1. Credit Unit Credit Unit Consumer Economics

2. Unit Overview I. Getting Credit II. Problems with Debt III. Credit Laws

3. I.Getting Credit 3 C’s of Credit Character – financial reputation Character – financial reputation –“Will this person pay his/her debts on time?” Capacity – earning power Capacity – earning power –“Can this person AFFORD to pay his/her debts?” Capital – items owned (assets) Capital – items owned (assets) –“Can this person back up his/her ability to pay?”

4. Getting Credit (cont’d) Establishing Credit Open checking and savings accounts (video) Open checking and savings accounts (video)video –Make regular deposits –Avoid overdrawn checks Put a utility (phone/Internet service bill) in your name Put a utility (phone/Internet service bill) in your name –Pay bills promptly –Make sure company reports your payment history Apply for credit card from a local store/gas station Apply for credit card from a local store/gas station –Use card periodically –Pay bills on time Get adult to cosign a loan Get adult to cosign a loan –Pay bills promptly –Make sure company reports your payment history Get secured credit card Get secured credit card –Requires you to keep savings account as security –Your money is tied up with the credit card

5. Secured/Unsecured Credit Secured credit Secured credit –Backed by a pledge of property –“If I don’t pay you back, you can have my house.” –Relatively easy to obtain, as there is little risk Unsecured credit Unsecured credit –Backed by a promise to pay back a debt –No collateral required –Regular credit card is an example Getting Credit (cont’d)

6. Comparison Shopping for Credit Annual fee – some are free, others charge Annual fee – some are free, others charge APR (Annual Percentage Rate) APR (Annual Percentage Rate) Whether APR is variable or a teaser rate Whether APR is variable or a teaser rate Minimum payment Minimum payment Grace period (20-25 days is common) Grace period (20-25 days is common) Minimum finance charge Minimum finance charge Other fees (late payments, going over your limit, etc.) Other fees (late payments, going over your limit, etc.) Credit limit Credit limit Getting Credit (cont’d)

7. Credit Application (why are each of these important?) Employment Employment Residence Residence Home ownership Home ownership Monthly housing costs (rent/mortgage) Monthly housing costs (rent/mortgage) Credit references Credit references Collateral Collateral Bank references Bank referencesCosigner Someone who has a good credit rating Someone who has a good credit rating If you default, they promise to pay If you default, they promise to pay Common cosigners are family members / friends Common cosigners are family members / friends Getting Credit (cont’d)

8. Collateral Something of value used to guarantee payment of a loan Something of value used to guarantee payment of a loan Examples include cars, houses, boats, collectibles Examples include cars, houses, boats, collectibles Credit Report/Rating Credit bureaus collect information from banks, stores, vendors, and public records (court judgments) Credit bureaus collect information from banks, stores, vendors, and public records (court judgments) Information is compiled to create a credit report (link) Information is compiled to create a credit report (link)link Credit report available to individuals, others with permission Credit report available to individuals, others with permission Credit rating – evaluation of a person’s credit history Credit rating – evaluation of a person’s credit history Credit (FICO) score - number between 300-850 Credit (FICO) score - number between 300-850FICO –The higher the number, the better your credit rating –What banks and other lenders base decisions/rates upon You can / should view your credit history periodically You can / should view your credit history periodically Getting Credit (cont’d)

9. III.Problems with Debt Credit Counseling People or companies who help those with credit problems People or companies who help those with credit problems Develop a payment schedule Develop a payment schedule Help others learn to live within their means Help others learn to live within their means May be free or charge a small fee May be free or charge a small fee Credit Consolidation Combining all debts into one large, more manageable loan Combining all debts into one large, more manageable loan May seem at first attractive, but can be very costly in the long run May seem at first attractive, but can be very costly in the long runRepossession Creditors come to your home to reclaim merchandise Creditors come to your home to reclaim merchandise Perfectly legal, since you don’t own the merchandise Perfectly legal, since you don’t own the merchandise Shut-offs - phone company turns off service if you don’t pay Shut-offs - phone company turns off service if you don’t pay

10. Problems with Debt (cont’d) Bankruptcy A judge allows you relief from paying your creditors A judge allows you relief from paying your creditors Stated on your credit report for 7 - 10 years Stated on your credit report for 7 - 10 years VERY undesirable, can keep you from obtaining credit later VERY undesirable, can keep you from obtaining credit later Chapter 7 Chapter 7 –You must sell all of your property to pay bills Chapter 13 Chapter 13 –You must develop a court-approved plan to pay bills –Court appoints someone to supervise your adherence to your plan –Must have regular income

11. Problems with Debt (cont’d) Credit Card Fraud Keep cards with you or in a safe place at all times Keep cards with you or in a safe place at all times Keep it in sight when vendors handle it Keep it in sight when vendors handle it Keep receipts in a safe place Keep receipts in a safe place Destroy receipts when they are no longer needed Destroy receipts when they are no longer needed Don’t give card to just anyone Don’t give card to just anyone Keep a record of credit card numbers in a safe place in case the cards are stolen or lost Keep a record of credit card numbers in a safe place in case the cards are stolen or lost Review monthly statement for unauthorized/incorrect charges Review monthly statement for unauthorized/incorrect charges

12. Lost/Stolen Credit Card (link) link You don’t have to pay for any charges after you report it You don’t have to pay for any charges after you report it Only liable for first $50 per card charged before you report it Only liable for first $50 per card charged before you report it Need to call credit card companies as soon as possible Need to call credit card companies as soon as possible Identity Theft (1.3) What to do if you suspect it has happened What to do if you suspect it has happened –Check with your bank and credit card companies for unauthorized charges, close your accounts if you think so –Call three credit reporting companies (Equifax, Experian, and Trans Union) to ask that no new accounts be put in your name without your approval –File a report with the police Problems with Debt (cont’d)

13. IV.Credit Laws Truth in Lending Act Creditors must inform consumers credit terms and costs Creditors must inform consumers credit terms and costs APR, other finance charges, how rates are calculated APR, other finance charges, how rates are calculated Equal Credit Opportunity Act Protects credit applicants from discrimination based on sex, marital status, race, religion, national origin, age, or income from public assistance Protects credit applicants from discrimination based on sex, marital status, race, religion, national origin, age, or income from public assistance Fair Credit Reporting Act Assures your right to access your credit report and dispute errors Assures your right to access your credit report and dispute errors Only those who have a legitimate need to view your file can do so Only those who have a legitimate need to view your file can do so –Companies with which you have applied for credit –Employers or prospective employers, with your permission

14. Credit Laws (cont’d) Fair Credit Billing Act Outlines procedures to settle billing disputes Outlines procedures to settle billing disputes –Write a letter to creditor within 60 days of receiving the bill –Creditor is required to respond in writing within 30 days –Dispute must be settled within 90 days –You don’t have to pay disputed charge until it is settled Electronic Funds Transfer Act Banks must offer customers a receipt for all EFT transactions Banks must offer customers a receipt for all EFT transactions Banks must investigate errors and report back within 10 days Banks must investigate errors and report back within 10 days If ATM or debit card is stolen If ATM or debit card is stolen –If reported within four days, you are liable for first $50 of unauthorized charges –If you wait longer, you are liable for up to $500 –If you don’t report within two months, you are liable for the full amount

15. Credit Laws (cont’d) Fair Debt Collection Practices Act Protects consumers against abusive debt collectors Protects consumers against abusive debt collectors Debt collectors cannot: Debt collectors cannot: –Harass you at work or at home –Overcharge you above what you already owe –Disclose your debt to third parties (video) video

16. Billing Disputes at a glance… Billing Disputes You have 60 days to report problem They have 30 days to respond Must be settled in 90 days

17. ATM’s at a glance… DaysAmount 1-4 days to report problemMaximum you would owe is $50 Between 4 and 60 days to report problem Maximum you would owe is $500 If more than 60 days to report problem You owe the whole amount *The bank has 10 days to investigate and give you an answer!

18. II.Managing Credit (11.1 - 11.3) Costs of Credit Interest and fees Interest and fees Increased cost of merchandise Increased cost of merchandise –Retailers must pay banks to collect on their credit card sales –Retailers also have to increase prices to pay for deadbeats Opportunity cost Opportunity cost –Repaying old debts, with interest charges added, takes away from what you could buy now APR What you are charged if you don’t pay your debt in full What you are charged if you don’t pay your debt in full Can be fixed or variable Can be fixed or variable Watch out for a teaser rate (temporary, to pull you in) Watch out for a teaser rate (temporary, to pull you in)

19. Managing Credit (cont’d) Installments Paying only a portion of the total debt accumulated Paying only a portion of the total debt accumulated Helpful if you can’t pay it all off at once Helpful if you can’t pay it all off at once Raises the cost of the products because it includes interest Raises the cost of the products because it includes interest Best to pay off as much as you can as soon as you can Best to pay off as much as you can as soon as you can Grace Period Period of time you can pay amount in full without incurring finance charges Period of time you can pay amount in full without incurring finance charges Commonly 20-25 days Commonly 20-25 days Finance Charge Amount of money you owe if you have a balance (link) Amount of money you owe if you have a balance (link)link Can also include fines for late payments Can also include fines for late payments