CREDIT Personal Finance

Advantages of Credit  Improved Standard of Living:  Credit lets you purchase items now, instead of having to wait until you have enough cash to pay for them.  Remember credit is all money lent to you.  Convenience & Safety  Help in Emergencies:  Auto Repairs or Injuries  Easier to keep track of expenses

Disadvantages of Credit  Interest charges and fees:  If you do not pay your bill in full each month, you will be charged interest.  Some credit cards are allowed to change interest rates without your prior knowledge.  Increased Impulse Buying  Danger of Financial Problems  Credit Fraud & Identity Theft

Types Of Credit  Service Credit:  Each month you use utilities and do not pay for the services until the following month, this is a form of credit  Installment Credit:  Repaid in equal amounts over a set period of time.  Student loans, car payments, mortgage payments  Credit Cards:  Buy now and pay for it later

Credit Terms  Grace Period: time in which no interest is charged to your principal.  Bankruptcy: legal process in which a debtor declares the inability to repay debts over a reasonable period of time.  Credit Fraud: theft and illegal use of someone’s credit information.  Annual Percentage Rate (APR): amount of interest expressed as a yearly rate.  Revolving Account: An account you do not have to pay in full each month.

Types of Credit Cards  Charge Cards  Pay all charges in full every month by the due date; cannot carry a balance  No balance = no interest  Secured Credit Cards  Guaranteed by money deposited in an account; credit limit usually equals the amount of the deposit  Can be used by people with credit problems to reestablish good credit  Prepaid Cards (stored value cards)  These are used by retailers as gift cards travelers as a safe way to get funds on the road parents who want to give their kids the convenience of a credit card withou t the risk

What to Look For  Credit Terms  Look for a box with: interest rates, grace period, annual fee  This box is: required by law and often headed with the words “Rates and Fees” or “summary of terms”  Consumers don’t know when they apply what credit line they will receive  Many offers state “up to” a certain amount (for example: “up to” $25,000)  Key words — “up to” company can and often will give consumer a lower credit limit

Cardholder Agreements  Sent with every new card  Legal contract between consumer and the card issuer  By using the card, consumer agrees to honor the terms and conditions in the agreement  Card terms and conditions are subject to change at any time  Change notices are usually sent by mail, along with the monthly statement  Consumers should review everything sent by issuer, even if it looks like junk mail

Tips for Using Credit  Sign your cards as soon as you get them.  Carry only one or two cards with you at one time.  Photocopy both sides of your cards and keep the copies in a safe place.  Keep an eye on your card during transactions and put it in your wallet immediately.  Do not let anyone borrow your card.  Cut up expired cards  Keep receipts

Obtaining Credit  Understanding costs:  The principal is how much money you borrow.  The longer you spread out your payments, the more you pay in the end.  An increase of 2% points in your interest rate can cost you hundreds of thousands of dollars.  Finance charges: annual fees, origination fees, etc.  Credit contracts:  If you sign these contracts you are agreeing to everything in it says, whether or not you read it.

Qualifying for Credit  To obtain a loan or a credit card, you usually have to fill out an application.  Credit card companies want to know how much of a risk you are.  You might be asked to pledge something you own as collateral.  The company providing the credit will then request a credit report on you.  The government requires companies to provide you with your credit report at least once a year.  AnnualCreditReport.com is the only authorized site.

Using Credit Wisely  Pay your bills on time and use automatic bill pay if available.  Use only free, low interest credit cards (no annual fee, bonus points, etc.)  Always pay more than the minimum.  Example: If you owe $4500 on your credit card and only made the minimum payment each month, it would take you 44 years to pay off the debt and cost you nearly $17000 in interest!

Bankruptcy  Chapter 13:  Allows people with a steady income to keep property.  They are allowed to use future income to pay off all or part of their debt in 3 to 5 years.  After 5 years most of your debts are discharged.  Chapter 7:  Requires giving up all assets that are not exempt.  This means giving up your house or business.  Most debts are discharged within a few months.  Both types of personal bankruptcy have to be declared in federal bankruptcy court and can be a costly process in and of itself.