USING CREDIT

Managing Money & Credit: A Lifelong Skill

What is Credit? “Buy now, pay later” Supplying of money, goods, or services at present time in exchange for the promise of future payment

Why Credit is Important FICO or credit score: Credit Card Issuers & Lenders  Determine Annual Percentage Rate (APR) Auto Insurers  Determine Premium Employers  Are you a worthy hire? Landlords  Are you a reliable tenant?

The Four Cs of Credit Character: The way you handle money and have repaid debt in the past. Capacity: Your ability to pay the debt after considering other monthly expenses. Capital: The value of your assets or what you own. Collateral: Typically used in home or auto loans. This is what they can take from you if you don’t pay!

Advantages: Able to buy needed items now Don’t have to carry cash Creates a record of purchases More convenient than writing checks Consolidates bills into one payment

Disadvantages: Interest (higher cost of items) May require additional fees Financial difficulties may arise if one loses track of how much has been spent each month Increased impulse buying may occur

Your Responsibilities Borrow only what you can repay Read & understand the credit contract Pay debts promptly Notify creditor if you cannot meet payments Report lost or stolen credit cards promptly Never give your card number over the phone unless you initiated the call or are certain of the caller’s identity

Your Rights Truth in Lending Act (1968) Insures consumers are fully informed about cost & conditions of borrowing Fair Credit Reporting Act (1970) Protects the privacy & accuracy of information in a credit check

Credit Cards – The Perceived Great Equalizer Credit lets you buy more than you can afford.  Credit and credit cards  Current World Problem Needs are essentials  Food  Shelter  Clothing  Reliable transportation Wants are extras  Eating out  Big, expensive house  Shop till you drop  Brand new or an expensive car

Who Uses Credit Cards? U.S. population = 298 million Use credit cards = 150 million Pay off monthly = 50 million Carry a balance = 100 million 2/3 of credit card users don’t pay off their balance $9,300 = average debt per household

America’s Love of Credit 1.6 million bankruptcies were filed in 2004 Americans are declaring bankruptcy at 10x the rate they were during the depression

Use Credit Wisely You should use credit to buy:  House  Car  Education (student loan) and you’ll avoid trouble

Only Buy What You Can Afford Pay off monthly balances  Avoid interest  Avoid late fees Know your budget Know yourself  Are you an impulse buyer?

Pay More than the Minimum If you have a credit card balance:  Make a plan to pay as much as you can every month  Start with the credit card with the highest interest rate  Pay off the credit cards as quickly as you can

Limit the Number of Cards Americans have an average of 8 credit cards

Always Pay on Time Avoid late fees Keep your money in your pocket Maintain a good credit score  Late payments have the biggest negative impact. Easiest way to make money is to save money.

Choose a Low Rate 0% is lowest  But there is often a catch Rates can range from 0-41%. If you pay your card off every month, the rate won’t matter.

Building a Credit History Establish a steady work record Pay all bills promptly Open a checking account & don’t bounce checks Open a savings account & make regular deposits Apply for a local store credit card & make regular monthly payments Apply for a small loan using your savings account as collateral Get a co-signer on a loan & pay back the loan as agreed

Types of Credit Cards Gasoline Credit Cards 1. One of the easiest to get 2. Provides credit for gas, oil & other products 3. Must pay interest on unpaid balance Travel and Entertainment 1. Diners Club, American Express 2. Yearly membership fee, usually higher than annual fee for bank cards 3. Expected to pay balances in full each month 4. Can be used throughout the world on airline tickets, renting a car, hotel, etc

Types of Credit Cards Retail Credit Card 1. Department store or chain of stores 2. No annual fee 3. May receive special offers 4. No annual fee 5. Finance charge on any unpaid balance Bank Cards 1. Issued by banks 2. Can be used at hotels, restaurants, department stores, theaters, almost anywhere! 3. May have an annual fee (especially to get mileage) 4. Must pay interest on unpaid amount