WHAT S AHEAD 10.1 What Is Credit? 10.2 How to Qualify for Credit 10.3 Sources of Consumer Credit 10.4 Credit Rights and Responsibilities 10.5 Maintain a Good Credit Rating
LESSON 10.1 What Is Credit? GOALS Identify reasons to borrow and the trade-offs you make when you borrow. Discuss how to plan when and how much to borrow. Slide 2
KEY TERMS credit Equity Credit Video: http://www.youtube.com/watch?v=83wtyeqd1fc Funny Money Credit Video Slide 3
Consumer Action Ryan lives at home with parents. His take-home pay from a part time job is $1,700 a month. He gives his parents $300 each month to help out with expenses. He would like to buy a new car that he saw at a local dealership. To buy it, he would have to get a loan with payments of $400 a month. He really wants the car. Should he buy it? Slide 4
What is Credit? The ability to borrow money in return for a promise of future payment is credit. Future repayment usually includes interest. Example: Suppose you use credit to buy a jacket for $100. If your interest rate is 15% per year, you must repay $115 at the end of the year. 100 X.15 =$15 100 + 15 = 115 You give up future spending for the ability to purchase now. Slide 5
Why Borrow? For your goals For a home A home as an investment Equity: The difference between the amount owed on a home and the homes' value. Taxes and homeownership For your education Student-loan borrowers average debt in 2011 was $26,500! For your health Slide 6
Plan Your Borrowing 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? How much to borrow Basic rule to borrowing is that your total debt payments (excluding housing costs) should be no more than 20 to 25 percent of your net pay Example: If you make $500/month your total debt payment should be no more than $125/month 500 X.25 = $125 Slide 7
LESSON 10.2 How to Qualify for Credit GOALS Explain how lenders judge your creditworthiness. Describe the factors that determine your credit rating. Slide 8
KEY TERMS creditworthiness character credit history cosign capacity capital credit bureau credit rating Slide 9
Your Creditworthiness Creditworthiness is a measure of your reliability to repay a loan How you can establish creditworthiness Find and keep a job with steady income, either part-time or full-time Establish a checking and savings account at a financial institution. Do not overdraw your accounts Apply for a credit card through a local bank or institution. Charge only what you can afford and pay it off on a monthly basis Apply for a loan and make all payments in full and on time. Slide 10
Your Creditworthiness The Three C s of Credit Character A measure of your financial responsibility Credit History: A record of your past borrowing and repayments Capacity A measure of your financial ability to repay a loan Capital The value of what you own (assets) including savings, investments and property Slide 11
Your Credit Rating Loan applications Credit bureaus A company that collects information such as your borrowing and repayment history and sells it to lenders. Three largest credit bureau companies Experian, Transunion, Equifax Credit ratings Fair Isaac Corporation, which created the most widely used scale referred to as FICO scores. Between 300 and 850 (Best) Slide 12
Credit Rating Factors Book Pg. 334 Payment history Current debt Length of credit history New accounts and inquiries Types of credit used Weighting of factors that affect FICO credit scores Slide 13
What are the three C s of credit? Character Capacity Capital What is a credit rating? A measure of your creditworthiness What kinds of information is a credit bureau collecting about you? Your past borrowing Your repayment history Slide 14
LESSON 10.3 Sources of Consumer Credit GOALS Explain differences between a secured and an unsecured loan. Describe benefits and costs of using credit cards. Slide 15
KEY TERMS secured loan collateral installment loan unsecured loan regular charge account revolving charge account grace period credit limit Slide 16
Types of Consumer Borrowing Loans You receive an amount of money all at once to make your purchase Specific payments to repay the loan with interest by a certain date Credit Card Accounts The amount of your purchase is added to your account Pay at least the minimum payment each month No specific payoff date Slide 17
Consumer Loans Secured loan Backed by something of value pledged to ensure payment Example: Home loans The property pledged to back a loan is called Collateral Installment loan Repaid in a certain number of payments with a fixed interest rate for the term of the loan Example: Vehicle Loans Unsecured loan Not backed by collateral Based on your creditworthiness alone Usually higher interest rates Slide 18
Sources of Loans Banking institutions Banks, savings and loan associations and credit unions Other sources of consumer loans Finance companies Payday loans Life insurance companies Credit card cash advances Pawnbrokers Rent-to-own companies Book Pgs. 337-338 Slide 19
Credit Cards Regular charge accounts Account balance must be paid in full each month No stated interest rate American Express, Diner s Club, some department stores Revolving charge accounts Allows you to carry a balance from one month to the next. Pay interest on the account balance Sources of credit cards Visa, MasterCard, American Express, Discover Charities, gas companies, universities, credit unions, Credit card incentives Example: Free gas, airline miles etc. Slide 20
Did you know?? The first widely accepted plastic charge card was issued in 1958 by American Express. Average credit card debt per household with credit card debt: $15,799* Each American household receives approximately 6 credit card offers a month. The typical response rate is.33% (one third of one percent). Total U.S. consumer debt: $2.5 trillion, as of December 2011 The average age at which a U.S. consumer under the age of 35 first adopted a credit card is 20.8 years Slide 21
Credit Card Costs Annual fees $15 to $100 Many cards do not have annual fees Interest Credit Card Balance Calculator Grace period- the time between the billing date and the payment due date when no interest is charged. Limits and penalties Credit limit-the maximum amount you are allowed to charge Fees if you go over your credit limit Slide 22
Control Credit Card Costs A loan as an alternative The minimum payment trap Choose the least expensive card Slide 23
LESSON 10.4 Credit Rights and Responsibilities GOALS Discuss ways that laws protect your credit rights. Describe how to take responsibility for your own financial health. Slide 24
KEY TERMS finance charge annual percentage rate (APR) Slide 25
Consumer Credit Rights Truth in lending Truth in Lending Act of 1968 Requires all banks to calculate credit costs the same way Provide the finance charge and annual percentage rate Finance charge: the total cost a borrower must pay for a loan, including interest and fees Annual percentage rate: the finance charge calculated as a percentage of the amount borrowed Equality in lending Equal Credit Opportunity Act of 1975 Made it illegal to refuse credit based on the basis of race, color, religion, national origin, gender, marital status or age. Slide 26
Consumer Credit Rights Protect your credit history Fair Credit Reporting Act of 1971 Requires lending organizations to identify the credit bureau that supplied information used in lending decisions Allows people who are refused credit 30 days to request a free copy of their credit report Requires credit bureaus to give consumers one free copy of their credit report a year. Slide 27
Consumer Credit Rights Act if you are refused credit pg. 346 Resolve billing and product quality problems Within 60 days write to company that issued your card Company must reply within 30 days and resolve the dispute within 90 Protection from abusive collection practices Fair Debt Collection Act of 1977 A debt collector may not: Call before 8 am Call after 9 pm Call your place of work if they are aware that your employer doesn t approve Lie or harass you Ignore a written request to a stop contact Slide 28
Consumer Credit Responsibilities Accept responsibility Know your debt capacity Take Home pay Fixed expenses (rent, insurance)- Other expenses (food, gas, etc) = What's left? Credit and family Self-control with credit Pay more than the minimum Avoid too many credit cards Pay cash Keep accurate records Slide 29
LESSON 10.5 Maintain a Good Credit Rating GOALS Explain how to establish a positive credit history. Discuss how to avoid credit problems and get help if you need it. Slide 30
KEY TERMS identity theft debt consolidation loan bankruptcy Slide 31
Establish Your Credit History Start small Never miss a payment Save Regularly Charge small amounts and pay them off immediately Establish your own credit Avoid common credit mistakes Read what you sign Be aware of identity theft Identity theft: using someone else s identity to get cash or buy products using credit, or to access financial accounts that belong to the victim. Businesses are responsible for debts, but records of the transactions can ruin your credit history! Slide 32
Identity Theft How They Become You Social security #, Driver s license # or Credit Card # How to protect yourself Never give out your Social Security number unless absolutely necessary What to do if you identity is stolen Call the 3 major reporting agencies Equifax, Experian, & Trans Union. Have them to put a fraud alert on your file and ask that they call you before any new accounts are opened or existing accounts are changed Report the theft to law enforcement agencies Contact your bank or other organizations that have extended you credit Call the Federal Trade Commission (FTC) ID hotline or visit the FTC s website. Slide 33
Help for Credit Problems Debt consolidation loans Designed to pay off all the smaller loans and give you one payment to make each month Cost of a debt consolidation loan Lower monthly payment, but you pay more in interest It s a bandage, not a cure Credit counseling services Bankruptcy A legal process in which people who cannot pay their debts must surrender most of their property. Stays on your credit report for 10 years. Slide 34