1. CREDIT CHAPTER 10 CREDIT You’re In Charge WHAT’S AHEAD 10.1 What Is Credit? 10.2 How to Qualify for Credit 10.3 Sources of Consumer Credit 10.4 Credit Rights and Responsibilities 10.5 Maintain a Good Credit Rating

2. Slide 2 Chapter 10 LESSON 10.1 What Is Credit? GOALS  Identify reasons to borrow and the trade-offs you make when you borrow  Discuss how to plan when and how much to borrow

3. Slide 3 Chapter 10 Why Borrow?  For your goals  For a home  A home as an investment  Equity  Taxes and homeownership  For your education  Investing in yourself  For your health

4. Slide 4 Chapter 10 Plan Your Borrowing  When to borrow Ask yourself four questions before borrowing 1.Is it important to buy it now? 2.Do I have to borrow to buy it? 3.Can I afford to make the payments on the loan? 4.Will I be able to buy other things I want more if I get this now?  How much to borrow  Total debt should be not more than 20-25% of your take-home pay.

5. Slide 5 Chapter 10 LESSON 10.2 How to Qualify for Credit GOALS  Explain how lenders judge your creditworthiness  Describe the factors that go into your credit rating

6. Slide 6 Chapter 10 Your Creditworthiness  Character  A measure of your sense of financial responsibility. ie. Dependable?  Look at your credit history  Other signs of responsibility  Capacity  Measure of your financial ability to repay a loan  Sufficient income; overextended?  Capital  The value of what your own; savings, investments, property

7. Slide 7 Chapter 10 Your Credit Rating  Loan applications  Credit bureaus  Collects information about consumers’ credit history and sells it to lenders. I.e.. Stores, banks, utility companies, court records, missed payments, bounced checks  Trans Union, Equifax, Experian  Credit ratings (a score between 100-820: FICO) FICO  Payment History (most important Factor in your score)  Current Debt  Length of credit history  New accounts and inquiries (too many is a bad sign)  What kind of credit do you use? (too many cards will lower your score)

8. Slide 8 Chapter 10 LESSON 10.3 Sources of Consumer Credit GOALS  Identify different options for getting credit  Describe the benefits and costs of credit cards

9. Slide 9 Chapter 10 Types of Consumer Borrowing  Secured loan (backed by something of value)  Collateral: property pledged to back a loan  Installment loan: repaid in a certain number of payments with a certain interest rate. (also called closed-end credit. One time, one amt. loan)  Unsecured loan (not backed by collateral)  Grants credit based on your creditworthiness alone  Usually pay a higher interest rate than secured loan because greater risk

10. Slide 10 Chapter 10 Sources of Loans  Banking institutions  Shop around for best interest rate, fees, other costs.  Other sources  Finance companies (higher rates than banks)  Life insurance companies  Credit card cash advances (17-24% interest rate)  Pawnbrokers  Rent-to-own companies (not a good deal: p.343)

11. Slide 11 Chapter 10 Credit Cards  Regular charge accounts  Must pay balance in full each month  American Express, Diner’s Club  Revolving charge accounts  Can carry a balance each month; pay interest  Sources of credit cards  VISA, American Express, MasterCard, Discover  Others: charities, gas companies, universities  Credit card incentives  Free gas, airline miles, car discounts, cash back, purchases

12. Slide 12 Chapter 10

13. Slide 13 Chapter 10 AgeDebtAgeDebt 18-29$8,63650-59$20,157 30-39$16,29860-69$15,964 40-49$18,65970+$6,500

14. Slide 14 Chapter 10 Website link

15. Slide 15 Chapter 10

16. Slide 16 Chapter 10 Business Costs  Cost of Retail Credit Cards  Adds to retail expenses in order to process cards and absorb bad debts Cost of Bank-Card Credit Merchants pay banks to collect on their credit sales Ex. You charge $1,000/bank pays merchant $950-960 (discount) What does this do to the cost of g/s? (markup) Cash Discount Act allows merchants to give discounts to cash customers

17. Slide 17 Chapter 10 Credit Card Costs  Annual fees  Can be from $15 to $100  Many are free  Interest Rates  Shop around  Limits and penalties  Credit limit: max. amount you can charge  Missed or late payments

18. Slide 18 Chapter 10

19. Slide 19 Chapter 10 Control Credit Card Costs  A loan as an alternative  Interest will be lower than credit card’s  The minimum payment trap  Most of the payment is interest  Choose the least expensive card  Compare rates among cards **Not an issue if you pay your balance each month**

20. Slide 20 Chapter 10 Security Agreement Terms & conditions  Annual or Membership Fees  Grace Period  Payment Obligations  APR  Computation Method  Minimum Finance Charge  Other Fees  Security Interest

21. Slide 21 Chapter 10 LESSON 10.4 Credit Rights and Responsibilities GOALS  Discuss ways that laws protect your credit rights  Describe how to take responsibility for your own financial health

22. Slide 22 Chapter 10 Consumer Credit Rights  Truth in lending (1968)  Must provide Finance Charge and Annual Percentage Rate  Equality in lending (1975)  Cannot refuse credit on the basis of race, color, religion, gender, marital status, age or national origin  Protect your credit history  Check accuracy of credit reports: now 1 free per year  Resolve billing and product quality problems  Unauthorized charges; inferior product quality  Protection from abusive collection practices  Prohibits harassment, threatening calls, abusive conduct

23. Slide 23 Chapter 10 Consumer Credit Responsibilities  Accept responsibility  Know your debt capacity  Credit and family  Self-control with credit  Pay more than the minimum  Avoid too many credit cards  Pay cash  Keep accurate records Pay your balance Each month And You won’t Have any Problems!

24. Slide 24 Chapter 10 LESSON 10.5 Maintain a Good Credit Rating GOALS  Explain how to establish a positive credit history  Discuss how to avoid credit problems and how to get help if you need it

25. Slide 25 Chapter 10 Establish Your Credit History  Start small  Dept. store card; and save regularly  Credit for married people  Establish your own credit history or have joint accounts  Avoid common credit mistakes  Call lender if problems paying arise  Read what you sign  Acceleration Clause : if you miss a payment; entire balance due  Balloon payment : final payment larger than regular payments  Bankruptcy  Sell your property to pay off debt; stays on credit report for 10 years; hurts future credit, renting and purchasing  True-name fraud (identity theft)  Social security #, drivers license or credit card #

26. Slide 26 Chapter 10 Help for Credit Problems  Debt consolidation loans  Cost of a debt consolidation loan  It’s a bandage, not a cure  Credit counseling services  National Foundation for Consumer Credit: a non-profit service that helps consumers create budgets and pay their bills

27. Chapter 10 What factors affect your score?

28. Chapter 10 To Maximize Your Score…  Don’t procrastinate – pay all your bills on time  Avoid owing more than 30% of your available revolving credit  “Less is more” – keep your revolving debt as low as possible  “Older is better” – older accounts score more favorably  Minimize the opening of new revolving accounts

29. Slide 29 Chapter 10 REVIEW  There are 4 types of Credit Cards  Credit cards from Banks  Retail Credit Cards  Travel and Entertainment Credit Cards  Gasoline Credit Cards What are the 3 C’s of credit and what do they mean??? Capacity Character Capital

30. Slide 30 Chapter 10 10-3: Sources of Consumer Credit  Unsecured loan (Open- End Credit)  Not backed by any collateral.  Based on your creditworthiness  Pay higher interest rates  Most Credit Cards are considered unsecured Secured loan (Closed- End Credit) Loan that is backed by something of value pledged to ensure payment Collateral Installment loan** You can get a loan at a bank, savings and loans, and credit unions.

31. Slide 31 Chapter 10 Advantages of Credit Cards  Temporary expansion of income  Reduced need for cash  Provide convenience and security  Establishes credit  a credit rating is a record, kept by a credit rating agency that tells prospective creditors how good a person is at paying off debts  Advance notice of sales  Reduced sale prices

32. Slide 32 Chapter 10 Disadvantages of Credit Cards  Interest/Finance Charges  Can lead to overspending (customers spend 20 to 30% more using credit cards than they would with cash)  Can give you bad credit rating (not making payments on time, incurring excessive debt)  College students (with limited or no credit history and income) are charged higher interest rates.

33. Slide 33 Chapter 10 Credit Card Don’ts  Don’t get a card with a high limit  Don’t get more than 1 card  Don’t use them for cash advances  Don’t charge more than you can pay off in a month  Don’t let banks increase your credit limit Source: USA Funds Life Skills -Module 1

34. Slide 34 Chapter 10 Credit Card Do’s  Limit the number of cards you have  Use a debit card vs. a credit card  Use a card that has no annual fee and lower interest rates  Know all of your card’s hidden fees  Always pay more than the minimum amount each month  Pay on time, all the time.