Credit

Overview: Credit 101

• Credit: someone is willing to loan you money - called principal - in exchange for your promise to pay it back

• Interest: amount you pay to use someone else’s money.

• Annual Percentage Yield (APR): amount it costs you a year to use credit, expressed as an interest rate

In addition to the APR, there may be other costs of using credit

1. Annual Fee: yearly charge for the privilege of using credit.2. Finance Charge: Actual dollar cost of using credit, which is

calculated by a lender.3. Origination Fee: Charge for setting up the loan.4. Over-the-limit Fee: Spending more than your limit.5. Late Fee: Penalty for making a payment after the due date.6. Universal Default: Hike in interest rate because you made 1

late payment.

Need to Know

• Grace Period: the number of days in which no interest or finance charges will apply.

• Minimum Payment: The smallest amount you must pay on your credit card each month (usually 2%).

• Credit Limit: The maximum amount that you can charge on your credit card.

• Loan Term: The length of time you have to pay off the loan.

5 C’s of Credit

1. Capacity –Can you repay the loan?

2. Collateral – What if you don’t repay the loan?

3. Capital – What are your assets and net worth?

4. Credit History – What is your credit history?

5. Character – Will you repay the loan?

Credit Benefits

1. Access to cash in an emergency

2. The ability to use it now

3. Safety and convenience

4. Earn bonus points or miles

Comparing Credit Cards

What to look for:

Do I QualifyAPR

Loan TermFees

Prepayment PenaltiesMaximum Loan Amount

Minimum Payment Amount

Type of Credit Institution Features

Credit Card Banks, credit unions, stores, and gas stations

•Some types of credit cards can be used just about anywhere, some only at a specific place.•No payoff deadline•Monthly minimum payments vary, based

on the balance•Usually has the highest rate of these four

types of credit

Installment Loan

Banks, credit unions, auto dealers, and other financial institutions

•Typically used for large purchases such as a car or an appliance •Loan term can vary from a few months to

many years•Monthly payment amount are often set

for the life of the loan•Usually has a lower interest rate than a

credit card

Type of Credit Institution Features

Student Loan Banks, credit unions, stores, and the federal government

•Used for tuition and other college expenses•Depending on your income level, some loan

programs let you delay making payments until you graduate• Loan term is usually up to 10 years, depending

on the amount borrowed•Monthly payment amounts are usually set

annually•Usually has lower interest rate than an

installment loan•May provide an income tax break on interest

paid to the lender

Mortgage Banks and credit unions

•Used specifically for a loan to purchase a home•Usually repaid over 15-30 years•Monthly payments may be set for the life of

the loan, or changed more frequently, depending on the type of interest rate•Usually has a lower interest rate than an

installment loan•May provide an income tax break on interest

paid to the lender

Your Credit Record

Credit Report

You credit history, a

record of your personal (or

family) financial

transactions.

Credit History

It is very important to an

individuals ability to obtain credit. It is the

equivalent of his credit

reputation.

Credit Scoring

Lenders use a mathematical

model to produce a credit score for you. The score helps lenders

predict the likelihood that you will pay your bills

as promised.

3 Credit Reporting Agencies

Equifax Information

Service Center

P.O. Box 740241 Atlanta, GA30374-0241

1-800-997-2493www.equifax.com

Experian National Consumer

Assistance Center

P.O. Box 2104Allen, TX

75013-21041-888-397-3742www.experian.com

Trans Union Corporation Consumer Disclosure

Center

P.O. Box 390Springfield, PA

19064-03901-800-888-4213

www.transunion.com

FICO• The score ranges from

about 300 – 850• The higher your score

the lower risk you are for the lender

• A credit score of 680 or above is good

Most popular Credit Score

A good credit history just takes discipline:

• Always pay your bills on time.• If you have a savings account, it’s good to make

additional regular deposits, no matter how small.• Be choosy about your credit cards and loans– Apply for only the ones you need– Keep them for a long time

• It is better for your score to maintain a low balance on one card and pay it off each month than to have no balance at all.

How to hurt your credit history and credit score:

• Make late payments– Just one missed payment can affect your credit

report.• Writing checks when you do not have enough

money in your account to cover them• Having a lot of credit cards and loans• Maintaining high balances on your credit cards

and loans• Changing credit cards frequently

LAWS

Truth in Lending Act - 1968(Consumer Credit Protection Act)

Requires the credit card issuing company to disclose to the consumer:

1. APR that will be charged2. How the APR is determined if it is

a variable rate3. The method for computing the

balance at the end of the month4. The annual fee that will be

charged5. The amount of the minimum

finance charge6. Transaction fee for purchases

It covers four major areas:

1. It requires lenders and merchants to fully disclose in writing the total cost of using their credit.

2. It requires lenders and merchants to be truthful in their advertising about the cost of using their credit.

3. It gives consumers the right to cancel credit within three business days on certain types of credit.

4. It limits the liability of a credit card holder to $50 per card in case of unauthorized use.

The Fair Credit Reporting Act1971

• Is designed to provide access to personal credit information on file with credit bureaus.

• Requires the credit bureau to investment errors and correct the report.

• Borrower’s have 30 days to review their file without charge if they are denied credit.

• For a fee of approximately $10, they can review their file at any time.

Fair Credit Collection Practices Act

Protects you from the harassment of creditors. The debt collector is not allowed to:

•Use abusive language with you•Call at unreasonable hours or an excessive number

of times•Threaten to notify your employer•Attempt to collect more than you owe•Send you misleading letters that appear to be from

a government agency or a court of law

Top Ten Questions to Ask Yourself Before You Sign on

the Dotted Line

1. Do I really need this item right now or can I wait?

2. Can I qualify for credit?3. What is the interest rate (APR)?4. Are there additional fees?5. How much is the monthly payment and when

is it due?

6. Can I afford to pay the monthly payments?

7. What will happen if I don’t make the payments on time?

8. What will be the extra cost of using credit?

9. What will I have to give up to pay for it? (Opportunity cost)

10. All things considered, is using credit worth it?

How to Avoid the Pitfalls

• Always read the fine print of a credit card or loan application before you sign on the dotted line.

• To avoid the higher interest rates of credit cards, consider a loan for large purchases

• Be choosy about your credit card, and don’t apply for more than you actually need

• Pay as much as you can every month• Pay a bill at least a week before it is due– Arrange for automatic payments of your monthly bills

• Get into a saving mode so you rarely need credit or loans for monthly purchases

Can you Believe?

1. _____% of students with a credit card don’t repay the entire balance each month.

2. _____% of teenagers say they have never discussed using credit cards responsibly with a family member.

28

68

4. _____% of teenagers say they are pretty familiar with credit cards

5. _____% of teenagers have access to a parent’s credit card.

6. _____% of teenagers aged 18-19 already have a credit card in their own name.

9

56

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