1. CreditCredit Buy now. Pay Later

2. DefinitionsDefinitions  Creditor-person or company who gives credit  Borrower-person who uses the credit  Interest-the rate charged for the use of the money  Collateral-personal property pledged to back the loan

3. Advantages of Credit  Can provide emergency funds  Increased buying power  Safer to carry than cash  Easier to do some transactions (phone or internet)  You can use it while you pay for it

4. Disadvantages of Credit  Costs more  Ties up future income  Leads to overspending  Can lead to inflation

5. CreditCredit  EQUITY:  House Value – House Mortgage Difference between the home’s value and the amount owed on a house  Basic Rule: Your total debt payments should be no more than 20% of your take- home pay.

6. How to establish credit  Open a savings account: Shows that you save money. Keep the balance growing. (Character and Capital)  Open a checking account: Shows responsibility. (Character and Capital)  Don't bounce checks: Shows bad character.

7. How to establish credit  Use your parents to get started: –Get a credit card with your parents as consignors. Make small purchases and repay when due.  Don't carry a balance. (Character)  Get a small loan: Take out a loan and repay it.  Apply for a bank credit card: –After you have a steady job, apply for a bank card. Use it and make your payments. Once you get a bank card, credit will be easier to come by.

8. 3 C's of Credit: 1.Character—Will you repay the loan (trustworthy) A measure of your financial responsibility. Past bill paying experiences. Is your Job Stable 2.Capacity—Can you repay the loan (income and current amount of debt) Will you have enough left over after your fixed expenses or other credit obligations?

9. 3 C's of Credit: 3.Capital—Assets/Net worth: The value of what you own. Including; savings, investments, and property.

10. Collateral—If you don’t pay, what property or savings do you have. Do you have anything that can be promised to secure the loan? Credit History—A record of your past borrowing and repayments (Do you pay bills on time?)

11. Credit Bureau  Credit Bureau: Company that collects information about consumers’ credit history and sells it to lenders. –Get info from stores, banks, utility companies, and court records –Trans Union, Equifax, Experian (3 major credit bureaus)

12. Credit Report  A written report issued by a credit bureau  They gather information from "subscribers" or companies that ask for reports before they give credit. (Banks, credit card companies, other lenders)  Also get information from other public sources. (Marriage records, papers, court records)

13. Info contained in report  Bankruptcy  Failure to pay taxes  File for divorce  Apply for a marriage license  Occupation and length of employment  Spouses name  Residence and length of occupancy  Number of children

14. Credit Rating  Measure of your credit worthiness – judgment about whether or not you have the ability and willingness to pay for your bills on time  Done by a computer system called FICO  Get score between 300 & 850 (High Score good)

15. Credit rating based on 5 factors…  Payment History  Current Debt  Length of Credit History  New Accounts and Inquires  What kind of credit do you use

16. Fair Credit Reporting Act (1971)  Allows you access to your credit report  Lending organizations must tell you the credit bureau that supplied them information  Refused credit –30 days to get a free copy of your report

17. Consumer Credit Reporting Reform Act, 1996  Makes it easier for consumers to correct mistakes in their credit reports  Credit bureaus have 30 days to investigate disputed items  Item must be removed if the bureau can’t verify the information in 30 days

18. Secured vs. Unsecured Loans  Loans backed with collateral are secured  The creditor can keep the property if you don’t pay  Secured loans are safer for the creditor, generally a lower interest rate

19. Types of Credit  Open Thirty Day Accounts (Regular Charge) –Pay full balance at the end of the month –No Interest –Usually an annual fee –American Express, Diner’s Club  Revolving Accounts –Can pay in full or just minimum balance –Can carry a balance over to the next month –Visa, MasterCard, Discover, department stores, or gas cards

20. Closed-End Credit  Installment Credit –Loan paid in fixed amounts each month –Big purchases –Be careful of acceleration clause

21. Closed End Credit  Total Payments=Principal + Interest  Monthly Payments= Total Payments/# of Months  Example: One time purchase of a car or furniture and you sign an installment contract

22. ExampleExample You borrow $1000 at 5% for 2 yearsYou borrow $1000 at 5% for 2 years Total Payment=$1000+(1000x.05x2)Total Payment=$1000+(1000x.05x2) Total Payment=$1000 (principal)+100 (interest)Total Payment=$1000 (principal)+100 (interest) Monthly Payments=$1100/24*Monthly Payments=$1100/24* 2 years x 12 months=24 months2 years x 12 months=24 months

23. Open-end credit  A loan with a certain limit on $amount of money you can borrow for a variety of goods and services.  Examples: VISA, Mastercard, department store credit cards

24. Truth in Lending Act  The total cost of credit must be revealed to you Must state the APR-Annual Percentage RateMust state the APR-Annual Percentage Rate The total cost of borrowing including fees and other chargesThe total cost of borrowing including fees and other charges Provides borrowers information needed to compare credit costs between lenders.Provides borrowers information needed to compare credit costs between lenders. It is important to shop around for credit

25. Fair Credit Billing Act  Part of the Truth-in-Lending Act  Helps consumers correct credit card billing mistakes  Can refuse to pay a disputed bill –60 days to submit written complaint to credit card company –Company must reply within 30 days and resolve the error within 90 days –Don’t have to pay interest during dispute

26. Equal Credit Opportunity Act, 1975, 1977  Illegal to refuse credit on the basis of –Race –Color –Religion –National origin –Sex –Marital status –Age

27. Fair Debt Collections Practices Act, 1977  Stops debt collection agencies from using abusive practices –Threatening phone calls –Deceptive means to get information

28. Credit Dangers  Bankruptcy/Insolvency-when you owe more than you make –Person is unable to pay his bills –Court action to sell what you own and pay off debts –Those you can not pay, you no longer owe –Wipe your slate clean –Can show on credit report for up to 10 years (many remove after 7 years)

29. BankruptcyBankruptcy  Harder to rent an apartment or obtain a home mortgage  May be refused credit in the future or  High Interest Rates

30. Declaring Personal Bankruptcy Bankruptcy should be the last resort, because of the damage to your credit rating; stays in a person’s credit report 10 years. Personal bankruptcy is a legal process to distribute some or all assets among a person’s creditors due to an inability to repay debts. 5-30 U.S. Bankruptcy Act of 1978 Chapter 7 = straight bankruptcy Chapter 13 = wage earner plan

31. After Chapter 7 You May No Longer Owe: – Retail store charges – Bank credit card charges – Unsecured loans – Unpaid hospital or physician bills You Still May Owe... –Certain taxes and fines –Child support and alimony –Educational loans 5-31 https://www.youtube.com/watch?v=SBu-FSyAasM

32. CARD Act of 2008  45 days notice before key changes in account terms (up from previous 15 days)  Minimum payment illustrations on credit card bill  “Universal default” practice was banned  “Teaser rates” must last at least 6 months  Bills must be mailed 21 days before due date

33. CARD Act of 2008 for College Students  Prohibited from offering free merchandise in exchange for credit card applications (on campus, campus events)  No credit cards under age 21 unless cosigner or proof of income to make payments  Limits amount of credit given to those under 21

34. Co-signing a Loan Co-signing means guaranteeing a debt for someone else –If borrower doesn’t pay, cosigner is liable for the full amount plus any late or collection fees –If payment is missed, creditor can collect from the cosigner first –Unpaid debts will appear on the cosigners credit report 5-34

35. Credit Dangers  Creditors can force you into involuntary bankruptcy  Employment problems  Leads to general overspending  Consolidation-grouping all your bills into one loan –One payment per month

36. The Cost of Using Credit $2,000 charged to Credit Account Make required minimum monthly payment @ 19.8% interest plus $40 annual fee Will take 31 years and 2 months to pay off this charge! You paid an additional $8,202 in non-tax deductible charges. When you make the last payment, will the stereo, car, or clothing you purchased be long gone? Will it be worth it?

37. Cost of Using Credit BalanceTime To Pay Off Interest Charged Total Pay $1,00012 years$979$1,979 $2,50019 years$2,941$5,441 $5,00024 + years$6,210$11,210 Interest Rate: 17% Minimum Payment 2.5% or $10

38. ReviewReview  If a credit card is stolen or lost what is the owner of the card liable for? –No more than $50 after notifying the issuer of the card  What is the purpose of the Truth in Lending Act? –To give borrowers enough information so they can compare costs

39. ReviewReview  The Truth and Lending act defines the APR as an attempt to combine all the costs of credit into one figure.  FICO or points scoring, used in credit application refers to what?  Character, capacity, capital  What is the major disadvantage of credit?  Impulse buying by credit users

40. ReviewReview  The longer the payback time for a loan the higher the dollar cost of the interest. T/F  True  What does it mean if a person is insolvent?  They can’t pay their debts  What is an acceleration clause?  A clause in a contract that states if a payment is late or missed the remaining balance is due on the next payment date

41. ReviewReview  What is repossession?  When a person can’t pay for an item and it is repossessed  Can excessive consumer buying on credit lead to inflation? Yes or No  Yes  Do lenders have to tell you why you were denied credit. Yes or No  Yes

42. ReviewReview  If you want to make your monthly payment smaller on an installment loan you could stretch out the repayment time. T/F  True  Creditors force a consumer into involuntary bankruptcy? T/F  True  To determine the true cost of a product purchased on credit, one must add the total credit cost to the original price. T/F  True

43. Always Remember ….  Never borrow more money than you can easily repay.  Sometimes borrowing is a necessity, other times it is not!