1. Chapter 4

2.  What is Credit? ◦ Principal + Interest  Installment Debt ◦ Equal Payments ◦ Durable Goods ◦ Longer Term = Lower Payment BUT ◦ More Interest ◦ Mortgage  Longest Terms

3.  Do not want to wait  Spread payments over the Service Life of item  Is Satisfaction Greater than Interest paid?  Checklist for Using Credit for Purchases ◦ Do I really require the item? Can I postpone purchasing? ◦ If I pay cash, what will I be giving up that I could buy with these funds? ◦ If I borrow with the satisfaction I get from using the item now outweigh the interest paid? ◦ Have I done comparison shopping for credit? ◦ Can I afford to use credit now?

4.  Commercial Banks ◦ Offer widest variety of services  Savings and Loan Associations ◦ Accepts deposits and lend funds  Interest rates usually slightly lower than commercial  Savings Banks ◦ Serve small savers ◦ Lend money for mortgages, auto and personal loans ◦ Many also offer checking and other commercial functions  Credit Unions ◦ Owned and operated by members ◦ Offer savings, checking, and loans ◦ Higher interest earnings and lower interest charges  Finance Companies ◦ Installment debt for stores ◦ Very High Rates ◦ Loans to people with BAD credit

5.  Charge Accounts or Charge Card ◦ Buy goods from a particular company or store ◦ Regular Charge Account  Set amount can be charged  No interest if paid in specified amount of time  Very high interest rate if unpaid on time ◦ Revolving Charge Account  Able to make additional purchases (even if unpaid balance)  Interest on Unpaid Balance  If paid in full no interest charged ◦ Installment Charge Account  Items purchased and paid through equal payments  Principal and Interest paid monthly  Credit Cards ◦ Access to loans at all times without having to apply ◦ Difference between Charge Cards? ◦ Difference between Debit and Credit Cards?

6.  Finance Charges? ◦ Interest costs + any other costs with having Credit  Dollar and Cents cost of credit ◦ Computed in 4 Ways (Next Slide)  Annual Percentage Rates ◦ Cost of Credit expressed in a yearly amount ◦ Also included is any non-interest cost of credit ◦ APR provides easy way to compare credit

7.  Previous Balance Method  Adjusted Balance  Average Daily Balance  Past Due Balance

8.  How does a person get credit? ◦ Application ◦ Credit Bureau  Private Business ◦ Credit Check  Income, Current debt, personal life, repayment in past  Looking for history in paying debt, capacity to pay (debt:income, length at job, unemployed), character, any collateral  What determines a person’s creditworthiness? ◦ Everybody has a credit score from the credit check ◦ Higher the score better potential to get loan  AnnualCreditReport.com  Equifax, TransUnion, and Experian – 1 Free a year  From Each Company

10.  Late payments  High debt-to-income ratio  Having many open accounts  Previous Bankruptcy ◦ Stays for 10 years  Unemployment  Legal Trouble  Secure Loan vs. Unsecured loan ◦ Cosigner?

11.  Loan is a Promise!! ◦ If you don’t repay, creditor loses $  Losses passed off to others ◦ Hurts credit rating  Keep track of all charges ◦ Immediately report Fraud, Lost or Stolen Card  Visit Financial Counselors for Help if Needed ◦ Consolidate Loans ◦ Pay High Interest First ◦ Pay more than Minimum Payment

12.  The Truth in Lending Act (1968) ◦ Requires Lenders to keep borrowers informed of credit conditions  The Equal Credit Opportunity Act (1974) ◦ Cannot deny based on race, religion, national origin, gender, marital status, or age ◦ Cannot deny because income comes from public assistance  State Usury Laws ◦ Limits on amount of interest that can be charged  Consumer Finance Agencies allowed higher because loans are high risk

13.  THIS IS THE FINAL RESORT!!!  What is Bankruptcy?  How does Bankruptcy work? ◦ Bankruptcy Court ◦ Decide what debt to keep and which to give up ◦ Taxes and School Loans MUST be repaid ◦ Stays on record for 10 years ◦ Constitution allows Congress to make laws on Bankruptcy