CreditChapter 10

10.1 What is Credit?

Credit - the ability to borrow money in return for a promise of future repayment.

Never borrow more money than you can easily repay!

Using credit for owning a home (called a mortgage) is almost essential.

For education

For health

When to Borrow

Some people do not use credit wisely. They borrow for what they want. Then, when they really need to use credit, they are unable to get a loan.

Or, they take on more debt then they are able to repay.

Before you borrow, ask yourself

1. Is it important that I buy now?

2. Do I have to borrow?

3. Can I afford the payments?

4. Will I be able to buy other products I want more if I borrow now?

The interest you will pay on the purchase could be used to buy other things you want. Is it worth the sacrifice?

10.2 How to Qualify for Credit

Credit Worthiness - a measure of your reliability to repay a loan.

The 3 C’s for Credit

Character – your sense of financial responsibility

Capacity – ability to repay

Capital – value of what you own

Credit history – record of your borrowing & repayments. Paying bills on time is the most important factor.

Work steadiness.

Mobility.

Attendance.

Savings.

Co-sign – agree to repay the loan if the you don’t.

Your Credit Rating

Credit rating Payment history

Current debt

Length of credit history

New accounts & inquiries

Kind of credit you use

Credit Bureaus – collect credit information & sells to lenders. The three largest

TransUnion

Equifax

Experian

10.3 Sources of Consumer Credit Two forms: loans and credit card accounts

Loans

Secured – backed by something of value, “collateral”

Unsecured

Banking Institutions as sources of loans

Finance companies

Life insurance companies

Credit card cash advances

Pawnbrokers

Rent-to-Own Companies

Credit Cards

Regular charge accounts – must be paid in full each month, no interest

Revolving charge accounts – balance may be carried over month to month with minimum payment, pay interestGrace period – the time between the

billing date and the payment due date when no interest is charged

Credit Card costs

Annual Fees

Interest

Credit limits

Penalties

Control credit card costs

Use a loan as an alternativeDon’t just pay the minimum

paymentChoose the least expensive card –

annual fees, percentage rates

10.4 Credit Rights and Responsibilities

Truth in Lending – 1968

all banks must calculate credit costs the same way

must provide finance charge & annual percentage rate

Equality in Lending – may not discriminate based on:

Sex

Color

Race

Religion

marital status

age

Rights (cont)

Protect Your Credit History – you have access to your credit history & may amend mistakes to it

Resolve Billing and Product Quality Problems – may withhold payment if you believe there is a mistake

Protection from Abusive Collection Practices

Responsibility

Act ResponsiblyKnow your debt capacitySelf-control

Pay more than the minimumAvoid too many credit cardsPay cashKeep records

10.5 Maintaining a Good Credit Rating

Do not miss a paymentSave regularlyMarried couple – establish some

credit separatelyCommon Mistakes

Pay on timeDon’t skip a payment – call

institution immediately for unusual circumstances

Read what you sign

Acceleration clause – entire debt is due if you miss a payment

Balloon Payments – final payment much larger than the scheduled payments

Bankruptcy – when you cannot pay debts & must surrender property.The court sells the property to pay the

debts.Carried in credit history for 10 years.

True-Name Fraud – stolen identity to open charge accountsThe business is responsible to pay the

charges.

Protect Yourself from Fraud

Never give your SS# unless absolutely necessary.

Keep your records in a safe.Keep track of your bills.