1. The Three “C’s” of Credit
Capacity: Your ability to pay back a loan
Collateral: Your assets used as a guide to determine your ability to repay the debt
Character: Your reputation as a reliable and trustworthy person

2. Credit Terminology Principal:
The actual dollar amount borrowed or charged.
Interest:
The percentage cost of borrowing or charging. Multiplied against the amount of principal owed per year.
Finance Charge:
The dollar cost of credit. Derived by multiplying the principal by the interest rate.

3. Credit Terminology Line of Credit:
The maximum credit limit on a credit account.
Equity:
Value of property minus debt on property. People often borrow against this value in what are often called “2nd mortgages”.
Collateral:
Something of value that can be sold to satisfy a debt. Usually required to secure a loan.

4. Credit Card Facts
Americans charged more than $980 billion on their bank credit cards in 2010
Americans paid $125 billion in credit card interest in 2009
The average credit cardholder has more than nine credit and charge cards
Average credit card debt per household with credit card debt: $15,799

5. Benefits of Credit
Earlier consumption; use of goods while paying for them
Convenience
Use for emergencies
Establishment of a good credit history
Consolidation of debts
Identification

6. Credit Dangers
Using credit to finance basic necessities, e.g. groceries, rent, bills.
Paying one credit account with cash advances from another.
Cash advances from credit cards
Carrying and using several different credit cards
Making only minimum payments on credit card bills.

7. Types of Credit Regular Credit
Full balance due on billing
Revolving Credit Minimum payment required, but balance can be carried over with interest charges.
Installment Credit
Equal monthly payments for specific term

8. Four Methods of Determining Credit Cost
Cost of Credit
Four Methods of Determining Credit Cost
Previous Balance
Average Daily Balance
Adjusted Balance
Past Due Balance
Assume a $300 bill and a $150 payment. Interest rate is 18% per year (1.5% per month)

9. Different Methods of Computing Finance Charges Calculation Finance
Type of Method/
Amount on which interest is due
Calculation
Finance
Charge
Balance
Due
Previous Balance
$300 x .015 = $4.50
$4.50
$154.50
$300 despite payment
Adjusted Balance
$152.25
$150 balance on last day of billing period
$150 x .015 = $2.25
$2.25
Average Daily
Balance
15 days x $300 =$4500
15 days x $150 =$2250
30 days =$6750
$6750/30 =$225
$225x .015 = $3.38
$3.38
$153.38
$225
Past Due Balance
$150 x .00 = 0 $0
$150.00 $0

10. Sources of Loans

11. Commercial Banks Accept deposits Lend money
Transfer funds among banks, businesses, and individuals
Offer checking, savings, and loan services to individual consumers
Largest source of consumer loans (45%)

12. Credit Unions Owned and operated by members of companies or unions
Offer low interest loans to members
Provide savings and checking services
Offer higher interest rates on savings than traditional banks
14% of Consumer loans

13. Consumer Finance Companies
They finance department store installment debts
Charge higher interest rates than traditional lender
Consumer Finance Companies
Make direct loans to consumers at high interest rates. Usually 20%-35% interest rates
Make loans to those usually unable to borrow from traditional lenders with lower rates
23% of consumer loans

14. Credit Reports

15. Agencies

16. Credit Report Personal Information Credit Requests Credit Reviews
Name, address, employer
Credit Requests
Credit Reviews
Credit History/Condition
Experian Example

17. Credit Score Factors Job History Residence History Credit Repayment
Amount of current credit
Amount of Debt (ratio of credit)
Types of Credit

18. Credit Scores
As of 12/3/2012

19. Loan Types Mortgage: Typically to purchase a home
Consumer: For small purchases
Equity: Borrowing against excess value in a home
Re-Finance: Paying off one loan with another
Payday: Short-term loan until next paycheck