Chapter 10 Notes Credit – You’re in Charge - PowerPoint Presentation

1. Chapter 10 NotesCredit – 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.Section 10.1What is Credit?

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.Section 10.1What is Credit?

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.Section 10.1What is Credit?

5. Investing in yourself and your education pays off. Statistics show people with more education & training may have higher salaries.Section 10.1What is Credit?

6. Plan Your BorrowingBorrowing creates fixed expenses that you have to pay.To be useful, your budget must take borrowing and repayments into accountBorrowing should be for what you needSection 10.1What is Credit?

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)Section 10.1What is Credit?

8. Your Credit WorthinessA measure of your reliability to repay a loan.Must have the ability and willingness to pay your debts.Lenders judge on 3 factors:CharacterCapacityCapitalSection 10.2How to Qualify for Credit

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!Section 10.2How to Qualify for Credit

10. Capacity – a measure of your financial ability to repay a loan.IncomeOther expensesSection 10.2How to Qualify for Credit

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.Section 10.2How to Qualify for Credit

12. Credit BureausA 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.Section 10.2How to Qualify for Credit

13. Credit RatingsMeasure of your credit worthiness.Computerized score called FICO. Between 300 – 850.Based on certain factors of your credit report:Payment history (most important!!)Current debtLength of credit historyNew account and inquiriesKind of credit you useSection 10.2How to Qualify for Credit

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!Section 10.3Sources of Consumer Credit

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.Section 10.3Sources of Consumer Credit

16. Other options are usually MUCH more expensive than borrowing from a bankCredit 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!Section 10.3Sources of Consumer Credit

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.Section 10.3Sources of Consumer Credit

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.Section 10.3Sources of Consumer Credit

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.Section 10.3Sources of Consumer Credit

20. Consumer Protection LawsA. Truth in Lending Act 1968Requires 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.Section 10.4Credit Rights and Responsibilities

21. Equal Credit Opportunity Act 1975Illegal to refuse credit on the national basis of race, color, religion, national origin, sex, marital status, or age.Section 10.4Credit Rights and Responsibilities

22. Fair Credit Reporting Act 1971A way for consumers to check credit reports.You can request a free copy once a yearSection 10.4Credit Rights and Responsibilities

23. Fair Credit Billing ActHelps 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!Section 10.4Credit Rights and Responsibilities

24. Consumer Credit ResponsibilitiesAccount ResponsibilitiesLenders are in the business of making money, NOT trying to protect you from financial difficulties!Know Your Debt CapacityConsider 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!Section 10.4Credit Rights and Responsibilities

25. Self-Control with CreditPay more than the minimum! Avoid too many credit cards!Pay cash!Keep accurate records!Section 10.4Credit Rights and Responsibilities

26. Establish Your Credit HistoryStart Small – Open one credit card and pay off the balance each month.Do not miss a paymentSave regularly to encourage banks to extend you credit in the future.Section 10.5Maintain Good Credit Rating

27. Credit for Married PeopleIt 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.Section 10.5Maintain Good Credit Rating

28. Avoid Common Credit MistakesEasier 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.Section 10.5Maintain Good Credit Rating

29. BankruptcyLegal process in which people who cannot pay their debts must surrender most of their property.Court sells property to pay debtsCredit report shows bankruptcy for 10 years. May not be able to get credit during this time.Section 10.5Maintain Good Credit Rating

30. True Name FraudUsing 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.Section 10.5Maintain Good Credit Rating