1. Credit
Chapter 10

2. Credit
The ability to borrow money in return for a promise of future repayments
Usually includes interest
When you save, you give up the ability to spend now.
When you obtain credit, you give up the ability to spend later.
Never borrow more than you can easily repay

3. Home Ownership Equity Values go up Tax advantages Renting vs. Owning
Difference between what you owe and the value
Values go up
Tax advantages
Renting vs. Owning
(something to show vs. nothing to show

4. Other Reasons to Borrow
Education
Salary goes up
Investment in yourself
Health care costs

5. Considerations
Is it important that I buy the good or service I want now?
Do I have to borrow to buy the product?
Can I afford to make the payments on the loan?
Will I be able to buy other products I want more if I buy this product?
Many borrow for wants, not needs.

6. Credit
Debt payments should not be more than % of your take home pay
Credit worthiness – measure of your reliability to repay a loan
Three C’s of credit:
Character
Capacity
Capital

7. Character Credit History Other indications of responsibility
Having a job for a long time
Living at the same address for a while
Having good school and work attendance
Saving regularly
COSIGN A LOAN

8. Capacity Ability to pay back (expenses vs. income)
Are you already overextended?

9. Capital Value of what you own
Savings
Investments
Property
Things you could sell if you needed to pay loan back

10. Credit Rating Loan application Credit bureaus
Information obtained from:
Stores
Banks
Utilities,
Courts
Creditors
TransUnion, Equifax, Experian

11. Credit Rating FICO scoring system (100-800)
Payment history (largest factor)
Current debt
Length of credit history
New accounts and inquiries
Kind of credit used (# of cards, available credit)

12. LOANS Secured loan Unsecured loan Collateral Installment loan
Closed-end credit
Fixed payments, fixed payoff date, fixed loan amount
Unsecured loan
Granted on credit rating alone
Usually higher interest rates than secured loans
Sometimes credit cards are considered unsecured, open-end credit

13. Places to Obtain Loans Banks
Savings and loan institutions (mostly real estate)
Credit unions
Finance companies
Higher interest, higher risk clients
Life insurance companies
Borrow against policy collateral
Low rates
Balance deducted from death benefits

14. Places to Obtain Loans Credit card cash advance Pawnbrokers
High interest! %
Pawnbrokers
Turn over property to get loan
High interest
Rent-to-own
Expensive

15. Credit Cards Regular charge accounts Revolving charge accounts
Pay balance in full each month
American Express, Diner’s Club, dept. stores
Revolving charge accounts
Interest is charged
May take years to pay off
Minimum balance

16. Credit Cards Sources Incentives Costs
Banks, dept. stores, charities, gasoline companies, universities, credit unions, and more!
Incentives
Costs
Annual fees
Interest
Introductory rates usually only temporary

17. Credit Cards Grace period Credit limit Penalties
15-25 days
Time between billing and due dates where no interest is charged
Credit limit
Penalties
Watch for surprise charges on your statement!

18. Downside of Credit Most expensive option Consider loan as alternative
Minimum payment trap
Most of this payment is pure interest
Choose the least expensive cards

19. Credit Rights & Responsibilities
Truth in Lending Act of 1968
Must report information the same way
Finance charges
Annual percentage rate (APR)
Equal Credit Opportunity Act (1975, 1977)
Equal opportunities for credit
Illegal to refuse credit based on race, color, religion, national origin, sex, marital status, or age

20. Credit Rights & Responsibilities
Fair Credit Reporting Act of 1971
Organizations must identify the credit bureau that supplied the information used to make their decision
If denied, you have 30 days to request a free copy of your file
Request a copy for a small fee

21. Credit Rights & Responsibilities
Consumer Credit Reporting Reform Act (1996)
Requires credit bureaus to investigate disputed items on a credit report within 30 days
If bureau can’t verify the information the item must be removed from the record

22. If you were refused credit unfairly
Contact the bureau the lender used
Write to the bureau and request a copy of report
Study for inaccuracies
Report errors in writing
If no errors, but unusual circumstances, can attach a 100-word explanation to your report

23. Credit Rights & Responsibilities
Fair Credit Billing Act (part of Truth in Lending Act)
Helps consumers correct credit card billing mistakes
You have the right to refuse paying for something you didn’t charge
You have 60 days to contact credit card
They have 30 days to reply
They have 90 days to resolve
You are not charged interest during this time
Inferior products may also be disputed

24. Credit Rights & Responsibilities
Fair Debt Collections Practices Act (1977)
Stops debt collection agencies from using abusive practices
Stops abusive or threatening phone calls
Stops deceptive means to get information
Applies to agencies that are in business of collecting debt (not to individuals or businesses trying to collect their own accounts)

25. Credit Cards Credit is a privilege not a right
Lenders are in business to make money—will give you lots of credit to make more money!
Pay more than the minimum
Avoid too many cards (flyers in mail)
Pay cash when possible
Save receipts for charges/verify accuracy

26. Maintain a Good Credit Rating
Start small
Department credit card
Do not miss a payment
Save regularly
Call lender if issue—work with them!
Negative credit more difficult to fix
Stays on credit for years!
Read what you sign

27. Maintain a Good Credit Rating
Acceleration clause
Payment in full is due if you miss one payment
Balloon payment
Final payment is larger than the regular payments
Bankruptcy
Legal process in which people cannot pay their debt and must surrender most of their property
Lost property
Credit reporting for 10 years

28. Maintain a Good Credit Rating
True-Name Fraud
SSN, DL’s #, and credit card # being used by someone else
Never give this information out!!

29. Help for Credit Problems
Deb Consolidation Loans
Could pay more in long run
Don’t use the extra monthly income to spend!
Credit Counseling Services