1. Fundamentals of Credit Day 2 Mr. Eleuteri C-114

2. 6.1 understand the process, responsibilities and costs associated with obtaining credit and loans. 6.2 calculate the true cost of credit. 6.3 understand credit bureaus and their credit score, credit collection practices and the importance of keeping a clean credit record. Standards

3. Slide 1 – Types of Credit Lesson Reference: Credit, Activity 3 – Handout 1 Revolving Credit : A predetermined line of credit that is constantly renewed as it is repaid (American Express card) Installment Credit- Buying goods and services with the agreement that payment will be made at fixed intervals over a period of time, with each payment carrying interest charges (example: car loan) 3 COMMON TYPES OF CREDIT

4. Private Label Issued by a single source Can only be used at a single source Examples: Department Stores, Gasoline Companies General Label Issued by a single source Can be used in many places Examples: Bank Card, Major Credit Card 4 TYPES OF REVOLVING CREDIT-CREDIT CARDS

5. USING CREDIT

6. PROS OF CREDIT Big help in an emergency Use for making purchases online or over the phone (even overseas) Helps to establish credit for future purchases (car loan, house mortgage) Credit cards are convenient—don’t need to carry cash Bonus: If you pay your credit card bill at end of month, you avoid finance charges

7. MORE PROS OF CREDIT Credit cards allow you the right to dispute billing errors and defective merchandise. They allow you withhold payments. Allows you to buy now….pay off monthly. Some cards offer cash back (as an incentive). Provides a record of expenses.

8. CONS OF CREDIT It’s easy to buy more than you can afford (overspending is common); some people might event feel compelled to spend more than you have. Interest rates on credit cards are usually high Late fees are charged if you miss a payment

9. MORE CONS OF CREDIT Credit car companies allow you to make a small minimum payment each month (your balance can continue to grow…even if you don’t put more charges on your bill!) Credit card fraud could occur

10. 10 WHAT QUESTIONS SHOULD YOU ASK YOURSELF BEFORE USING CREDIT?

11. 1. Is this a necessity or luxury item? 2. Do I really need this item? 3. Can I meet my obligations to repay it? 4. Do I really understand all of the terms and obligations? Slide 4 – Questions to Ask Lesson Reference: Credit, Activity 1 – Handout 3 11 WHAT QUESTIONS SHOULD YOU ASK YOURSELF BEFORE USING CREDIT?

12. 5. Do I realize that this would cost less if I paid cash? 6.Have I really thought about the consequences of this purchase? 7.Can I repay the debt in a timely fashion? Slide 4 – Questions to Ask Lesson Reference: Credit, Activity 1 – Handout 3 12 WHAT QUESTIONS SHOULD YOU ASK YOURSELF BEFORE USING CREDIT?

13. 13 Avoiding Credit Card Pitfalls

14. 14 1.Keep track of your purchases by closely reviewing your monthly statements. 2.Have a budget and avoid overspending. 3.Make an effort to pay off credit card balances at the end of the month. 4.Make purchases with reliable companies and take extra precautions when making purchases online. 5.Report stolen cards immediately to the credit card company. Avoiding Credit Card Pitfalls In order to avoid the pitfalls of credit cards and maximize their benefits do the following:

15. 1.What is the annual fee? 2.What is the annual percentage rate (APR)? 3.When are payments due? 4.What is the minimum payment required each month? 5.Is there a grace period? Slide 6 – Questions to Ask Lesson Reference: Credit, Activity 3 – Handout 5 15 QUESTIONS TO ASK WHEN APPLYING FOR CREDIT

16. 6. Are there other fees associated with the credit, such as minimum finance charges? 7. What is the credit limit? 8. What are the penalties for late or missed payments? 9. What are the terms and conditions of the credit? What else is included in the fine print? 16 QUESTIONS TO ASK WHEN APPLYING FOR CREDIT

17. Mini Do Now Please list 3 areas in your life where a score matters. It could be any of measuring performance: 1. 2. 3. Relating to your answers above pick 1 idea: What does a high score mean? What does a low score mean?

18. Credit - Activity 2 We will learn about… Credit scores and their impact The factors that make up a credit score Strategies to improve your credit score 18 Credit Scores

19. A credit score is a number that helps a lender predict how likely an individual is to repay a loan, or make credit payments on time. A credit score is a number that changes as the elements in a credit report change. Slide 1 – What Is a Credit Score? Lesson Reference: Credit, Activity 2 – Overhead 1 19 WHAT IS A CREDIT SCORE?

20. A credit score has broad use and impact. Your credit past is your credit future. FICO ® scores, one of the most common credit scoring systems, vary between 350 and 850. VantageScore SM, a new credit scoring system developed by the three credit bureaus, ranges from 300-850. Slide 1 – What Is a Credit Score? Lesson Reference: Credit, Activity 2 – Overhead 1 20 WHAT IS A CREDIT SCORE?

21. WHAT MAKES UP A TYPICAL CREDIT SCORE? Slide 2– What Makes Up a Typical Credit Score? Lesson Reference: Credit, Activity 2 – Overhead 2 21 Source: Fair Isaac and Consumer Federation of America, 2013

22. SAMPLE CREDIT REPORT 22 Slide 3 – Sample Credit Report Lesson Reference: Credit, Activity 4 – Handout 2

23. Please answer(Based on previous slide) 1. What was John Doe’s high credit balance? 2. On what date did he open his first card? 3. Please list the 3 dates of late payments. 4. Were there any collections reported?

24. Please answer(Based on previous slide, continued) 5. What is the phone number of the credit bureau? 6. In your own words, does John Does seem credit worthy if he would fill out another credit application? Explain…

25. DEBT-TO-INCOME THERMOMETER 25

26. Calculations 1. Harold has income of $72,000. His current debt level is somewhere between $50,000 TO $55,000. Where does he fall on the thermometer? 2. Bobbi has debt of $2,000. Her current income is $85,000. Where does she fall on the thermometer?

27. Solutions 1. $55,000/$72,000= 76% Danger Harold should not take on any more debt. 2. $2,000/$85,000= 2% Bobbi is in the great range. She may add more debt.

28. Challenge Question Why would some of the best business schools in the country teach that taking on debt is a good thing when there are many people who believe debt is bad because you always owe money? Please choose 1 side and defend your answer. Either debt is good or bad. Please explain…

29. Your explanation…

30. Rate how serious you think each of the following trouble signs is from 1 = Not Serious to 4 = Very Serious 30 ___ Late Fees ___Delinquent Payments ___Default Notices ___Repossessions ___ Collection Agencies ___Lien ___Garnishment DO NOW: MEASURING THE SERIOUSNESS OF CREDIT TROUBLE SIGNS

31. WARNING SIGNS OF DEBT PROBLEMS 31 1.Late Fees -additional funds that need to be paid (above the regular payment) because the payment was not paid on time. 2.Delinquent Payments- written notice payment is overdue 3.Default Notices- letters from credits above delinquent payments 4.Repossessions- creditor takes back item

32. WARNING SIGNS OF DEBT PROBLEMS 32 5. Collection Agencies – special agencies charged with collecting debt 6. Judgment Lien- court order placing a claim on property to recover the cost of the debt 7. Garnishment – court order that requires an employer to deduct amount owed from the debtor’s paycheck

34. ** Pay bills on time. Don’t exceed your credit limits on credit and credit cards. Pay what you owe (avoid interest charges) Get current and stay current. Slide 3 – Improving Your Credit Score Lesson Reference: Credit, Activity 2 – Handout 2 34 TIPS TO ESTABLISH, MAINTAIN AND IMPROVE YOUR CREDIT SCORE

35. Don’t open a lot of new accounts too rapidly. Use automated payments (so you don’t forget to pay a bill). Shop for loan rates within a focused period of time. Check your credit report; correct mistakes Slide 3 – Improving Your Credit Score Lesson Reference: Credit, Activity 2 – Handout 2 35 TIPS TO ESTABLISH, MAINTAIN AND IMPROVE YOUR CREDIT SCORE

36. Debt Consolidation Credit Counseling Bankruptcy Slide 3 – Improving Your Credit Score Lesson Reference: Credit, Activity 2 – Handout 2 36 Maintaining good credit helps you to avoid...

37. 1.Circle the incorrect items on your credit report. 2.Write a letter to the reporting agency, telling them which information you think is inaccurate. Provide supporting documentation. 3.Send all materials by certified mail. 4.Send a similar letter to the creditor whose reports you disagree with. 5.The reporting agency will conduct an investigation. 6.If negative information is accurate, it can stay on your report for 7-10 years. Slide 4 – Correcting Credit Errors Lesson Reference: Credit, Activity 6 – Handout 4 37 CORRECTING CREDIT ERRORS

38. Exit Ticket You have the following items on your credit report. What should you do? 1. You are 60 days overdue on a bill. 2. The credit bureau reported an inaccuracy. 3. You just paid a bill in full 2 days ago but it is still on your credit report.