1. Credit – You’re in Charge

2.  Credit – the ability to borrow money in return for a promise of future payment. ◦ Credit has the opposite trade-off as saving. You give up the ability to spend in the future for the ability to spend now.  Borrowing with interest makes you give up more future spending than the amount of the loan.

3.  Credit can help you buy things you want earlier than you could get them by saving. ◦ Never borrow more money than you can repay easily. ◦ Sometime borrowing is necessary (ie: house, car, appliances, furniture) ◦ As long as you use credit responsibly, and you don’t borrow more than you can repay easily, then using credit makes sense.

4.  Without credit, most Americans could never own a home. ◦ You get the benefits of living in it while you are making loan payments. ◦ You should always try to own something in exchange for your money!  Equity – the difference between the amount owed on a home and the home’s value. ◦ Home values usually increase over time, so a home is an investment. This is not true of most consumer goods.

5.  Investing in yourself and your education pays off. Statistics show people with more education & training may have higher salaries.

6.  Plan Your Borrowing ◦ Borrowing creates fixed expenses that you have to pay.  To be useful, your budget must take borrowing and repayments into account ◦ Borrowing should be for what you need

7.  The first rule of borrowing is to buy responsibly.  The more you buy on credit, the higher your payment will be. ◦ Your debt payments should be no more than 20-25% of your take home pay. (net pay)

8.  Your Credit Worthiness ◦ A measure of your reliability to repay a loan.  Must have the ability and willingness to pay your debts.  Lenders judge on 3 factors:  Character  Capacity  Capital

9. ◦ Character – measure of your sense of financial responsibility.  Credit history – record of your past borrowing and repayments.  Most important factor = PAYING YOUR BILLS ON TIME!  Co-sign a loan – usually a parent agrees to pay the debt if you don’t. If your cosigner is credit worthy the lender will feel safe lending to you.  If someone asks you to cosign a loan, the loan is legally as much your responsibility as the borrower’s!

10. ◦ Capacity – a measure of your financial ability to repay a loan.  Income  Other expenses

11. ◦ Capital – the value of what you own, including savings, investments and property.  The more capital you have, the safer it is for a lender to give you a loan.

12. ◦ Credit Bureaus  A company that collects information about consumers credit history and sells it to lenders.  Has records about every payments made, including late payments, bounced records and court records.  Three largest credit bureaus are Trans Union, Equifax and Experian.

13. ◦ Credit Ratings  Measure of your credit worthiness.  Computerized score called FICO. Between 300 – 850.  Based on certain factors of your credit report:  Payment history (most important!!)  Current debt  Length of credit history  New account and inquiries  Kind of credit you use

14. Types of Consumer Borrowing – Consumer borrowing takes 2 basic forms: LOANS and CREDIT CARDS.  Types of Loans ◦ Secured Loans – backed by something of value pledged to insure payment.  Collateral = property pledged to back a loan.  Installment Loan – repaid in a certain number of time periods with a certain interest rate. Made at one time for one amount!

15.  Unsecured Loans – not backed by any collateral.  Lender grants you credit based on your credit worthiness alone.  Generally require you to pay higher interest rates because the lender is taking greater risk.  Most credit cards are considered unsecured loans because they are open for an unspecified amount.

16.  Other options are usually MUCH more expensive than borrowing from a bank  Credit Card Cash Advances – you will receive cash and then add it to your credit card balance. Very HIGH interest rate! Avoid doing this at ALL cost!  Pawnbrokers – turn over personal property to get a loan. Pay the loan back, get your property back. Very high rates!  Rent-to-own Companies – paying installments to use an item before you own it. Technically, you don’t pay interest, but payments equal more than you would pay upfront for the product!

17. ◦ When you open a credit card account, you are actually borrowing money. Your credit card represents your account.  Regular Charge Account – must pay your balance in full each month. No stated interest since you are not borrowing money.  Revolving Charge Account – allow you to carry a balance from one month to the next. You pay interest on this type of account. You may pay any amount over the minimum each month.

18.  Retail stores have credit cards, but most credit cards are issued by VISA, Mastercard, American Express and Discover.  Some organizations offer incentives to use their card.  designed to encourage you to sign up for a particular card and then run up your credit card balance.

19. ◦ Evaluate costs and alternatives before opening a credit card.  Annual Fees – many banks have no annual fees if you have an account there. Be sure to evaluate annual fees.  Interest – All credit accounts charge interest on unpaid balances.  Limits and Penalties – Credit limit = the maximum amount you are allowed to charge. Going over the limit means you pay a penalty.

20. Consumer Protection Laws  A. Truth in Lending Act 1968 ◦ Requires all banks to calculate credit costs in the same way.  Finance charges – total cost a borrower must pay for a loan, including all interest rates and fees.  Annual Percentage Rate (APR) – the finance charge calculated as a percentage of the amount borrowed.

21. ◦ Equal Credit Opportunity Act 1975  Illegal to refuse credit on the national basis of race, color, religion, national origin, sex, marital status, or age.

22. ◦ Fair Credit Reporting Act 1971  A way for consumers to check credit reports.  You can request a free copy once a year

23. Fair Credit Billing Act ◦ Helps consumers correct credit card billing mistakes. ◦ You have the right to refuse to pay a bill but you must do so in writing within 60 days!

24. Consumer Credit Responsibilities ◦ Account Responsibilities  Lenders are in the business of making money, NOT trying to protect you from financial difficulties! ◦ Know Your Debt Capacity  Consider all your fixed expenses and your debt payments.  Figure your debt expenses and fixed expenses from your net (take-home) pay and then use common sense!

25. ◦ Self-Control with Credit  Pay more than the minimum!  Avoid too many credit cards!  Pay cash!  Keep accurate records!

26.  Establish Your Credit History ◦ Start Small – Open one credit card and pay off the balance each month.  Do not miss a payment  Save regularly to encourage banks to extend you credit in the future.

27. ◦ Credit for Married People  It is still important that you establish credit on your own.  Open accounts and take out loans in both names or separately.  Joint accounts affect credit equally.

28. ◦ Avoid Common Credit Mistakes  Easier to destroy credit history than build a good one.  Always pay bills when they are due. Never ignore a bill even if you are short on money.  Contact the lender immediately to make payment plans.  Records stay on your credit history for 7 years.  Know What You’re Signing! “KWYS”  If you don’t understand something, ask the lender for an explanation.

29. ◦ Bankruptcy  Legal process in which people who cannot pay their debts must surrender most of their property.  Court sells property to pay debts  Credit report shows bankruptcy for 10 years. May not be able to get credit during this time.

30. ◦ True Name Fraud  Using someone else’s identity to get cash or buy products.  The business that extended the credit are responsible for the debts.  Guard your personal documents with your background information.