Credit Chapter 10

Credit The ability to borrow money in return for a promise of future repayments Usually includes interest When you save, you give up the ability to spend now. When you obtain credit, you give up the ability to spend later. Never borrow more than you can easily repay

Home Ownership Equity Values go up Tax advantages Renting vs. Owning Difference between what you owe and the value Values go up Tax advantages Renting vs. Owning (something to show vs. nothing to show

Other Reasons to Borrow Education Salary goes up Investment in yourself Health care costs

Considerations Is it important that I buy the good or service I want now? Do I have to borrow to buy the product? Can I afford to make the payments on the loan? Will I be able to buy other products I want more if I buy this product? Many borrow for wants, not needs.

Credit Debt payments should not be more than 20-25 % of your take home pay Credit worthiness – measure of your reliability to repay a loan Three C’s of credit: Character Capacity Capital

Character Credit History Other indications of responsibility Having a job for a long time Living at the same address for a while Having good school and work attendance Saving regularly COSIGN A LOAN

Capacity Ability to pay back (expenses vs. income) Are you already overextended?

Capital Value of what you own Savings Investments Property Things you could sell if you needed to pay loan back

Credit Rating Loan application Credit bureaus Information obtained from: Stores Banks Utilities, Courts Creditors TransUnion, Equifax, Experian

Credit Rating FICO scoring system (100-800) Payment history (largest factor) Current debt Length of credit history New accounts and inquiries Kind of credit used (# of cards, available credit)

LOANS Secured loan Unsecured loan Collateral Installment loan Closed-end credit Fixed payments, fixed payoff date, fixed loan amount Unsecured loan Granted on credit rating alone Usually higher interest rates than secured loans Sometimes credit cards are considered unsecured, open-end credit

Places to Obtain Loans Banks Savings and loan institutions (mostly real estate) Credit unions Finance companies Higher interest, higher risk clients Life insurance companies Borrow against policy collateral Low rates Balance deducted from death benefits

Places to Obtain Loans Credit card cash advance Pawnbrokers High interest! 17-24% Pawnbrokers Turn over property to get loan High interest Rent-to-own Expensive

Credit Cards Regular charge accounts Revolving charge accounts Pay balance in full each month American Express, Diner’s Club, dept. stores Revolving charge accounts Interest is charged May take years to pay off Minimum balance

Credit Cards Sources Incentives Costs Banks, dept. stores, charities, gasoline companies, universities, credit unions, and more! Incentives Costs Annual fees Interest Introductory rates usually only temporary

Credit Cards Grace period Credit limit Penalties 15-25 days Time between billing and due dates where no interest is charged Credit limit Penalties Watch for surprise charges on your statement!

Downside of Credit Most expensive option Consider loan as alternative Minimum payment trap Most of this payment is pure interest Choose the least expensive cards

Credit Rights & Responsibilities Truth in Lending Act of 1968 Must report information the same way Finance charges Annual percentage rate (APR) Equal Credit Opportunity Act (1975, 1977) Equal opportunities for credit Illegal to refuse credit based on race, color, religion, national origin, sex, marital status, or age

Credit Rights & Responsibilities Fair Credit Reporting Act of 1971 Organizations must identify the credit bureau that supplied the information used to make their decision If denied, you have 30 days to request a free copy of your file Request a copy for a small fee

Credit Rights & Responsibilities Consumer Credit Reporting Reform Act (1996) Requires credit bureaus to investigate disputed items on a credit report within 30 days If bureau can’t verify the information the item must be removed from the record

If you were refused credit unfairly Contact the bureau the lender used Write to the bureau and request a copy of report Study for inaccuracies Report errors in writing If no errors, but unusual circumstances, can attach a 100-word explanation to your report

Credit Rights & Responsibilities Fair Credit Billing Act (part of Truth in Lending Act) Helps consumers correct credit card billing mistakes You have the right to refuse paying for something you didn’t charge You have 60 days to contact credit card They have 30 days to reply They have 90 days to resolve You are not charged interest during this time Inferior products may also be disputed

Credit Rights & Responsibilities Fair Debt Collections Practices Act (1977) Stops debt collection agencies from using abusive practices Stops abusive or threatening phone calls Stops deceptive means to get information Applies to agencies that are in business of collecting debt (not to individuals or businesses trying to collect their own accounts)

Credit Cards Credit is a privilege not a right Lenders are in business to make money—will give you lots of credit to make more money! Pay more than the minimum Avoid too many cards (flyers in mail) Pay cash when possible Save receipts for charges/verify accuracy

Maintain a Good Credit Rating Start small Department credit card Do not miss a payment Save regularly Call lender if issue—work with them! Negative credit more difficult to fix Stays on credit for years! Read what you sign

Maintain a Good Credit Rating Acceleration clause Payment in full is due if you miss one payment Balloon payment Final payment is larger than the regular payments Bankruptcy Legal process in which people cannot pay their debt and must surrender most of their property Lost property Credit reporting for 10 years

Maintain a Good Credit Rating True-Name Fraud SSN, DL’s #, and credit card # being used by someone else Never give this information out!!

Help for Credit Problems Deb Consolidation Loans Could pay more in long run Don’t use the extra monthly income to spend! Credit Counseling Services