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CREDIT

Learn about the concept of credit, including the ability to borrow money, interest rates, grace periods, minimum payments, and the importance of creditworthiness. Discover how to determine how much to borrow and how to qualify for credit. Explore different types of consumer borrowing, such as loans and credit card accounts.

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CREDIT

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  1. CREDIT CHAPTER 11

  2. What is Credit? Section 1

  3. What is Credit? • Credit- is the ability to borrow money in return for a promise of future repayment • Giving up the ability to spend in the future in order to spend now

  4. Saving • Giving up spending now for the ability to spend later

  5. Interest • Charge for unpaid balances • Giving up more future spending than original cost • Spend $100 • Interest is 12% APR (annual percentage rate) • Interest per month would be 1% • $1 of interest for one month • $12 of interest for one year • This is assuming you don’t add to the amount

  6. Grace Period • Is the time between the billing date and the payment due date when no interest is charged • 20 to 25 days • If not paid off: • Interest is charged from the date of your purchase

  7. Minimum Payment • 2 percent (%) of your total balance Example: $100 balance $1000 x .02 x .02 $2 $20 • As your balance goes down so does your minimum payment • Paying off a big charge little by ever-so-little also means that a $1,000 debt can turn into a 22-year commitment -- and that you'll accumulate thousands more in interest in the meantime

  8. Next Month Minimum Payment • $1000 starting balance + 20 interest (24% APR) • 20.40 min. payment (usually 2% of balance) • $ 999.6 next months balance + 19.99 interest 1 20.39 min. payment $ 999.20 next months balance http://cgi.money.cnn.com/tools/debtplanner/debtplanner.jsp http://www.calculatorweb.com/calculators/creditcardcalc.shtml

  9. Opportunity Cost • Is giving up what you would spend in the future with the money you spent on interest plus the cost of the item you bought now

  10. Other • Never borrow more money than you can easily repay • Renting- money paid towards shelter without anything to show for it • Owning- using credit to live in a home while making payments; over time the home builds equity • Equity- difference between amount owed on a home and the home’s value • Investment- value of a product that grows over time

  11. Other • Credit Limit- maximum amount you are allowed to charge on your account • Tax advantage = property tax and interest paid for home loans are deducted from taxes • Investing in yourself = education or training = higher income • Budget borrowed money repayments

  12. Health Insurance • doesn’t pay for everything, BUT things happen so sometimes you will have to borrow money to pay for living expenses

  13. When to Borrow • 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 borrow to buy this product?

  14. How much to Borrow • No more than 20 to 25% of take home pay • $1000 x .20 or .25 = $200 to $250

  15. How to Qualify for Credit Section 2

  16. Credit Worthiness • Is a measure of your reliability to repay a loan • To be credit worthy you must have the ABILITY and WILLINGNESS to pay your debts

  17. Character • Is a measure of your sense of financial responsibility • Do you take your obligations seriously?

  18. Other Character Check • How long have you worked at the same job? • How long have you lived at your residence? • Do you have good work and school attendance? • Do you save regularly?

  19. Character History • A record of your past borrowing and repayments • Most important factor is: ALWAYS pay on time

  20. Cosign a loan • Parent/adult agrees to pay the debt if you don’t • Not recommended to do this for friends or irresponsible family members

  21. Capacity • Is a measure of your financial ability to repay a loan

  22. Are you Financially Over Extended? • Lenders will require all debt payments then they will calculate the percentage to see if you can take on another loan

  23. Capital • Is the value of what you own • savings, • investments, and • property • More capital you have the safer you are to loan to

  24. Credit Bureau • Is a company that collects information about consumers’ credit history and sells it to lenders

  25. Information on Application • Liabilities are your debts • Assets are things you own

  26. Credit Rating • Is a measure of your credit worthiness • Lenders have computerized systems called FICO (Fair Isaac Corporation) • Scores from 100 to 800 • The higher the number the better • Always pay on time and don’t take on more debt that you can easily repay

  27. Credit Reporting Companies • Equifax • Experian • TransUnion • Check once a year from each company • www.annualcreditreport.com • 1-877-322-8228

  28. Sources of Consumer Credit Section 3

  29. Types of Consumer Borrowing • Loans • Credit Card Accounts

  30. Loans • Given a certain amount of money all at once to make your purchase • Make specified payments with interest by a certain date

  31. Credit Card Accounts • Amount purchased is added to account • Pay what you want each month as long as you are paying the minimum required

  32. Secured Loan • Is backed by something of value pledged to insure payment • Safe for lender • Not safe for borrower

  33. Collateral • Property pledged to back a loan • Car • Boat • Home • Etc.

  34. Installment Loan • Is repaid in a certain number of payments with a certain interest rates

  35. Unsecured Loan • Is not backed by collateral • Lender lends based on your credit worthiness • Higher interest rates • Credit cards are considered unsecured loans because it’s an unspecified amount • Up to the customer’s credit limit • Date specified = closed-end • Date not specified = open-end

  36. Other Sources of Loans • Finance Companies • High interest rates because the borrower has higher risk • Life Insurance • Lower interest rates because the loan can be deducted from the life insurance policy if borrower passes away • Credit Card Cash Advances • Very high interest rates 17 to 24% • Can get borrower into a lot of financial trouble

  37. Sources continued • Pawn Brokers • Give up property to get money • To get property back, borrower pays a high fee • Rent to Own Companies • Rent property until you pay it off • Pay a lot higher for the item rented

  38. CREDIT CARDS • Regular Charge Account • You must pay your balance each month in full with in a specific amount of time • No interest rate since you are not borrowing money • Revolving Charge Account • Allows you to carry a balance from one month to another • Pay interest

  39. Large Company Visa MasterCard Discover American Express Small Company Banks Gasoline Universities Charitable organizations credit unions Sources of Credit Cards

  40. Credit Card Incentives • Incentive • Anything that is given in replacement of a particular agreement or action • Examples: • Free stuff (hats, shirts, cups, tickets, etc.) • Points to win things later • Money to Charity • Money to Schools • Low interest rates: 0% APR for one year! • Purpose • Encourages you to use their card

  41. Credit Card Costs • Annual fees $15 to $100 • One time fee for the use of the card • Interest • On all unpaid balances • 3.9% to 24% • 0% for 6 months to get you to pay on credit card; buy interest builds if you don’t pay it off in the 6 months • This is called back pay

  42. Loan as Alternative • Interest on a loan is lower than on a credit card • Loans are closed-end

  43. Minimum Payment Trap • Interest plus a little more • This is encouraged to extend amount of money paid in interest • More money on credit card and the longer it stays the more money you will pay the credit card company

  44. Credit Rights and Responsibilities Section 4

  45. Consumer Credit Rights • Truth in Lending At in 1968 • Requires banks to calculate credit costs in the same way • Finance charge • Annual Percentage Rate (APR) • Finance Charge • Is the total cost a borrower must pay for a loan • Includes • Interest • fees

  46. Consumer Credit Rights continued • Annual Percentage Rate • Is the finance charge calculated as a percentage of the amount borrowed • The laws does not guarantee that you will pay the lowest amount possible • Getting the best deal is up to you

  47. Equal Credit Opportunity Act • It is illegal to refuse credit based on: • Race • Color • Religion • National origin • Sex • Marital status • And age

  48. Fair Credit Reporting Act • If you have been refused credit • You have 30 days to request a free copy of your file

  49. Consumer Credit Reporting Reform • Requires credit bureaus to investigate disputed items on a credit report with in 30 days

  50. Credit is a PRIVILEGE not a RIGHT

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