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 Qualify
APR
Loan Term
Fees
Prepayment Penalties
Maximum Loan Amount
Minimum Payment Amount
Type of Credit
Institution
Features
Credit Card
Banks, credit
• Some types of credit cards can be used
unions, stores, and just about anywhere, some only at a
gas stations
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
• Used for tuition and other college expenses
Banks, credit
unions, stores, and • Depending on your income level, some loan
programs let you delay making payments until
the federal
you graduate
government
• 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
Credit Scoring
It is very
important to an
individuals
ability to obtain
credit. It is the
equivalent of his
credit
reputation.
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
Experian National
Consumer
Assistance Center
P.O. Box 740241
Atlanta, GA
30374-0241
1-800-997-2493
P.O. Box 2104
Allen, TX
75013-2104
1-888-397-3742
www.equifax.com
www.experian.com
Trans Union
Corporation
Consumer
Disclosure Center
P.O. Box 390
Springfield, PA
19064-0390
1-800-888-4213
www.transunion.com
FICO
Most popular
Credit Score
• 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
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
Truth in Lending Act - 1968
(Consumer Credit Protection Act)
Requires the credit card issuing
company to disclose to the
consumer:
It covers four major areas:
1.
1.
2.
3.
4.
5.
6.
APR that will be charged
How the APR is determined if it
is a variable rate
The method for computing the
balance at the end of the month
The annual fee that will be
charged
The amount of the minimum
finance charge
Transaction fee for purchases
2.
3.
4.
It requires lenders and merchants
to fully disclose in writing the total
cost of using their credit.
It requires lenders and merchants
to be truthful in their advertising
about the cost of using their credit.
It gives consumers the right to
cancel credit within three business
days on certain types of credit.
It limits the liability of a credit card
holder to $50 per card in case of
unauthorized use.
The Fair Credit Reporting Act
1971
• 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
28
repay the entire balance each month.
68
2. _____%
of teenagers say they have never
discussed using credit cards responsibly with
a family member.
4. _____%
of teenagers say they are pretty
56
familiar with credit cards
5. _____%
of teenagers have access to a
9
parent’s credit card.
6. _____%
of teenagers aged 18-19 already
31
have a credit card in their own name.