IDENTIFY THE ESSENTIALS OF CREDIT

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IDENTIFY THE ESSENTIALS OF CREDIT

Learning Activity 5

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Good Credit

Credit History

AdvantageCredit Cards

Late Fee

Impulse Buying

High Interest Rates

Human Factor

Payments Schedule

The Essentials of

Bad Credit

Credit

Disadvantage

Loans

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TYPES OF CREDIT

Credit CardsShort Term LoansLong Term Loans

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CREDIT CARD FACTS

Cards Cause a 32% Increase in Spending

Average Household Balance Is $5,700Average Indebted Household Is $7,743Average APR Is 15.00% PercentTotal Consumer Debt Is $3.3 Trillion

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CREDIT EXAMPLE

Amount Charged $ 5,000Interest Rate 18%Monthly Payments: 2% of BalanceTime To Pay Off Debt:

46 YEARS!!!Total Interest $ 13,931Total Paid $ 18,931

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SHORT-TERM LOANS

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Advantages

Better Interest Rate

Less Total Interest Paid

Costs To Finance $12,500 at 6% APR

Disadvantage

Higher Monthly Payment

Term of Loan

Monthly Payment

Total Interest Paid

3 years

$380.35

$1,192.60

LONG-TERM LOANS

AdvantageLower Monthly PaymentsDisadvantages

More Total Interest PaidCosts To Finance $12,500 at 6% APR5-

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Term of Loan

Monthly Payment

Total Interest Paid

5 years

$241.71

$2,202.60

HOW CREDIT

WORTHY ARE YOU?

Character Capacity

C

ollateral

“CREDITWORTHINESS"

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CHARACTER

Credit HistoryBankcardsDepartment Store CardsAuto Loans

StabilityAgeBank Account History

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CAPACITY

IncomePotential CreditNumber of CardsCredit Limits

Total Debt Level

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COLLATERAL

HomeCarOther

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THE

ABC’s OF APPROPRIATE CREDIT USE

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Purchase

A

ssets

“

B

ig Ticket” Items

For

Convenience

INAPPROPRIATE USES OF CREDIT

Cheap FurnitureClothing

Sports EquipmentEntertainmentDaily Living ExpensesPayments May Outlast Item(s)

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MOTIVATIONS TO ABUSE CREDIT

Impulse Buying Spending for Status Retaliatory Spending

Spending to Feel Good

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DEBT WARNING SIGNS

Excessive Credit Card DebtFalling Behind on PaymentsUsing Credit for Basic NeedsLack of Savings Being At or Near Card Limits

Needing Income from a Second Job5-

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CONSEQUENCES OF DELINQUENT ACOUNTS

Credit Scores Will Decrease

Loan DefaultDifficulty Obtaining New CreditGarnishment of WagesWithholding of Tax Returns

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INDICATIONS OF SERIOUS CREDIT PROBLEMS

Skipping or Rotating Bill Payments

Using Credit to Pay CreditDebt Consolidation LoansBeing Denied CreditDishonesty With Family

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CREDIT BUREAUS

EquifaxExperian

Trans Union

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REPORT COMPONENTS

Personal/Employment InformationCredit HistoryPublic RecordsInquiries

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CREDIT SCORING SYSTEM

Tool to determine creditworthinessPoints are awarded for each factor that predicts reliability for debt repaymentTotal number of points (credit score) helps predict how creditworthy you are

Credit scores between 300 and 850Called FICO and BEACON Scores

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WHAT IS A GOOD CREDIT SCORE?

No official guidelines, however roughly:751+

Excellent credit score. You should qualify for the best interest rate and loan terms. 720 – 750 Good credit score. There won’t be any problem in getting a loan at a good interest rate. 641 – 719 Average credit score. You may qualify for the loan but not at a good interest rate. 581 – 640 Poor credit score. You will have a tough time getting a loan or a credit card.

below

580

Bad credit score.

It’s doubtful that you will qualify for a loan or a credit card.

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HOW CREDIT REPORTS ARE USED

Potential Employers

Potential CreditorsSubjective EvaluationCredit ScoringAdverse InformationInsurance Agents

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ENSURING ACCURATE REPORTS

Get Copies of Your Credit ReportsDispute Incorrect InformationAdd Your Version (if necessary)

20 percent of all credit reports contain inaccurate information5-

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CONSUMER CREDIT PROTECTION LAWS

Federal Truth In Lending Act Fair Credit Billing Act Fair Credit Reporting Act Fair Debt Collection Practices Act

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CONSUMER CREDIT PROTECTION LAWS (Cont.)

Equal Credit Opportunity Act

Fair Credit and Charge Card Disclosure ActCredit Card ActState Laws

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DEALING WITH CREDITORS

Stay In Contact Current mailing address & phoneBe Honest

Life is unpredictableHave a PlanPay your just debts

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SITUATIONS TO AVOID

Credit ClinicsDebt Consolidation LoansSpending Behavior Must ChangeBankruptcy

Long-term effects (7-10 yrs)Last resort

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HOW TO ESTABLISH CREDIT

Check your credit reportGet your first credit reference – a secured credit card/line of credit/loan – but watch the interest rate

Use it, but don’t abuse itAfter 6 months, get more credit and round out referencesMonitor credit report

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HOW TO IMPROVE YOUR CREDIT

Get copies of your credit reports

Pay your bills on timeUnderstand how your credit score is determinedLearn the legal steps to take to improve your credit reportBeware of credit-repair scams

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SOURCES OF ASSISTANCE

Chain of CommandPersonnel Action Center (PAC)Army Community Service (ACS) Legal Office

Financial InstitutionsArmy Emergency Relief (AER)Consumer Financial Protection Bureau

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CHECK ON LEARNING

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True or False: A

credit repair company can erase a poor credit history.

FALSECHECK ON LEARNING

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Name Five Warning Signs of Financial Trouble.

1. Debt Consolidation Loans2. Using Credit for Basic Needs3. Falling Behind on Payments At or Near Credit Limits5. Lack of Savings

CHECK ON LEARNING

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CHECK ON LEARNING

True or False: You

will have lower monthly payments with a long term loan. TRUE

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True or False: If

someone uses your lost or stolen credit card, you are liable for no more than $50.

TRUE

CHECK ON LEARNING

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True or False: If

you pay a bill late, your creditor can report this information to a credit bureau.

TRUECHECK ON LEARNING

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Under the Truth in Lending Act, what is one thing a lender MUST disclose to you when you apply for a loan?

a. Annual Percentage Rate b. Warranty information c. Payment start date d. Lender’s name and address a. Annual Percentage Rate

CHECK ON LEARNING

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SUMMARY

DON’T ALLOW THIS TO BE YOU!

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