CHAPTER 26 HOW TO GET AND KEEP CREDIT

CHAPTER 26 HOW TO GET AND KEEP CREDIT

NATURE OF CREDIT • Picking a credit card – Main factor should be cost of card – But also look at: – Who accepts card? – Can you get cash advance? – What “perks” or benefits are there to the card? • Free miles, cash back, rebates on purchases, etc.

APPLYING FOR CREDIT • Fill out credit application – Where you live – Where you work and for how long – Other credit you have – Amount in checking and savings accounts

FIVE C’s OF YOUR CREDITWORTHINESS • Capacity – your ability to repay a loan • Character – your likeliness to repay a loan • Credit History – the way you have repaid in the past – Use a credit bureau • Credit bureau is a company that reports: – Pay bills on time – Miss payments – How much debt you have

FIVE C’s OF YOUR CREDITWORTHINESS • Capital – do you have money to repay the loan • Collateral – what will you give up if you do not repay the loan

WORTHINESS • Credit limit – how much each lender will allow you to charge with them – If you show you are responsible, many lenders will increase your credit limit • Cosigners – someone who will pay the loan if you fail to do so – Can use this person as way to establish credit

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LOANS • Credit cards are short term loans • Use to pay for smaller items or ones you can repay quickly • Higher interest rates than loans from banks • Use bank loans for larger or more expensive items

TYPES OF LOANS • Installment loans – Make down payment (which is part of the total cost of the item) – Rest is owed in equal payments over time – Interest is charged based on principal (which is amount you borrowed) • Cash loans – Borrow from bank or credit card (cash advance) and pay back over time in installments – Interest rates vary widely, so check before you get one

LOANS • Secured loan – a loan backed by collateral – Lower interest rate than unsecured • Unsecured loan – a loan backed only by your promise to repay – Higher interest rate than secured – More risk to creditor

COSTS OF CREDIT • Annual Percentage Rate (APR) – Cost of borrowing money if you were to borrow it for the full year • Finance Charges – total it costs you to borrow the money – Includes fees charged for loan, interest, etc. – Creditor has to issue this by law

COSTS OF CREDIT • Changes in interest rates can hurt you • Variable rate loans change the interest rate as the interest rate banks pay goes up – Your loan can become more expensive – Be careful about introductory offers – Know the real cost of credit • Fixed rate loans never change, regardless of what the interest rates are doing • Which is better?

COSTS OF CREDIT • Fees – charged for credit services – Application fee – Credit check fee – Cash advance fee – Late/missed payment fee • Grace period – amount of time you have to pay off loan before the interest charges are added – If pay off during this time, you pay NO interest

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KEEPING CREDIT • Start with smaller loans and small credit • Build responsibility early so you can get more credit later • Work hard to maintain your credit rating

CREDIT BURDEN • You should use no more than 20% of your income for credit • Making minimum payment – Will take over 30 years to pay off a $2, 500 loan on a credit card if only make minimum payment. Will have paid over $7, 500 in interest. – Pay off debts earlier, and as early as possible

OVEREXTENDING • When credit limit is reached, tempting to just use another card • Credit should only be used responsibly • If not, eventually you will owe all your money in credit

CREDIT PROBLEMS • Credit problems can arise if you get too in debt • Missing payments or having payment due letters sent to your house will hurt credit rating • Some creditors can take money from your paycheck before you get it (garnishment) • Some creditors can take back the collateral you pledged for the loan (repossess)

HOW TO GET CREDIT • Start small – Cell phone in your own name (non-prepaid) – Get single purpose credit card and use it, but pay it off every month – Get a secured credit card (pre-paid) – Get cable in your own name – Have cosigner for a loan – Borrow money from bank if possible (small amount) and repay it with interest • Sometimes you have to pay to establish credit

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