Bellwork 1-1

1. Bellwork 1-1 • What is your definition of credit? • List 3 forms of credit of which you know. • How can credit be misused?

2. Protecting Personal Credit Unit 8 Objective 7.02

3. What is Credit? • Obtaining goods and services with a promise to pay for them from future income • A temporary money substitute since it allows a person to buy today and pay tomorrow • Credit involves two parties, a lender and a borrower • Can be a valuable resource when used wisely

4. Types of Consumer Credit • Sales credit-credit to purchase goods and services from retailers • 3 Types: • Regular charge account • Borrower promises to pay in full within 20-30 days • If not paid in time, there is a finance charge • Example: Accounts with utility companies

5. Types of Consumer Credit • Sales Credit • 3 Types (Cont): • Installment account • Borrowers agree to schedule of payments of equal dollar amounts, including interest • Creditors hold the title or “own” the merchandise until payments are complete. • Borrowers typically asked to sign a written contract • A small down payment may be required • Examples: Accounts used to purchase appliances and furniture

6. Types of Consumer Credit • Sales Credit • 3 Types (Cont): • Revolving credit account • Borrowers may choose to pay in full each month or spread payments over time • A minimum payment (a percentage of unpaid balance) must be made each month • Unpaid balance may be carried over • A finance charge is applied to the unpaid balance. • The lender sets a credit limit for the borrower • Examples: Retail stores (Target, Sears); credit card issuers (Visa, MasterCard)

7. Types of Consumer Credit • Cash credit-money granted to use for a variety of purposes; may be secured or unsecured; may be installment, single-payment, or credit card/check credit loans • Unsecured loans • Require borrower’s signature as evidence of agreement with terms of the loan • No collateral required • Generally available for borrowers with a good credit history • Secured loans • Require some form of collateral (property) to secure the loan • Collateral reduces lender’s risk; can take property if the borrower does not repay • A cosigner can sign the loan if a borrower has neither collateral nor good credit • Cosigner typically has good credit and agrees to pay if borrower fails to repay

8. Types of Consumer Credit • Cash Credit • 3 Types • Installment loans • Provide a specific amount of money with promise of repayment with interest according to a schedule of monthly payments in a set amount • Single-payment loans • With collateral, provide a specific amount of money with the promise of repayment with interest in a single payment at a specified time.

9. Types of Consumer Credit • Cash Credit • 3 Types (Cont): • Credit card/check credit loans • Allow borrowers to use their credit cards to obtain money or write a check connected to the card account knowing the bank will cover up to a given maximum amount; borrowers repay with interest • 3 Types of Credit Cards: • Company or retail store credit card loan (ex. Sears) • Travel and entertainment credit card loan (ex. Motel 6) • General-purpose credit card loan (ex. Credit Union)

10. Credit Types Assignment • You are to find 3 examples of each of the following types of credit: • Regular Charge Account (ex. Light Bill) • Installment Account/Loan (ex. Car Loan) • Revolving Accounts: • Retail Credit Card (ex. Lowe’s Hardware) • Travel/Entertainment Credit Card (ex. American Airlines/Motel 6/Exxon) • General Purpose Credit Card (ex. VISA, MasterCard) • Single Payment Account (ex. Repay a neighbor for home repair) • For each example answer the following: • Name of Financial Institution • What is the Interest Rate? Is it Fixed or Variable? • Term (how long is the loan?) • Is it Secured or Unsecured? • If Secured, what it the Collateral? • Complete in PowerPoint and submit to Edmodo by end of class.

11. Bellwork 1-2 • Which purchase is most suitable for installment credit? • A. Fast food meal • B. Pair of movie tickets • C. Refrigerator • D. Gas for the car • Which is MOST suitable use of revolving credit? • A. Buying a new automobile • B. Buying new furniture for a bedroom • C. Paying for electrical power for the past month • D. Shopping for clothes in a retail department store • Credit applications usually request income information as evidence of a borrower's: • A. capacity. • B. capital. • C. character. • D. credit.

12. Advantages Can be used to purchase a variety of goods and services Frees consumers from having to carry cash to make purchases Enables consumers to make purchases online and over the telephone Initially expands borrower’s income Disadvantages Typically pay more for goods and services because of finance charges (interest and fees) Retailers increase prices to cover costs associated with accepting credit and paying bad debts Limits current buying power as income is required to repay old debts Must protect credit cards from unauthorized use Advantages and Disadvantagesof using Credit

13. Advantages Makes recordkeeping of purchases simpler Usually makes returning items easier When used responsibly, helps establish good credit Having the means to pay for emergencies provides a sense of comfort Disadvantages May lead to impulse purchases May lead to overspending May lose track of how much is actually being spent If debts not repaid, merchandise may be repossessed by creditors Advantages and Disadvantagesof using Credit

14. Advantages Allows use of goods and services before or while paying for them Allows consumers to purchase expensive items they would not otherwise be able to purchase with cash Good credit indicates that a consumer is responsible financially Convenient to use Disadvantages If debts not repaid, credit may be damaged If credit rating becomes poor, could impact their ability to get credit in the future Bad credit indicates that consumers are irresponsible and untrustworthy when it comes to finances Credit not always available because some retailers don’t accept credit Advantages and Disadvantagesof using Credit

15. Establishing Credit • Creditors only lend to people who can be expected to pay them back • Creditors look at credit-related information to determine if one is a good risk • A creditor’s evaluation of one’s ability and willingness to repay debts is a credit rating • Credit ratings are based on 3 Cs • Character---a person’s reputation for being honest and their financial history • Capacity---a person’s employment history and ability to earn money • Capital---a person’s financial worth

16. Establishing Credit • Ways to establish credit • Open/manage checking/saving accounts • Pay utility bills in your name • Obtain a credit card from a local store • Get help from a cosigner • Obtain a secured credit card

17. Establishing Credit Assignment • Go to: http://www.practicalmoneyskills.com/personalfinance/creditdebt/history/ • On the “Credit History” Section answer: • What is Credit History? • Who can see your Credit Report? • Who are the 3 Credit Bureaus? • On the “Credit Scores” Section answer: • What score range is considered “Poor”? • What score range is considered “Fair”? • What score range is considered “Good”? • What score range is considered “Excellent”? • List 3 ways to keep your credit score strong. • On the “Your Credit Report” Section answer: • How often can you request a free credit report? • List and describe the 5 parts to a credit report. • On the “Three C’s of Credit” Section answer: • How do lenders judge character? • How do lenders determine your capacity? • Based on your notes, what method/s would you choose to establish your credit? Write a 50 word essay explaining your reasons. • Put in PowerPoint and submit to Edmodo by end of class.

18. Bellwork 1-3 • An ADVANTAGE of using credit is the: • A. increase of debt resulting from credit use. • B. payment of interest on the amount borrowed. • C. potential to misuse credit and spend too much. • D. use of goods and services while making payments. • A DISADVANTAGE of using credit is: • A. buying items at a low price on sale. • B. having a source of cash for emergencies. • C. the convenience of paying on the Internet. • D. the payment of interest on the amount borrowed. • Jose is nineteen and is trying to establish credit. What should he do? • A. Borrow a friend's credit card • B. Fill out a college application • C. Get a loan from his parents • D. Get a secured credit card from a financial institution

19. Loan Sources • Preferred lenders • Most reliable lenders • Examples: banks, credit unions, savings and loan associations, consumer finance companies, insurance policy loans, credit card companies, private loans • Non-preferred lenders • May take advantage of people with poor credit; typically charge high interest rates • AKA “Sub-Prime Lenders” or “Predatory Lenders” • Examples: “payday” lenders, pawnbrokers, loan sharks, auto title loan lenders, tax refund loan

20. Considerations When Shopping for Loans • Conditions of loans • Annual fees • Annual percentage rate (APR)---the amount and whether it changes • Method used to calculate interest • Minimum payment • Grace period • Minimum finance charge and other fees • Credit limit • Special features and services

21. Considerations When Shopping for Loans • Cautions when seeking loans • Always “read the fine print” and know the terms of loans before signing • Consider if this would be wise or unwise use of credit • Remember that, once signed, borrowers are bound by the terms of the agreement • Consumers can apply for loans in person, online, over the telephone or in writing • Typically, provide information about income, employment history, residence, credit history • The lender will likely run a credit check. • If approved, borrowers may have right to rescission (cancel) within three days if they choose; a provision of the Truth in Lending Act

22. Maintaining Good Credit • Evaluate the need to borrow. Can the purchase be avoided, delayed or bought on lay-away? • Identify and use the right type of credit for the intended purchase and shop for the best terms • Know how you will pay it back before you borrow • Only use the amount of credit that you can afford to repay • Meet all the terms of credit contracts and agreements • Keep accurate records of charges, statements, and payments • Consult creditors immediately if you cannot pay on time • Resolve billing errors promptly

23. Credit Reports • A credit report is like a report card reflecting how well a person has used credit resources • Credit reporting agencies maintain records on how people manage their credit accounts • Equifax, Experian, and TransUnion are three national credit-reporting agencies • Contains information about employment history, credit accounts, balances, payment patterns • Consumers should check each of the three credit reports annually to verify accuracy • The Fair Credit Reporting Act---can get a free copy of credit reports every 12 months • The FTC site http://www.ftc.gov/freereports explains how to obtain the free reports

24. Lender Types Assignment • Go to: http://relistr.com/real-estate/prime-loan-vs-subprime-loan.html • What is a “Prime Loan”? • What is “Subprime Lending”? • What are “Subprime Borrowers”? • What are “Subprime Lenders”? • Go to: http://relistr.com/real-estate/avoid-being-a-victim-of-predatory-lenders.html • What is “Predatory Lending”? • List and describe the 8 ways to “Avoid Predatory Lenders”. • Go to: http://www.forbes.com/2007/02/02/credit-score-fico-pf-ie-in_cc_0202creditscore_inl.html • Write a 50 word summary of this article • Go to: http://www.forbes.com/2007/02/02/credit-score-fico-pf-ie-in_cc_0202creditscore_inl_slide_2.html?thisSpeed=15000 • Make sure you pause the videos • List and describe the “10 ways to improve your credit” • Complete in PowerPoint and submit to Edmodo by end of class.

25. Bellwork 1-4 • Which is an example of a prime or preferred lender? • A. Gregory obtained a payday loan but the interest rate was very high. • B. Haley went to a loan shark when no one else would give her a loan. • C. Judy obtained a personal loan from the credit union. • D. Katie took jewelry to a pawnbroker to get some cash. • Which is an example of a sub-prime or non-preferred lender? • A. Carla went to a pawnbroker to get money in exchange for her mother's pearl ring. • B. Dean borrowed money from the value of his life insurance policy. • C. The Coleys obtained a home mortgage from the bank to buy their new home. • D. The Dells obtained a loan from a consumer finance company. • As Larry walked across airport terminal, he was stopped by a representative of a credit card company recruiting people to become cardholders in exchange for the free gift of two large soft drinks. What should he do? • A. Avoid accepting the offer without thoroughly checking terms, including fine print • B. Find his friends so they can all benefit from the free drinks • C. Leave his personal information so the representatives can contact him later • D. Walk the other way to avoid talking to the representatives

26. Signs of a Debt Problem • Consumers find themselves stressed and constantly worrying over their finances • Having no savings • Having reached the credit limit on most of their credit cards • Skipping payments on some bills in order to pay others • Using cash advances on one credit card to pay another • Relying on credit cards to purchase day-to-day items like groceries and fast food • Relying on credit cards to pay monthly bills • Opening new credit card accounts in response to reaching the credit limit on others • Regularly receiving contacts from creditors/collection agencies trying to collect unpaid debts

27. Strategies for Getting out of Debt • Actively deal with the problem; ignoring it will only make it worse • Stop using credit; focus on repaying the debt owed • Get help from trained people---a credit counselor or credit counseling service • Develop a spending plan that includes living expenses and debt repayment funds. • Contact creditors immediately, let them know your situation, ask to have credit terms adjusted

28. Bankruptcy (A Last Resort) • Legal relief or forgiveness from repaying certain debt • Try to deal with debts using all means available before filing for bankruptcy • Bankruptcy carries serious, long-term consequences---part of one’s credit report for ten years • Chapter 7---must sell certain personal belongings, use proceeds to repay debts • Chapter 13---can retain most personal property, but must propose a repayment plan, go to credit counseling, receive financial management education, and be employed

29. Bankruptcy Assignment • Find 3 Celebrities/Athletes who have filed for bankruptcy: • For each describe how they became bankrupt • For each describe the end result of the bankruptcy