1. Credit

2. Questions to Consider What is credit? Does credit cost?
What are the advantages of using credit?
What happens if I misuse credit?

3. Credit
A legal agreement to receive cash, goods, or services now and pay for them in the future.

4. History of Credit Reporting
Born over 100 years ago
1960s – reported only negative financial information
1971 – Fair Credit Reporting Act (FCRA)
Credit reporting was born more than 100 years ago, when small retail merchants banded together to trade financial information about their customers. The merchant associations then turned into small credit bureaus, which later consolidated into larger ones with the advent of computerization.
By the 1960s, CRAs back then reported only negative financial information as well as "lifestyle" information culled from newspapers and other sources -- information such as social habits, arrests, drinking habits, and cleanliness.
The controversy led to a congressional inquiry, and in 1971, Congress passed the Fair Credit Reporting Act (FCRA), which established a framework for fair information practices to protect privacy and promote accuracy in credit reporting. Consumers gained the right to view, dispute and correct their records, and CRAs began to supplement the often-bleak reports with information on consumers' positive financial history.

5. Credit in Utah The average credit card balance for 2011 was $6,576.00
Utah’s average was $

6. Types of Credit Credit Cards Installment Loans Service Credit
Revolving Credit
Student Loans
IOU
Single Payment Credit

7. Credit Cards
Plastic cards with electronic information that can be used by the holder to make purchases or obtain cash advances using a line of credit made available by the card-issuing financial institution.

8. Installment Loan
A loan in which the amount of payment and the number of payments are predetermined, such as an automobile loan.
Fixed payment
Set period of time
Set or varying interest rates
Examples: Car loans and mortgages

9. Revolving Credit
A type of credit that does NOT have a fixed number of payments, such as a credit card.
No stated payoff time
Limit to credit
Minimum monthly payments
Finance charges
Example: credit card

10. Service Credit
A member's earned service, prior service, and purchased service.

11. Student Loans
Loans offered to students to assist in payment of the costs of professional education. These loans usually charger lower interest than other loans, and are also usually issued by the government.
Allows a person to finance their education and defer payments until after graduation.

12. Debit Cards
Debit cards are plastic cards with electronic information, that look very similar to credit cards, that you can use to take money out against your checking account.
When you swipe your debit card remember that the money is taken immediately from your checking account.

13. Sources of Credit Bank Credit Union Finance Companies Retail Stores
Savings & Loan Asociations
Internet Stores

14. How to establish credit
Bank accounts
Employment history
Residence history
Utilities in borrower’s name
Department store or gas credit card

15. How to maintain a good credit rating
Establish a good credit history.
Pay monthly balance on time.
Use credit cards sparingly and stay within the limit.
Do not move balance to other cards.
Check credit report regularly.

16. Risks of Credit Interest Overspending Debt Identity Theft
Interest. As you learned earlier, interest is the amount you pay for using credit. This automatically makes the item more expensive than if you had just paid for it with cash.
Overspending. People often use credit to live beyond their means—buying items they simply can’t afford. As time goes on and the amount they owe grows, it gets harder and harder to pay down the balance.
Debt. The amounts you borrow add up to what is called your debt, or the entire amount of money you owe to lenders. These lenders have legal claims against your future income should you not be able to repay a debt.
And if you take on too much debt, it can completely derail your financial plan—and your future.
Identity Theft. Identity theft occurs when someone uses your personal information without your permission to commit fraud or other crimes. Each time you give out your credit card or Social Security number, you’re at risk for someone stealing that information to run up debts in your name.

17. Responsibilities of Credit
Know the real cost of debt.
Don’t use credit to live beyond your means.
It is all about the details…read the fine print!
Pay as much as you can, as early as you can.
Credit—if you use it wisely—can be a valuable tool in your financial tool box. And understanding the
value of credit really comes down to just four things:
1 Know the real cost of debt. The same item will cost more in the end if you buy it on credit instead of with cash. So choose the credit option carefully.
2 Don’t use credit to live beyond your means. If you can’t pay for an item in a reasonable amount of time, you shouldn’t be borrowing money to buy it.
3 It’s all about the details. The fine print is your friend when you’re comparing credit options. Uncover the details of what an option may truly cost you in interest, fees, and other penalties.
4 Pay as much as you can, as early as you can. This will help you reduce your overall finance charges, avoid penalties, and keep your credit report in good standing.

18. Co-Signer
The person who agrees to be responsible for loan payments if the borrower fails to make them.

19. Collateral
A form of security to help guarantee that a creditor will be repaid.

20. Advantages Disadvantages Convenient Immediate No need for cash
Zero liability on fraud
Helps on reservations
Bonuses, points
It is a loan
Interest rate
Additional fees
Easy to overspend
Can promote impulse purchases
Risk of identity theft
Responsible if lost

21. The Cost of Using Credit
SCENARIO:
Interest Rate 17%
Minimum Payment 2.5% or $10.00
Balance
Time to Pay Off
Interest Charged
Total Pay
$1,000.00
12 years
$979.00
$1,979.00
$2,500.00
19 years
$2,941.00
$5,441.00
$5,000.00
24+ years
$6,210.00
$11,210.00

22. The Cost of Using Credit
SCENARIO:
Interest Rate 24%
Minimum Payment: 4% of current balance or $10
Balance
Time to Pay Off
Interest Charged
Total Pay
$2,000.00
9 yrs & 9 mo
$1,774.96
$ ,
$6,000.00
14 yrs & 4 mo
$5,775.08
$11,775.08
$10,000.00
16 yrs & 5 mo
$9,774.89
$19,774.89

23. How long will it take to pay off? (Paying only the minimum payment)
You owe $4500
APR = 21%
Minimum Payment:
4% of current balance or $15
By only making minimum payments it will take 143 more payments or 11.9 years to pay off the remaining balance. Interest will amount to $3,331.
11.9 years

24. How much will it cost? (Paying only the minimum payment)
You owe $4500
APR = 21%
Minimum Payment:
4% of current balance or $15
$3,331.00
interest
$7,831.00
TOTAL
By only making minimum payments it will take 143 more payments or 11.9 years to pay off the remaining balance. Interest will amount to $3,331.

25. 27” TV
Suppose you see a TV you want to buy with a retail price of $400.
$400.00
cash
Suppose you see a 27” T.V. you want to buy. The cost of a particular model I priced, was $ If you are one of the smart ones who has saved up some money, you pay cash (or check) and you can watch your favorite programs.
If you have saved enough in your “buy stuff” account, you can withdraw your money and buy the TV. If you use a credit card, and pay off the balance within the billing cycle, you pay no interest (if it is a credit card which has the grace period).

26. 27” TV On Sale $350.00 by smart shopping $50 / .80 = $62.50 earn
If you shop around and find the same TV for $350, you just saved $50. But what did you save in terms of your ability to earn money? If you are in an average tax bracket of about 20%, you must earn $62.50 before you can spend $50. So if you avoid spending $50, that is like earning $ If you earn $10 per hour, you just saved the equivalent of 6 1/4 hours of work!
$350.00
by smart shopping
Suppose you shop around and buy the same T.V. on sale for $350. You obviously just saved $50, but what did you just save in terms of your earning power?
Suppose you are in a 20% tax bracket (about average). That means you can spend 80% of what you earn. If you have a really good part-time job and earn $10 per hour, by saving $50, you just saved about 6 1/4 hours of work. If you can save 6 1/4 hours of work by shopping around for an hour or two, it is probably worth it. If on the other hand, you are a doctor and make $150 per hour, it may not be worth your time.
$50 / .80 = $62.50 earn
$62.50 / 10 = ~6 1/4 hrs

27. 27” TV $400.00 using a credit card
Paying $26.00/mo
Balance
Time to Pay Off
Interest Charged
Total Pay
$400.00
18 months
$59.00
$459.00
Back to the $400 T.V. purchase: suppose you pay the $400, and charge it on your credit card. If your rate is 18%, and you determine that you can pay $26 per month, it will take 18 months to pay it off. Total interest, $59. The $59 won’t ruin you financially, but if you pay 18% on all your purchases, the cost over time mounts up.
Also, how many of us would go buy a $400 TV if we saw or heard an advertisement stating that it was on sale for $459? Very few of us, yet people do just that by using their credit card and spreading out the payments over 18 months.
Assuming the same tax bracket & hourly wage as in the previous example, your earnings cost is about 7 hours of work. Some people like to work more than play, so for them, it may not matter.
$59.00 / .80 = $74 earn
$74 / 10 = ~7.4 hrs extra to pay the $59.

28. 27” TV $400.00 Finance Company 36% A.P.R. 18 months $29.00/month
$ interest
Total Cost $523
$123 / .80 = $154
$154 / 10 = ~15.4 hrs
If you go to one of the many small loan companies who offer 36% APR loans, and get an 18 month loan to buy the T.V., you pay and extra $123, or ~15 hours of work, assuming the same details.

29. 27” TV $400.00 Too Easy Loan (Bad Credit OK)
300% A.P.R.
Car Title Pawn
18 months
$ payment/month
$1,433 interest
Total Cost $1833
$1433 / .80 = $1791
1791 / 10 = 179 hrs
The lenders who advertise that they make loans to people no matter what their credit rating, charge high to astronomical rates. If you were to buy the same T.V. using a car title pawn at the 300% rate, you’d pay $ What kind of T.V. could you buy for $1800?
Do you want to blow your next 5 weeks of salary so you can buy the T.V. from these guys?

30. Costs of Using Credit Finance charges Interest Late fees Default rates
Closing costs

31. Warning Signs of Credit Abuse
Delinquent Payments
Default Notices
Repossession
Collection Agencies
Judgment Lien
Garnishment

32. Financial Consequences of Debt
Overspending
Paying high interest rates
Lowers credit score
Difficulty getting a loan