Credit – You’re in Charge

Credit – the ability to borrow money in
return for a promise of future payment.
◦ Credit has the opposite trade-off as
saving. You give up the ability to
spend in the future for the ability to
spend now.
 Borrowing with interest makes you
give up more future spending than the
amount of the loan.

Credit can help you buy things you want
earlier than you could get them by saving.
◦ Never borrow more money than you can
repay easily.
◦ Sometime borrowing is necessary (ie:
house, car, appliances, furniture)
◦ As long as you use credit responsibly, and
you don’t borrow more than you can repay
easily, then using credit makes sense.

Without credit, most Americans could
never own a home.
◦ You get the benefits of living in it while
you are making loan payments.
◦ You should always try to own something
in exchange for your money!
 Equity – the difference between the
amount owed on a home and the
home’s value.
◦ Home values usually increase over time,
so a home is an investment. This is not
true of most consumer goods.

Investing in yourself and your education
pays off. Statistics show people with
more education & training may have
higher salaries.

Plan Your Borrowing
◦ Borrowing creates fixed expenses
that you have to pay.
 To be useful, your budget must
take borrowing and repayments
into account
◦ Borrowing should be for what you
need


The first rule of borrowing is to buy
responsibly.
The more you buy on credit, the
higher your payment will be.
◦ Your debt payments should be no
more than 20-25% of your take
home pay. (net pay)

Your Credit Worthiness
◦ A measure of your reliability to repay a
loan.
 Must have the ability and willingness
to pay your debts.
 Lenders judge on 3 factors:
 Character
 Capacity
 Capital
◦ Character – measure of your sense of
financial responsibility.
 Credit history – record of your past
borrowing and repayments.
 Most important factor = PAYING YOUR
BILLS ON TIME!
 Co-sign a loan – usually a parent
agrees to pay the debt if you don’t. If
your cosigner is credit worthy the
lender will feel safe lending to you.
 If someone asks you to cosign a loan,
the loan is legally as much your
responsibility as the borrower’s!
◦ Capacity – a measure of your financial
ability to repay a loan.
 Income
 Other expenses
◦ Capital – the value of what you own,
including savings, investments and
property.
 The more capital you have, the safer it
is for a lender to give you a loan.
◦ Credit Bureaus
 A company that collects information
about consumers credit history and
sells it to lenders.
 Has records about every payments
made, including late payments,
bounced records and court records.
 Three largest credit bureaus are Trans
Union, Equifax and Experian.
◦ Credit Ratings
 Measure of your credit worthiness.
 Computerized score called FICO.
Between 300 – 850.
 Based on certain factors of your
credit report:
 Payment history (most
important!!)
 Current debt
 Length of credit history
 New account and inquiries
 Kind of credit you use
Types of Consumer Borrowing –
Consumer borrowing takes 2 basic
forms: LOANS and CREDIT CARDS.
 Types of Loans
◦ Secured Loans – backed by something
of value pledged to insure payment.
 Collateral = property pledged to back
a loan.
 Installment Loan – repaid in a certain
number of time periods with a certain
interest rate. Made at one time for
one amount!

Unsecured Loans – not backed by any
collateral.
 Lender grants you credit based on
your credit worthiness alone.
 Generally require you to pay higher
interest rates because the lender is
taking greater risk.
 Most credit cards are considered
unsecured loans because they are
open for an unspecified amount.
 Other options are usually MUCH more
expensive than borrowing from a bank
 Credit Card Cash Advances – you will
receive cash and then add it to your credit
card balance. Very HIGH interest rate!
Avoid doing this at ALL cost!
 Pawnbrokers – turn over personal property
to get a loan. Pay the loan back, get your
property back. Very high rates!
 Rent-to-own Companies – paying
installments to use an item before you own
it. Technically, you don’t pay interest, but
payments equal more than you would pay
upfront for the product!
◦ When you open a credit card account,
you are actually borrowing money.
Your credit card represents your
account.
 Regular Charge Account – must pay
your balance in full each month. No
stated interest since you are not
borrowing money.
 Revolving Charge Account – allow
you to carry a balance from one
month to the next. You pay interest
on this type of account. You may pay
any amount over the minimum each
month.


Retail stores have credit cards, but most
credit cards are issued by VISA,
Mastercard, American Express and
Discover.
Some organizations offer incentives to
use their card.
 designed to encourage you to sign up
for a particular card and then run up
your credit card balance.
◦ Evaluate costs and alternatives before
opening a credit card.
 Annual Fees – many banks have no
annual fees if you have an account
there. Be sure to evaluate annual
fees.
 Interest – All credit accounts charge
interest on unpaid balances.
 Limits and Penalties – Credit limit =
the maximum amount you are
allowed to charge. Going over the
limit means you pay a penalty.
Consumer Protection Laws
 A. Truth in Lending Act 1968
◦ Requires all banks to calculate credit
costs in the same way.
 Finance charges – total cost a
borrower must pay for a loan,
including all interest rates and fees.
 Annual Percentage Rate (APR) – the
finance charge calculated as a
percentage of the amount
borrowed.
◦ Equal Credit Opportunity Act 1975
 Illegal to refuse credit on the national
basis of race, color, religion, national
origin, sex, marital status, or age.
◦ Fair Credit Reporting Act 1971
 A way for consumers to check
credit reports.
 You can request a free copy once
a year
Fair Credit Billing Act
◦ Helps consumers correct credit card
billing mistakes.
◦ You have the right to refuse to pay a
bill but you must do so in writing within
60 days!
Consumer Credit Responsibilities
◦ Account Responsibilities
 Lenders are in the business of making
money, NOT trying to protect you from
financial difficulties!
◦ Know Your Debt Capacity
 Consider all your fixed expenses and
your debt payments.
 Figure your debt expenses and fixed
expenses from your net (take-home) pay
and then use common sense!
◦ Self-Control with Credit
 Pay more than the minimum!
 Avoid too many credit cards!
 Pay cash!
 Keep accurate records!

Establish Your Credit History
◦ Start Small – Open one credit card and pay
off the balance each month.
 Do not miss a payment
 Save regularly to encourage banks to
extend you credit in the future.
◦ Credit for Married People
 It is still important that you establish
credit on your own.
 Open accounts and take out loans in
both names or separately.
 Joint accounts affect credit equally.
◦ Avoid Common Credit Mistakes
 Easier to destroy credit history than
build a good one.
 Always pay bills when they are due.
Never ignore a bill even if you are short
on money.
 Contact the lender immediately to make
payment plans.
 Records stay on your credit history for 7
years.
 Know What You’re Signing! “KWYS”
 If you don’t understand something, ask
the lender for an explanation.
◦ Bankruptcy
 Legal process in which people who
cannot pay their debts must surrender
most of their property.
 Court sells property to pay debts
 Credit report shows bankruptcy for 10
years. May not be able to get credit
during this time.
◦ True Name Fraud
 Using someone else’s identity to get
cash or buy products.
 The business that extended the credit
are responsible for the debts.
 Guard your personal documents with
your background information.