The Fundamentals of Credit

1. Personal Finance The Fundamentals of Credit

2. What is Credit? • credit— the PRIVILEGE of using someone else’s money. • debtor— one who buys on credit or borrows money via loans. • creditor— A person or business that lends money. The seller of credit. • trust—the foundation of credit—the creditor’s belief that the debtor will honor the promise to pay later for goods and services that have already been received or used. TRUST IS THE FOUNDATION OF CREDIT

3. Types of Credit • loan Credit —borrowing money to be used for some purpose. Examples: car loans, mortgages, school loans. • sales credit -- credit used to purchase items at the time of sale—credit card purchases. • Revolvers—pay the minimum payment or an amount less that the balance owed. • Convenience users—pay off the entire credit card bill within the grace period. ONLY OPTION FOR YOU!! • trade credit – credit extended to businesses to allow them to purchase inventory or raw materials—paid for a specified later date.

4. Users of Credit • Consumers use credit to purchase cars, houses and finance and education. Consumers also use credit cards to purchase services and goods. • Businesses obtain loans for land equipment. Trade credit finances raw materials and inventory. • Local, state, and the federal governments sell bonds to finance goods and services that benefit the public good. Washington borrows 40 cents of every dollar it spends in 2011.

5. The Three “Cs” of Credit • Character—refers to your honesty and willingness to pay a debt when it is due. How you will pay in the future is how you paid your bills in the past. • Capacity– your ability to pay a debt when it is due. Can your income support the additional debt. • Capital – the value of the borrower’s possessions. Money you possess and property you own—could be used as collateral for a loan.

6. Five Reasons to Maintain a Good Credit Rating—Creditworthiness • To qualify for mortgages, credit cards, and car loans and to qualify for low interest rates. • To get a job—many employers ask to see your credit report before they will hire you. • To insure good relationships—no one wants to marry a dead beat. Marry at least a “700”. • To qualify for low car insurance rates. • To get a cell Phone

7. Good Reasons to Use Credit • To invest in you —school loans. Beware of for-profit schools and minimize the debt by choosing the school which best meets your needs for the least amount of money. • Real Estate —houses are expensive and nearly impossible to pay for in cash. Buy a house within your budget and finance for no longer than 15 years.

8. Good Reasons to Use Credit (cont’d) • Purchase a Car — If you need a car to get to work and you don’t have the cash to purchase one. A new car is a luxury and unless you have 50% down you should not by a new car. Buy a used car and run it into the ground. Use carfax. • Online or Phone Purchases — credit cards offer protection against fraud that debit cards do not provide. ONLY BUY WHAT YOU CAN PAY OFF IN THE GRACE PERIOD. Be a convenience user of credit cards.

9. Bad Reasons to Use Credit • Gifts—Holiday, birthday, wedding anything –no cash no gifts. People will understand. Save for the holiday and spend that money. • Weddings—People take on a ridiculous amount of debt for one day—not worth it in any way. Pay cash for your wedding and don’t expect your parents to go into to debt to finance your day.

10. Bad Reasons to Use Credit • Clothes, Jewelry, Shoes, etc—live within your means. Never pay interest on these items—often they are not necessities but wants—a form of retail therapy. • Vacations—never pay interest on trips and vacations. You may use your credit card but you must have the money in the bank to pay off the bill when you return home. If you don’t have cash you take a “Staycation.”

11. Bad Reasons to Use Credit Do not borrow money to loan to a friend. Whatever you do, don't "loan" them money. Particularly, if you have to borrow it for the purpose. And never loan money to a boyfriend or girlfriend. Without a written contract, you're toast. --True love conquers all. Except contractual obligations. Don’t borrow money to invest in the stock market or make other investments—called using “leverage.” Avoid get rich quick schemes—the only one making money is the seller.

12. Bad Reasons to Use Credit • Plastic Surgery—more and more people are getting plastic surgery and don’t have the money to pay for it so they are financing procedures. Companies such as CareCredit and Cosmetic Surgery Financing are working with doctors and charging interest as high as 26.99%

13. Benefits of Credit • Convenience—Credit can make it convenient for you to buy. You can shop with carrying much cash with you. ALWAYS PAY YOUR CREDIT CARD BILL DURING THE GRACE PERIOD—DO NOT BECOME A REVOLVER. • Immediate Possession -- Credit allows you to have immediate possession of the goods and services. You can buy expensive items without waiting until you have enough cash. Examples: house, cars, and an education.

14. Benefits of Credit • Credit Rating— You will establish a favorable credit rating if you pay your bills on time. A good credit rating is essential for obtaining loans, getting a job and other reasons. • Use in an Emergency -- You should have an emergency fund, but if you have yet to save one, credit allows you to borrow money to fix your car, or deal with short-term financial problems due to a loss of a job. BE CAREFUL—You should have six months of livings expenses in a savings account to cushion you in the event of a job loss. Many Americans are one paycheck away from financial devastation.

15. Credit Precautions • Overbuying-- Overuse of your credit card. It is much easier to whip out the credit card then you realize. Just “Charge it” has become the too easy for many Americans. Remember you have to pay off the credit card in full each month so BE CAREFUL!!

16. Credit Precautions • Careless Buying-- You become a lazy shopper and do not shop around for the best deal. You fail to comparison shop. Buy things in the season when they are the cheapest. • Overuse of Credit – People can end up buying too much on credit and not being able to pay it back. When you owe far more than you can pay, liabilities (debt) far exceeds income and assets—BANKRUPTCY may be the only option. This creates much stress and heartache. AVOID THIS SITUATION BY LIVING WITHIN YOUR MEANS. ESTABLISH AN EMERGENCY FUND (six months of income in case you lose your job.)