the reputation one has built in his or her dependability in regard to paying back borrowed money

Credit

What is credit?

The reputation one has built in his or her dependability in regard to paying back borrowed money

Four C’s of Credit Health

1. Credit History: › How faithful have you been at paying back borrowed money?

2. Character› Criminal past? Anything in the person’s history?

3. Capacity to payWhat is the person’s monthly income and can he or she handle a monthly payment schedule?

4. Capital› How much does the person have in the bank?

Credit Rating

Entitled to one free credit report a year

Three main credit bureaus:› Trans Union› Equifax› Experian

FICO (Fair Isaac Corporation)

Range from 300-850 660 borderline sub-prime

(high risk)

FICO Factors 35% punctuality of payments in

the past 30% capacity used (maxed out?) 15% length of credit history 10% type of credit used

(installment, revolving) 10% recent applications for

credit/recent credit obtained

Credit Cards

Convenient Easy to get, Easy to use Risks are high Theft and fraud

Are you ready for a credit card?

How should a consumer select the best credit card for his or her financial situation?

Checklist for comparing credit cards:

Issues you may face after you have obtained a credit card

Late fees Interest rates Other card offers start to

come Statements have due dates

close so it is difficult to pay on time

Avoid ID Theft (Deter. Detect.Defend)

Don’t Jump at that Credit-Card Offer

Credit Card Bill of Rights

Federal Reserve’s Credit Card Repayment Calculator

Red Flag Rules to Stem I.D. Theft

Homework for Friday

Read “Deter, Detect, Defend, Avoid ID Theft” and “Red Flag Rules”

Answer questions: 1-4 from Deter, 5-9 from Red Flag

1. What are the ways in which credit card account information is fraudulently obtained?

2. What risks do creditors take when issuing unsecured credit cards?

3. What incentive exists to compensate creditors for taking the risk of extending credit?

4. What would happen if government imposed limits to the amount of interest these providers could charge?

5. What are the Red Flag Rules?

6. Whom do the Red Flag Rules apply to?

7. Who opposes the Red Flag Rules? Why?

8. What are the benefits of the Red Flag Rules?

9. What are the costs of the Red Flag Rules?