying bills on time. Useful for emergencies

Credit Concerns Overbuying Careless buying High prices- stores that only accept cash may sell items at lower prices than those that offer credit. Overuse of Credit

Questions to Ask How will you benefit from this use of credit? Is this the best buy that you can make or should you shop around? What will be the total cost of your purchase, including any finance charges? What would you save if you paid cash? Will the payments be too high for your income?

Calculating Interest Interest is the cost of borrowing/using someone else’s money On single payment loans, interest is usually simple. Formula for simple interest is below: I=P x R x T –I=Interest –P=Principal –R=Rate –T=Time

Installment Loans Installment loans-Loans that are repaid in partial payments, each payment is called an installment. –With some loans the lender adds the amount of interest to the amount you borrow. –You sign a promissory note for the total amount you owe, and pay in equal installments.

Determining the Maturity Dates Maturity Dates-The date on which a loan must be repaid. –When the time of the loan is stated in months, the date of maturity is the same day of the month as the date on which the loan was made –Ex- a one month loan made on January 15 th will be due on February 15 th. –When the amount is in days you must count the exact number of days to find the maturity date.

Applying for Credit What makes you worthy? –Income/Character –Current debts –Debt payback history –Collateral These determine your credit rating. Two types of loans could be granted. –Secured –loan is backed with collateral property. –Unsecured – No collateral is needed.

The Five C’s of Credit Character-responsible attitude toward living up to agreements. Capacity-The financial ability to repay a loan with present income. Capital-Property you possess that is worth more than your debts. (A-L=NW) Conditions-General economic conditions. Ex: The state of the economy. Collateral-Property pledged to assure repayment of a loan.

Build a Good Credit History Establish a steady work record Pay all bills on time Open a checking/saving account Don’t bounce checks Apply for a local store credit card. Get a co-signer on a loan & pay back the loan as agreed.

Advantages & Disadvantages of Credit Advantages –Able to purchase need items immediately –Don’t have to carry cash –Creates a record of purchases –More convenient than writing checks –Consolidates bills into one payment Disadvantages –Interest –Additional fees –Financial difficulties to repay –Increased impulse buying may occur

Credit Responsibilities Use credit wisely Limit spending to what you can actually afford to pay. Read & understand agreements Contact the creditor when there is a problem.

Avoid Unnecessary Credit Costs Unused Credit Make more than the minimum payment Don’t increase credit spending when your income increases Keep # of credit cards to a minimum Pay cash for purchases under $25 Understand the cost of credit Take advantage of rebates

What happens if you don’t pay the loan back? Lender will hire collection agency. If they don’t get their money, they write it off as a loss. Everyone else pays that loss with higher interest rates.

What do you do if you have too much debt? List everything you owe and the interest rates. Pay the debts with higher interest rates first. Pay more than the minimum balance.

Other Credit Information Credit Application-form for which you provide information needed by a lender to make a decision about granting credit. Credit Bureau-credit reporting agency, that gathers information on credit users. It sells that information to businesses offering credit. Credit Report-shows the debts you owe, how often you use credit, & whether you pay your debts on time

Credit Report Credit Report-A written statement of a consumer’s credit history, issued by a credit bureau to its business subscribers. When you are denied credit, you can get a free report, within 30 days of being denied The 3 Major Credit Bureaus Transunion Experian Equifax

KWYS Keep the following four letter in mind when signing any legal form. K - Know W - What Y - You’re S - Signing

Credit Use Regulations Fair Credit Billing Act –Requires prompt correction of billing mistakes Fair Credit Reporting Act –Law that gives customers the right to know what information credit bureaus are giving potential creditors, employers, & insurers. Consumer Credit Reporting Reform Act –Places the burden of proof for accurate credit information on the credit reporting agency rather than on you. Fair Debt Collections Act –Requires debt collectors treat you fairly.

Credit Problems A person who cannot pay his or her bills when they are due might take these four steps. 1.Contact creditors & explain their situation 2.Make a realistic proposal 3.Keep any promises you may make 4.Make a written copy of agreement

Credit Problems Credit Counseling-discusses and suggests actions to take to reduce spending and eliminating credit difficulties. Bankruptcy - legal process of reducing or eliminating an amount owed.

Why Bankruptcy? People get into financial trouble: –They have ignored the total cost of borrowing. –They have taken too many offers for credit. Filing takes place in the courts and you must give up most of what you own. Bankruptcy stays on your credit history for 10 years making it difficult to buy a new home or car without higher interest rates.