Chapter 4

What is Credit?

Installment Debt

◦ Durable Goods◦ Longer Term = BUT

Longest Terms Up to 30 years

$1,000 Installment

Loan At 9 % Interest

Term Of Loan 24 Months 36 MonthsMonthly Payments $45.69 $31.80Total Interest Paid $96.56 $144.80Total of Payments $1096.56 $1144.80

Checklist for Using Credit for Purchases◦ Do I really require the item? Can I postpone

purchasing?◦ If I pay cash, what will I be giving up that I could

buy with these funds?◦ If I borrow, will the satisfaction I get from using

the item now outweigh the interest paid?◦ Have I done comparison shopping for credit?◦ Can I afford to use credit now?

◦ Offer widest variety of services

Interest rates usually slightly lower than commercial Savings Banks

◦ Lend money for mortgages, auto and personal loans◦ Many also offer checking and other commercial functions

Credit Unions

◦ Higher interest earnings and lower interest charges Finance Companies

◦ Installment debt for stores

Charge Accounts or Charge Card◦ Buy goods from a particular company or store

Set amount can be charged No interest if paid in specified amount of time

Very high interest rate if unpaid on time◦ Revolving Charge Account

◦ Installment Charge Account

Principal and Interest paid monthly Credit Cards

◦ Difference between Charge Cards?◦ Difference between Debit and Credit Cards?

Finance Charges?◦ Interest costs + any other costs with having

Credit Dollar and Cents cost of credit

◦ Computed in 4 Ways (Next Slide) Annual Percentage Rates

◦ Also included is any non-interest cost of credit

Previous Balance Method Adjusted Balance Average Daily Balance Past Due Balance

I can apply for credit and understand what factors will determine if I can get credit

How does a person get credit?

Private Business◦ Credit Check

(debt:income, length at job, unemployed), character, any collateral What determines a person’s creditworthiness?

◦ Higher the score better potential to get loan AnnualCreditReport.com

Equifax, TransUnion, and Experian – 1 Free a year FROM EACH COMPANY http://www.annualcreditreport.com

Having many open accounts

◦ Stays for 10 years Unemployment

Secure Loan vs. Unsecured loan◦ Cosigner?

I can identify steps to get out of trouble if I misuse credit

Itemize Debts Contact Creditors Seek help from Government/Financial

Advisors Eliminate High Interest Debt First Create another Budget and LIVE BY IT

Loan is a Promise!!◦ If you don’t repay, creditor loses $

Losses passed off to others◦ Hurts credit rating

Keep track of all charges◦ Immediately report Fraud, Lost or Stolen Card

Visit Financial Counselors for Help if Needed◦ Consolidate Loans◦ Pay High Interest First◦ Pay more than Minimum Payment

I know the laws protecting me as a borrower and the negative impact Bankruptcy has on my life.

The Truth in Lending Act (1968)

The Equal Credit Opportunity Act (1974)

◦ Cannot deny because income comes from public assistance

State Usury Laws◦ Limits on amount of interest that can be charged

Consumer Finance Agencies allowed higher because loans are high risk

THIS IS THE FINAL RESORT!!! What is Bankruptcy? How does Bankruptcy work?

◦ Taxes, Child support, Alimony, School Loans MUST be repaid

◦ Stays on record for 10 years◦ Constitution allows Congress to make laws on Bankruptcy

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 Encourages people to file Chapter 13 vs. Chapter 7

Chapter 7 Chapter 13

Disadvantages:◦ Give up all assets

Exempt – Jewelry, work tools, household furnishings

Turned over to a Trustee Gets Liquidated

◦ Cannot file for 8 years Advantages:

◦ Gets rid of unsecured debt◦ Stops foreclosure,

garnishment, utility shut-offs

Disadvantages:◦ Must show plan to rid

debt in next 3-5 years Advantages:

◦ Can keep chosen property

◦ Can refile in as little as 2 years if needed

◦ Stops foreclosure, garnishment, utility shut-offs