CREDIT 101 BASICS TO CREDIT Credit The opportunity

CREDIT 101

BASICS TO CREDIT _______ Credit --The opportunity to borrow money or to receive goods or services in return for a promise to pay later Borrow -- To receive and use something belonging to ______ somebody else, with the intention of returning or repaying it--often with interest in the case of borrowed money. Borrower -- An individual who has received and _____ used something belonging to somebody else, with the intention of returning or repaying it--often with interest in the case of borrowed money.

BASICS TO CREDIT _______ Debt -- An obligation or liability to repay for something borrowed such as money to purchase a car. _____ Principal -- The original amount of money borrowed. Interest -- The cost of borrowing money. _____

CREDIT CARD ITEMS Credit card -- Any card, plate, or coupon book that ______ may be used repeatedly to borrow money or buy goods and services on credit. ______ Credit limit -- The maximum amount of money that will be extended to a person by a financial institution or credit-card issuer

CREDIT CARD ITEMS Annual fee -- Yearly charge for having a credit _____ card or credit account. Finance charge -- Total cost of credit, ________ including interest and transaction fees. _______ Late fee -- Fee charged when payment is received after the due date.

OBTAINING CREDIT _______ Credit History -- Record of past borrowing and repayments. Credit Worthiness -- Evaluation of a borrower's ________ ability to repay a loan based on his or her character, capacity and capital. _______ Credit Report -- Statements containing information about prospective customers furnished by credit bureaus, including his or her ability and willingness to repay debts, based on how reliably he or she has repaid debts in the past.

OBTAINING CREDIT Credit Bureaus -- Organizations to which business __________ firms apply for credit information on prospective customers. _________ FICO Score -- Fair Isaac and Company software used by credit bureaus to calculate an individual’s credit risk provided to lenders; the higher the score the lower the risk but other factors are considered in addition to this score. Credit Worthy __________ -- Having the ability and willingness to repay debts or the extent to which a person is deemed suitable to receive credit, especially as shown by reliability in repaying loans in the past.

FIVE C’s OF CREDIT ____ Capacity -- Creditors evaluate your debt-to-income ratio, how much you owe compared to how much you earn. High earnings and low debt, indicate a strong capacity to make payments on the loan in question. _______ Character -- Creditors look at how creditworthy a borrower is likely to be, as determined by the borrower's handling of past debts and his or her stability in jobs and residences. Collateral -- Something of value (often a house or a car) that a ______ lender has a right to take ownership of and use to pay the det if the borrower is unable to make the loan payments as agreed.

FIVE C’s OF CREDIT - Continued ____ -Capital Refers to your net worth: the value of your assets minus your liabilities. Conditions ____ -- Outside circumstances that may affect the borrower’s financial situation and ability to repay a loan, such as the local economy. If a borrower is a construction worker, and the housing market is slow, the lender may require more down payment, or a smaller loan amount.

TYPES OF CREDIT Revolving Credit ___________ -- Type of credit that does not have a fixed number of payments, in contrast to installment credit, with credit cards as main example Installment Credit _________ -- Type of credit that has a fixed number of payments, with home or car loans as main examples

TYPES OF CREDIT Loan _____ -- A sum of money provided temporarily on the condition that the amount borrowed be returned, usually with an interest fee Leasing -- Paying for the possession of the property _____ belonging to another person for a time period set by the lease or (landlord or owner) Line of credit -- A credit arrangement in which a bank _______ agrees to lend money to a customer up to a specified limit. Generally arranged before funds are actually needed. Provides flexibility for customer when short-term cash is needed. Also called bank line or credit line.

CREDIT LAWS Truth in Lending Act ____________ -- Federal law that requires creditors to disclose finance charges and interest rates in a standard, uniform manner. Usury Law ______ -- A law that establishes a maximum permissible interest rate for a particular type of loan. Loans at rates above the loans’ ceiling are illegal.

CREDIT LAWS Bankruptcy -- Legally declared unable to pay ______ one’s creditors. Usually initiated by debtors as means to repay creditors. Creditors may file a petition against a debtor in an effort to recoup a portion of what they are owed. Consequences of filing for bankruptcy: • Can lose personal property such as a home or car • Loss of privacy – the bankruptcy is a public record • Credit Score and credit worthiness is dramatically lowered

THINGS TO CONSIDER WHEN BORROWING 20/10 Rule __________ -- Suggested rule to follow for being able to safely borrow. 20% Never borrow more than _______ of yearly net income. Monthly payments should be less than 10% _____ of your monthly net income.

THINGS TO CONSIDER WHEN BORROWING Annual Percentage Rate (APR)-- Percentage rate _______________ charged on the principal of a loan to be paid as interest in one year. Calculated on the declining balance of the loan. • The Truth in Lending Act requires lenders to disclose this to prospective borrowers Prime Rate -- The interest rate charged by banks to their _______ most creditworthy customers (usually the most prominent and stable business customers). %