Discuss the factors on which credit is granted and the cost of credit.

G42

Process of Obtaining Credit

1. Credit Application2. Documentation3. Processing4. Underwriting5. Closing 6. Funding

G43

Credit Application• Form on which you provide information

needed by a lender to make a decision about granting credit or approving a loan.

• Provide the following information:– Salary, Employer, Outstanding Credit (Debt),

Assets, Credit References, Checking and Savings Accounts, Stock Portfolio, etc.

G44

Documentation• Creditor will collect and verify necessary

documentation for the extension of credit.– Examples: Bank statements, credit card

statements, past W-2’s, etc.

G45

Processing

• Building of loan file.• Evaluating credit worthiness.

G46

Credit Worthiness Terms (Processing)The C’s of Credit Worthiness• Capacity – Your ability to pay (income)

• Character– Earned by paying bills on time and being a trustworthy,

reliable, stable person.– References – people you have borrowed from in the past.

• Collateral – Security to help guarantee that the creditor will be repaid.

G47

Credit Worthiness Terms (Processing) continued

• Credit History– Indicates the amount of debt you have and your payment

history.• Capital – How much you have beyond what you owe.

• Credit Limit– Maximum amount you can borrow.

• Cosigner– Responsible for a loan if you, the original debtor, do not

pay.

G48

Underwriting• Reviewing loan for soundness.• Consumer Reporting Agencies– Company that compiles and keeps records on

consumer payment habits.– Used to evaluate creditworthiness.• Examples: Equifax, Experian, and TransUnion.

G49

Closing

• Representative explains terms of credit.• Debtor signs appropriate forms.

G50

Funding

• Creditor will issue credit/funds to the debtor.

G51

Denial of Credit

• Fair Credit Opportunity Act requires that credit denial cannot be based on sex, family, religion, etc.

• Must be based on ability to pay back loan.

G52

Cost of Credit• Interest Rates– Percentage that is applied to debt.

• Principal– Amount of money borrowed.

• Time Factor– Length of time for which interest will be charged.

• Maturity Date– Date on which a loan must be repaid.

G53

• Finance Charge or Fees– Cost of credit stated in a dollar figure

• Annual Percentage Rate (APR)– Indicates how much credit costs on a yearly basis.

• Grace Period– Time period during which no finance charges will be

added to an account.

• Cash Advance– Borrow money on a credit card.

Cost of Credit continued

G54

Simple Interest Formula

I=PRTI=InterestP=PrincipalR=RateT=Time

G55