Credit

• Purchasing today, with the promise to pay later.

• What does credit offer you?– More time to pay– More money– Instant gratification– Safe if used wisely

• Priceless

The Language of Credit• Credit History is a record of your behavior

related to borrowing and repaying loans.• Credit Report is a detailed record of your

personal credit and financial transactions.• Credit Score is a rating used by credit reporting

companies to help lenders decide whether and/or how much credit can be extended to a borrower.

The Language of Credit• Debt is the entire amount of money you owe

to lenders.• APR (Annual Percentage Rate) is the total cost

to use credit in a year.• Term is how long you have to repay a loan,

often expressed in months.• Fees are charged to use credit. Examples:

Annual Credit Card Fee, Loan Origination Fee, Over-the-Limit Fee

WHEN YOU BUY “STUFF”

In fact, you bought $500 worth of “STUFF” with your credit card.You bought “STUFF” with your credit card.

Your APR is 18%.You plan to pay $10 a month to pay it off.

You will pay $431 in interest

Final cost of your purchases = $931.40

And it will take SEVEN YEARS and NINE MONTHS

4-I

The Cost of Using CreditInterest Rate = 24%

Payment = 4% of Current Balance

BALANCE TIME TO PAY OFF

INTEREST CHARGED TOTAL COST

$2,000 11 YEARS6 MONTHS $1,850 $3,850

$6,000 16 YEARS1 MONTH $5,850 $11,850

$10,000 18 YEARS2 MONTHS $9,850 $19,850

Subsidized Loans• Available to undergraduate students with financial need• Your school determines the amount you can borrow, and

the amount may not exceed your financial need.• The U.S. Department of Education pays the interest on a

Direct Subsidized Loan– while you’re in school at least half-time,– for the first six months after you leave school (referred to as a

grace period)• If in a 4 year bachelor program, only qualify for subsidized

loans for 6 years• Current Rate: 4.66%

Unsubsidized Loans• Available to undergraduate and graduate students;

there is no requirement to demonstrate financial need.• Your school determines the amount you can borrow

based on your cost of attendance and other financial aid you receive.

• You are responsible for paying the interest on a Direct Unsubsidized Loan during all periods.

• If you choose not to pay the interest while you are in school and during grace periods and deferment or forbearance periods, your interest will accrue (accumulate) and be capitalized (that is, your interest will be added to the principal amount of your loan).

More information about paying

• Fill out your FAFSA• Grants: Free Money usually from government• Scholarship: Free Money from anywhere• Work Study: Work part / full time, earn at least

minimum wage. Usually in field related to what you are studying

• Federal Perkins Loan: Available for those with exceptional financial needs, current rate is 5%– http://www.direct.ed.gov/about.html

Types of Credit Installment Credit• Fixed payments• Set period of time to

repay• Set or varying interest

rates• Car loans and home

loans are typical examples.

Revolving Credit• No stated payoff time• Limit to credit• Minimum monthly

payments• Interest rates vary or not• Finance charges• Credit cards most typical

example

How to read a credit card statement

• Handout• Find the parts and answer the questions

Basics of Credit

What is Credit?

• The five C’s– Character– Capacity– Collateral– Capital– Conditions

Character

• Your Integrity– Will you repay– What moral obligation do you have– How have you responded in the past• Reputation!

Capacity

• How much other debt do you have• Does your job afford you the ability to

repay

Collateral

• What are you using to pledge to borrow this money?– Home– Car

• What is the security that you will repay?

Capital

• Down payment• Money already in the business• What is your risk?

Conditions

• What will your interest rate and term be?– How will this make a difference in your ability to

repay the loan?– How will this make a difference in your ownership

position of the collateral?

Chapter 4, Section 3: Page 90

• Myth You need to take out a credit card or car loan to “build up your credit score”

• Truth: The FICO score is an “I love debt” score– Credit score is not how well you are financially, but

does matter if you want to get a car loan, mortgage or even phone plan

Credit Score

• 3 Credit Scores & FICO Score– FICO: Fair Isaac Corporation

• 3 digit number– Ranging from 300 to 850 = higher better

– 3 Credit bureau’s are Experian, TransUnion, & Equifax

How to Get Credit Report

• Credit Score is not usually free– Start by checking history– Annualcreditreport.com• Check each company 1 a year for free• Pick one every 4 months to look at

– At 18 or before loans = no credit history• Can see score if ask for a loan or credit card

(even if declined) and your bank can / will often show you

Page 92 Information

• Account info is removed (from credit score) after 7 years

• Except bankruptcy which stays for 10 years• Only information removed from report is

inaccurate information– All loans and credit will stay listed

Credit Reports

• Check your credit report annually – Many contain mistakes of some sort

• Fastest way to catch Identity Theft!

Identity Theft (pg 93)

• Is the fastest-growing white collar crime1. Place a fraud victim alert on your report

1. If items are compromised / stolen, report right away2. Get a police report3. Remember, this is theft. You owe nothing and

should pay nothing4. Contact the fraud victim division of each creditor

and furnish documentation 5. Be persistent. You now have a new hobby.

1. Many renters/homeowners insurance have Identity Theft protection

Federal Fair Credit Reporting Act

• Removal of inaccuracies within 30 days of notification– Letters will be emailed or sent certified mail– Fixed within 30 days and remove the entire account

from your file.– Lodge any complaints with the FTC

• Need a reason to look at your credit • You have the right to know why you are denied

credit and are provided with your report

Federal Fair Debt Collections Practices Act

• Act states that Harassment is illegal.• Can only call between 8am and 9pm• Can stop them from calling you at work– Request in writing by certified mail

• Can stop all contact except notification of lawsuit

• Do not do that because all negotiations then stop

• Cannot take bank account or garnish wages without court action

More Laws• Truth-in-Lending Act = Inform of credit terms,

known as credit disclosure form – Can compare credit costs (not all the same)

• Equal Credit Opportunity Act = Cannot be denied credit due to age, gender, marital

• 2009 Credit CARD Act = – 45 Day notice of changes in terms– If under 21 need: Proof of income or co-signer– Offering fee gifts as inducements is banned within

1,000 feet of campuses • 2013 – Store can charge 4% fee for using Credit

(not debit card, at this time)