Obtaining and Protecting Your Credit Chapter 9 Obtaining and Protecting Your Credit © 2010 Pearson Education, Inc. All rights reserved

Learning Objectives Explain the concept of consumer credit, including major types and its benefits and drawbacks Describe the keys to building and maintaining healthy credit Identify ways to protect your identity © 2010 Pearson Education, Inc. All rights reserved

The Basics of Credit for Consumers You will almost certainly need or want to use credit at some point in your life Used properly, credit can make it possible to purchase things that might be difficult to save the entire amount for Used unwisely, credit can wreak havoc in your financial life Explain how the need for credit exists at some point in almost all people’s lives. Give examples of things it might be difficult to save for (college, car, etc) © 2010 Pearson Education, Inc. All rights reserved

Types of Credit It is essential to know about: the major types of credit the advantages and disadvantages of each the laws that protect your right to get credit Credit for consumers fall into one of three categories: Noninstallment Installment Revolving open-end credit Discuss the importance of understanding the different types of credit. It is important to the financial plan. © 2010 Pearson Education, Inc. All rights reserved

Types of Credit The consumer borrows the money at the time of purchase Then the consumer pays off the entire amount within a short time Noninstallment credit is typically issued by: department stores furniture stores other businesses selling items that cost several hundred dollars noninstallment is credit that is extended for a short term, such as 30 days or less Discuss noninstallment credit. If you pay the amount in full, no interest will be applied. If not, it will. © 2010 Pearson Education, Inc. All rights reserved

Types of Credit Noninstallment credit encourages immediate purchases of specific items This type of credit may be useful to a person who is expecting to receive money soon enough to repay the amount borrowed Tell students to use this type of credit with caution. 0-6 © 2010 Pearson Education, Inc. All rights reserved

Types of Credit Installment loans typically require the borrower to make monthly payments Part of each payment goes to reduce the principal Monthly payments also include interest charges Installment credit is also used for specific purchases but allows the borrower more time to repay the money Principal is the total amount of money outstanding on the loan Discuss how installment credit differs from noninstallment credit. Tell students that the lender charges interest each month on the unpaid principle © 2010 Pearson Education, Inc. All rights reserved

Types of Credit Installment loans may span a few years These type of loans are generally used for purchases such as furniture, boats, and other large items Note that using installment credit does make the purchase of these items more costly Take a look at Figure 9.1 to see how much interest you might pay over the life of a typical loan 0-8 © 2010 Pearson Education, Inc. All rights reserved

Figure 9.1 © 2010 Pearson Education, Inc. All rights reserved

Types of Credit Revolving open-end credit allows consumers to borrow up to some preset maximum amount, such as $1,000 or $10,000 Credit limit the preset maximum amount you can borrow Consumers can use revolving credit to make one purchase or many They can repay the entire amount borrowed at the end of the month They can also spread payments over a longer time They can continue to use the credit as long as they do not exceed their credit limit Discuss how revolving credit is typically the most abused and mismanaged type of credit. Discuss how the minimum payments on these do not always cover the interest or fees owed. It is more difficult to pay off. © 2010 Pearson Education, Inc. All rights reserved

Math for Personal Finance Barbara borrowed $2,300 to buy some furniture and is paying 15 percent interest a year for the loan. The terms of the loan do not require her to pay off any of the loan balance during the first year. She only has to make interest payments. How much interest will she pay the first year if she does no reduce the principal of the loan? © 2010 Pearson Education, Inc. All rights reserved

Math for Personal Finance Solution: Barbara will pay $2300 x .15 = $345 in interest the first year © 2010 Pearson Education, Inc. All rights reserved

Advantages of Using Credit Credit helps you make large purchases sooner Using credit simplifies your finances by eliminating the need to carry cash or checks Using credit wisely can help you establish a good credit history A good credit history can make it less expensive for you to use credit in the future Credit history is the record of how one has used credit in the past Discuss the advantages of having a good credit history. People with good credit histories may be able to borrow at lower interest rates Explain how credit helps you make large purchases sooner than you would if you had to save for the entire purchase price in advance © 2010 Pearson Education, Inc. All rights reserved

Math for Personal Finance Harlan used his credit card—a form of short-term credit—to charge three tanks of gas this month. If his charges were $43.12, $51.87, and $38.35, how much should he pay at he end of the month? © 2010 Pearson Education, Inc. All rights reserved

Math for Personal Finance Harlan should pay the bill in full: $43.12 + $51.87 + $38.35 = $133.34 © 2010 Pearson Education, Inc. All rights reserved

Disadvantages of Using Credit It is often easier to get credit than it is to pay it back If you borrow too much money, you may have difficulty making the payments A bad history can make borrowing more costly—or impossible Failure to pay off loans can lead to bankruptcy Discuss the importance of managing credit – it is important to the financial plan. If you borrow money to buy a car or house and fail to make payments, you could lose your possessions and all the money you have invested in them Explain what bankruptcy means – a legal process in which a court takes over certain aspects o a person’s financial life © 2010 Pearson Education, Inc. All rights reserved

Disadvantages of Using Credit Credit cards can tempt us to purchase things today when it would be wiser to save and pay for in full Credit card interest rates are usually very high It is wise to use credit cards for purchases you plan to pay off when the bill comes in Check out www.chase.com for a payment calculator where you can plug in different balances and interest rates Explain why it is extremely costly to carry a credit card balance from one month to the next © 2010 Pearson Education, Inc. All rights reserved

Math for Personal Finance Sabrina charges $800 at the local sporting goods store to buy some exercise equipment. The store offers no interest for 90 days if the balance is paid in full, or 24 percent annually if the balance is not paid in full prior to 90 days. How much interest will she need to pay if she lets the account go for 91 days before paying the bill? © 2010 Pearson Education, Inc. All rights reserved

Math for Personal Finance Solution: She will pay 2 percent--.02 a month, since the annual rate is 24 percent. At 91 days, she will owe for three months-3 x .02. Therefore, her interest will be $800 x .06 = $48 © 2010 Pearson Education, Inc. All rights reserved

Credit Rights and Consumer Credit Laws Federal law helps protect your access to credit This legislation requires creditors to notify applicants within 30 days if they will receive credit They explain the reason for denial if credit is denied Refer to figure 9.2 for other consumer credit laws Equal Credit Opportunity Act prohibits creditors—people who provide credit—from denying credit based on gender, age, race, national origin, religion, and martial status Discuss the importance of knowing your rights and responsibilities for credit cards. © 2010 Pearson Education, Inc. All rights reserved

Figure 9.2 © 2010 Pearson Education, Inc. All rights reserved

Check Your Financial IQ What are the risks and benefits of consumer credit? © 2010 Pearson Education, Inc. All rights reserved

Check Your Financial IQ Credit is convenient and can make certain purchases possible. But credit is costly and can lead to financial problems if used unwisely 0-23 © 2010 Pearson Education, Inc. All rights reserved

Building Good Credit We all want to establish good credit Having no credit history at all may result in paying more for credit Lenders often charge higher interest rates for people with less-than-good credit Know the process by which you build good credit and how that information is collected and reported to creditors Discuss the importance of building good credit. © 2010 Pearson Education, Inc. All rights reserved

Your Credit History Each person’s credit history is collected in an individual credit report How many times have you borrowed money? Did you pay it back on time? Lenders use this information every time you apply for credit Every time you make a credit purchase, it will further establish your credit history, good or bad. © 2010 Pearson Education, Inc. All rights reserved

Your Credit History Paying for utilities, such as electricity and phone, also shows up on your credit history Failing to pay your utility bills will negatively affect your credit history It can also affect your ability to get credit in the future Discuss how each time you fail to pay a utility bill on time, it will negatively affect your credit history. Tell students to ask themselves each time they write a check or use a credit card if it will negatively hurt their credit report. 0-26 © 2010 Pearson Education, Inc. All rights reserved

Credit Bureaus and Credit Scoring Credit bureaus collect credit information on individual consumers There are three main credit bureaus: Equifax Experian TransUnion © 2010 Pearson Education, Inc. All rights reserved

Credit Bureaus and Credit Scoring Credit bureaus provide credit reports to potential lenders, employers, and others upon request Everyone can access his or her credit report once every 12 months free of charge You will see the types of records being maintained by these credit bureaus regarding your personal credit history Credit report shows every time you have applied for credit, whether or not you have paid your bills on time, if you have paid your credit cards in full every month or carried a balance, and if you have paid late fees Discuss what is on a credit report. Discuss how you can access your credit report. © 2010 Pearson Education, Inc. All rights reserved

Credit Reports When you apply for credit, the potential creditor will study your report and make decisions about extending additional credit Review your credit report now and make sure it contains accurate information Companies can make mistakes that can hurt your financial life Look at 9.3 for a sample credit report Fair Credit Reporting Act limits the sharing of your financial information only to firms that have a legal purpose to evaluate this information Discuss how it is important to act quickly to fix mistakes. Credit reporting agencies are required by law to remove incorrect entries. You will need proof! © 2010 Pearson Education, Inc. All rights reserved

Figure 9.3 © 2010 Pearson Education, Inc. All rights reserved

Credit Score Credit score a number based on your credit history that assesses your creditworthiness Credit bureaus use your credit history to create a credit score Individuals with higher credit scores get better interest rates on loans They are determined to have a lower risk of defaulting © 2010 Pearson Education, Inc. All rights reserved

Credit Score Credit scores are often called FICO scores Credit scores are calculated based on a model created by Fair Isaac Corporation (FICO) Credit scores are often called FICO scores FICO scores will be between 300 and 850 A higher score indicates better credit Look at figure 9.4 to see where most people’s credit scores fall © 2010 Pearson Education, Inc. All rights reserved

Figure 9.4 © 2010 Pearson Education, Inc. All rights reserved

Credit Score FICO scores are broken down the following way: 35 percent based on your credit history 30 percent based on how much of your available credit you are using The rest based on other information contained in your credit report (See figure 9.5) © 2010 Pearson Education, Inc. All rights reserved

Figure 9.5 © 2010 Pearson Education, Inc. All rights reserved

Check Your Financial IQ What are the elements of “good credit”? © 2010 Pearson Education, Inc. All rights reserved

Check Your Financial IQ Good credit means having a credit history that is generally free of credit problems, such as unpaid or late bills 0-37 © 2010 Pearson Education, Inc. All rights reserved

Threats to Your Credit: Identity Theft Identity theft occurs when someone uses your personal information without your permission for personal gain Identity theft can occur without you even knowing it Someone may use your personal information to open a credit account and buy a large purchase This account will be reported to the credit bureau under your name When they don’t pay the bill your credit score will suffer Explain how identity theft can occur without you even knowing it until you request a copy of your credit report and find out Discuss how protecting your personal information is key to your future access to credit and financial well being. © 2010 Pearson Education, Inc. All rights reserved

Threats to Your Credit: Identity Theft Some criminals use your personal information to establish totally new identities and engage in criminal activity People who have had their credit destroyed can no longer borrow money for anything Identity theft is illegal but is difficult to detect Discuss how information may be stolen and you might not even know it. © 2010 Pearson Education, Inc. All rights reserved

Identity Theft Tactics Shoulder surfing occurs when someone in a public place skims personal information to use against you by overhearing your conversation or viewing your personal information Identity thieves use a variety of tactics Be cautious when someone seems to be standing too close to you when you’re using a computer, using a credit card, etc Discuss the importance of keeping your personal information out of the hands of anyone else. © 2010 Pearson Education, Inc. All rights reserved

Identity Theft Tactics Identity thieves have been known to go through a person’s trash to gather information Credit card receipts, banking information, or unsolicited offers for credit cards can enable someone to profit from your identity Shred documents such as these prior to disposing of them © 2010 Pearson Education, Inc. All rights reserved

Identity Theft Tactics Other tactics include: Skimming involves copying your credit card or debit card numbers from your cards Pretexting occurs when someone improperly accesses your personal information by posing as someone who needs data for one reason or another Phishing is when pretexting occurs online and can include emailing you and asking you to verify account information Pharming uses email viruses to redirect you from a legitimate website to an official looking website designed to obtain your personal information Stress the importance of checking your credit report regularly. © 2010 Pearson Education, Inc. All rights reserved

Protecting against and Reacting to Identity Theft Preventing the theft of your identity is well worth the simple investment The purchase of identity theft insurance may also be worth considering Refer to figure 9.6 for some methods you should employ to prevent identity theft. © 2010 Pearson Education, Inc. All rights reserved

Figure 9.6 © 2010 Pearson Education, Inc. All rights reserved

Protecting against and Reacting to Identity Theft Act quickly if you detect a sign of identity theft Monitor your credit report and protect yourself from identity theft It is critical to your long-term financial health Figure 9.7 provides helpful resources that you can use to prevent and respond to identity theft Discuss ways to prevent identity theft. Keep copies of financial documents. Empty mailbox every day. © 2010 Pearson Education, Inc. All rights reserved

Figure 9.7 © 2010 Pearson Education, Inc. All rights reserved

Monitor Your Credit Report Check your credit report periodically Report inaccurate information to the three main credit reporting bureaus File a dispute related to the inaccurate information The credit bureaus will contact the creditor to verify the accuracy of information and change it if inaccurate © 2010 Pearson Education, Inc. All rights reserved

Check Your Financial IQ What is identity theft? © 2010 Pearson Education, Inc. All rights reserved

Check Your Financial IQ It is the improper use of personal information for gain 0-49 © 2010 Pearson Education, Inc. All rights reserved

Summary Credit is the ability to borrow funds that will be repaid in the future It comes in a number of different forms such as: Noninstallment Installment Revolving open-end credit © 2010 Pearson Education, Inc. All rights reserved

Summary Credit has advantages and disadvantages An advantage to credit is that it helps make large purchases easier A disadvantage is that credit can be costly Building good credit history is important to your financial future © 2010 Pearson Education, Inc. All rights reserved

Summary Credit bureaus maintain a complete history of your credit transactions They determine your credit score and report this information to interested parties You can obtain a free credit report from any one of the three credit bureaus to ensure that the report is accurate © 2010 Pearson Education, Inc. All rights reserved

Summary Identity theft is one of the fastest growing crimes in our country It is important to protect yourself against identity theft Act quickly if you suspect identity theft Keep copies of all correspondence and credit transactions © 2010 Pearson Education, Inc. All rights reserved

Key Terms and Vocabulary Credit Credit bureau Credit history Credit limit Credit report Credit score Creditor Equal Credit Opportunity Act Fair Credit Reporting Act Fair Isaac Corporation Identity theft Installment credit Interest Noninstallment credit Pharming Phishing Pretexting Principal Revolving open-end credit Shoulder surfing Skimming © 2010 Pearson Education, Inc. All rights reserved

Websites www.chase.com www.myfico.com www.myfico.com/CreditEducation/ImproveYourScore.aspx www.annualcreditreport.com www.ftc.gov www.privacyrights.org © 2010 Pearson Education, Inc. All rights reserved