Personal Finance Obj. 7.02  Understand ways to protect personal credit.

1. Personal Finance Obj. 7.02Understand ways to protect personal credit. • Essential Questions: • What are the types of credit? • How does one establish, shop for, and maintain good credit?

2. What Is Credit? • Obtaining goods and services with a promise to pay for them from future income • A temporary money substitute since it allows a person to buy today and pay tomorrow • Credit involves two parties, a lender and a borrower • Lender (creditor, credit-provider, source of credit) • One who provides money for purchases based on a person’s promise to repay • Lender expects borrower to pay extra, known as interest, for the use of the money • Borrower (debtor) --- One who received credit from a lender

3. Types of Consumer Credit • Sales credit-credit to purchase goods and services from retailers • Regular charge account • Borrower promises to pay in full within 20-30 days • If not paid in time, there is a finance charge • Example: Accounts with utility companies • Installment account • Borrowers agree to schedule of payments of equal dollar amounts, including interest • Creditors hold the title or “own” the merchandise until payments are complete. • Borrowers typically asked to sign a written contract • A small down payment may be required • Examples: Accounts used to purchase appliances and furniture

4. Types of Consumer Credit continued… c. Revolving credit account • Borrowers may choose to pay in full each month or spread payments over time • A minimum payment (a percentage of unpaid balance) must be made each month • Unpaid balance may be carried over • A finance charge is applied to the unpaid balance. • The lender sets a credit limit for the borrower • Examples: Retail stores (Target, Sears); credit card issuers (Visa, MasterCard)

5. Types of Consumer Credit continued… • Cash credit-money granted to use for a variety of purposes; may be secured or unsecured; may be installment, single-payment, or credit card/check credit loans • Unsecured loans • Require borrower’s signature as evidence of agreement with terms of the loan • No collateral required • Generally available for borrowers with a good credit history • Secured loans • Require some form of collateral (property) to secure the loan • Collateral reduces lender’s risk; can take property if the borrower does not repay • A cosigner can sign the loan if a borrower has neither collateral nor good credit • Cosigner typically has good credit and agrees to pay if borrower fails to repay

6. Types of Consumer Credit continued… c. Types of cash credit • Installment loans---provide a specific amount of money with promise of repayment with interest according to a schedule of monthly payments in a set amount • Single-payment loans---with collateral, provide a specific amount of money with the promise of repayment with interest in a single payment at a specified time.

7. Types of Consumer Credit continued… c. Credit card/check credit loans---allow borrowers to use their credit cards to obtain money or write a check connected to the card account knowing the bank will cover up to a given maximum amount; borrowers repay with interest • Company or retail store credit card loan • Issued by service stations, local merchants, or chain stores • Charge purchases ONLY with the merchant issuing the card • A credit limit and minimum monthly payments are common • Examples: Gasoline accounts and chain stores (Belk, Sears, Target) • Travel and entertainment credit card loan • Generally no credit limit, but account balance must be paid in full each month • For travel-related expenses only, such as airfare, tours, hotel expenses, etc. • May be paid off over time • Interest rates of 18% or more are common • Examples: American Express and AAA Travel Card • General-purpose credit card loan • Issued by banks, credit unions, and other financial institutions • Can be used to make purchases around the world where they are accepted • Cash can often be withdrawn from teller machines using these cards • Cards have a credit limit and require a minimum monthly payment • Finance charges/fees vary depending on card, issuer, and credit history • Examples: Visa, MasterCard, and Discover

8. Advantages and Disadvantages of Using Credit (see attached page)

9. Establishing Credit • Creditors only lend to people who can be expected to pay them back • Creditors look at credit-related information to determine if one is a good risk • A creditor’s evaluation of one’s ability and willingness to repay debts is a credit rating • Credit ratings are based on 3 Cs • Character---a person’s reputation for being honest and their financial history • Capacity---a person’s employment history and ability to earn money • Capital---a person’s financial worth • Ways to establish credit • Open/manage checking/saving accounts • Pay utility bills in your name • Obtain a credit card from a local store • Get help from a cosigner • Obtain a secured credit card

10. Loan Sources • Preferred lenders • Most reliable lenders • Examples: banks, credit unions, savings and loan associations, consumer finance companies, insurance policy loans, credit card companies, private loans • Non-preferred lenders • May take advantage of people with poor credit; typically charge high interest rates • Examples: “payday” lenders, pawnbrokers, loan sharks, auto title loan lenders, tax refund loan

11. Considerations When Shopping for Credit • Conditions of loans • Annual fees • Annual percentage rate (APR) --- the amount and whether it changes • Method used to calculate interest • Minimum payment • Grace period • Minimum finance charge and other fees • Credit limit • Special features and services

12. Considerations When Shopping for Credit continued… • Cautions when seeking loans • Always “read the fine print” and know the terms of loans before signing • Is a down payment required? • How much is the down payment? • Is there a balloon, acceleration, or add-on clause? • What is the cost of credit? Use amount of credit used, annual percentage rate, and length of repayment period to calculate • Consider if this would be wise or unwise use of credit • Wise use of credit means purchasing items that will increase in value • Examples of wise use are buying a home and paying for education • Unwise use is paying over time for consumables/items that decline in value • Examples of unwise use are paying for meals, movie tickets, and vacations • Remember that, once signed, borrowers are bound by the terms of the agreement • Consumers can apply for loans in person, online, over the telephone or in writing • Typically, provide information about income, employment history, residence, credit history • The lender will likely run a credit check. • If approved, borrowers may have right to rescission (cancel) within three days if they choose; a provision of the Truth in Lending Act

13. Maintaining Good Credit • Evaluate the need to borrow. Can the purchase be avoided, delayed or bought on lay-away? • Identify and use the right type of credit for the intended purchase and shop for the best terms • Know how you will pay it back before you borrow • Only use the amount of credit that you can afford to repay • Meet all the terms of credit contracts and agreements • Keep accurate records of charges, statements, and payments • Consult creditors immediately if you cannot pay on time • Resolve billing errors promptly

14. Credit Reports • A credit report is like a report card reflecting how well a person has used credit resources • Credit reporting agencies maintain records on how people manage their credit accounts • Equifax, Experian, and TransUnion are three national credit-reporting agencies • Contains information about employment history, credit accounts, balances, payment patterns • Consumers should check each of the three credit reports annually to verify accuracy • The Fair Credit Reporting Act---can get a free copy of credit reports every 12 months • The FTC site http://www.ftc.gov/freereports explains how to obtain the free reports

15. Signs of a Debt Problem • Consumers find themselves stressed and constantly worrying over their finances • Having no savings • Having reached the credit limit on most of their credit cards • Skipping payments on some bills in order to pay others • Using cash advances on one credit card to pay another • Relying on credit cards to purchase day-to-day items like groceries and fast food • Relying on credit cards to pay monthly bills • Opening new credit card accounts in response to reaching the credit limit on others • Regularly receiving contacts from creditors/collection agencies trying to collect unpaid debts

16. Strategies for Getting Out of Debt • Actively deal with the problem; ignoring it will only make it worse • Stop using credit; focus on repaying the debt owed • Get help from trained people---a credit counselor or credit counseling service • Develop a spending plan that includes living expenses and debt repayment funds. • Contact creditors immediately, let them know your situation, ask to have credit terms adjusted

17. Bankruptcy, a Last Resort • Legal relief or forgiveness from repaying certain debt • Try to deal with debts using all means available before filing for bankruptcy • Bankruptcy carries serious, long-term consequences---part of one’s credit report for ten years • Chapter 7---must sell certain personal belongings, use proceeds to repay debts • Chapter 13---can retain most personal property, but must propose a repayment plan, go to credit counseling, receive financial management education, and be employed