Credit Understanding Credit Credit the supplying of money

  • Slides: 41
Download presentation
Credit Understanding Credit

Credit Understanding Credit

Credit: the supplying of money, goods, or services at present in exchange for the

Credit: the supplying of money, goods, or services at present in exchange for the promise of future payment n Creditor: the business or organization that extends credit n

Credit Principal: the original amount borrowed n Ex: you borrow $5, 000, You pay

Credit Principal: the original amount borrowed n Ex: you borrow $5, 000, You pay a total of $5, 754 when payments are done n $5, 000 is your principal, $754 is your interest n

Credit Types of credit: n Cash credit: if you take out a loan and

Credit Types of credit: n Cash credit: if you take out a loan and receive cash/check n Sales credit: you buy something now and wish to pay for it later n Secured credit: is backed by a pledge of property n

Credit Collateral: the property that is pledged to guarantee repayment of a loan n

Credit Collateral: the property that is pledged to guarantee repayment of a loan n Collateral reduces the lender’s risk, the lender has a security interest n This means that they can take your property if you fail to repay the loan n

Credit Closed-end credit: is a one-time extension of credit for a specific amount and

Credit Closed-end credit: is a one-time extension of credit for a specific amount and time period. The total interest paid is known at the beginning of the loan n Ex: car loan n

Credit Open-ended credit: cardholders makes monthly payment on all or part of an account

Credit Open-ended credit: cardholders makes monthly payment on all or part of an account balance n Also known as a line of credit n Ex: credit cards, equity loans n The interest paid is determined by the length of time and amount of your balance n

Credit Installment loans: a set portion of the loan amount that the borrower must

Credit Installment loans: a set portion of the loan amount that the borrower must pay at regular scheduled intervals. n Ex: furniture store allows you to purchase a item and pay for it in four easy payments n

Credit Pros and cons of credit n Advantages: n 1. Temporary expansion of income,

Credit Pros and cons of credit n Advantages: n 1. Temporary expansion of income, especially helpful with unexpected expenses n 2. Convenience: You can carry less cash, shop online, n

Credit 3. Financial responsibility: good credit provides proof to others of financial responsibility n

Credit 3. Financial responsibility: good credit provides proof to others of financial responsibility n Costs of credit: n 1. Interest and fees, also known as finance charges n

Credit 2. Increased cost of merchandise, retailers may increase their prices to help pays

Credit 2. Increased cost of merchandise, retailers may increase their prices to help pays the must pay banks to collect their credit sales n 3. Opportunity cost: in the long run it reduces your purchasing power. n

Credit Other credit concerns: n 1. Security: risk of being lost, stolen, or used

Credit Other credit concerns: n 1. Security: risk of being lost, stolen, or used fraudulently n 2. Impulse buying: May cause you to buy on the spur of the moment without considering the purchasing decision n

Credit 3. Overspending: Can make purchases seem free, will lead into financial trouble down

Credit 3. Overspending: Can make purchases seem free, will lead into financial trouble down the road n What are some guidelines that should be put into place? n

Credit Three C’s of credit: n 1. Character: refers to a person’s reputation concerning

Credit Three C’s of credit: n 1. Character: refers to a person’s reputation concerning repaying debt on time n 2. Capacity: refers to a persons earning power and their ability to pay debt from a regular income n

Credit 3. Capital: refers to items owned or assets available to the creditor if

Credit 3. Capital: refers to items owned or assets available to the creditor if necessary n Credit history: a pattern of past behavior in regard to repaying debt. n Equal Credit Opportunity Act: ensures that all consumers are given equal chance to obtain credit n

Credit Bureau: known as credit reporting agency's. They collect information about credit worthiness of

Credit Bureau: known as credit reporting agency's. They collect information about credit worthiness of consumers. n They get info from stores, banks, and from public record n Equifax, Experian, and Trans Union are three national credit agencies n

Credit When credit bureaus and agencies compile info it is put into a n

Credit When credit bureaus and agencies compile info it is put into a n Credit report: a record of particular consumer’s transactions and payment patterns n It includes the number of credit cards open, balances, monthly payment amounts, and late payments n

Credit If you get approved for a loan and the interest rate paid is

Credit If you get approved for a loan and the interest rate paid is determined by your n Credit rating: an evaluation of a consumers credit history n Your rating leads to a numerical score known as your n

Credit score: a numerical rating based on credit report information n These scores range

Credit score: a numerical rating based on credit report information n These scores range from 300 to 850 n Fair Credit reporting Act: assures consumers rights to access his or her credit file and dispute incorrect information n

Credit Establishing credit: n 1. Open a checking and savings account, make regular deposits,

Credit Establishing credit: n 1. Open a checking and savings account, make regular deposits, and avoid overdrawn checks n 2. Put utility bills in your name and pay bills promptly n 3. Apply for a credit card and use the card. Pay the bill on time. n

Credit Another way to establish credit is to have a cosigner n Cosigner: a

Credit Another way to establish credit is to have a cosigner n Cosigner: a person with a good credit history who also signs the application n Secured credit card: one that requires you to keep a savings account as security n

Credit Types of cards n 1. Private Label: can only be used at a

Credit Types of cards n 1. Private Label: can only be used at a single retailer ex: JC Penny n 2. General purpose: known as bank cards or major credit card. Can be used across the country and ATM’S n

Credit Revolving credit: card holder has several options of payment n 1. Pay in

Credit Revolving credit: card holder has several options of payment n 1. Pay in full. n 2. Pay minimum n 3. Pay amount in between n Interest accrues in balance is not paid in full n

Credit card variations: n 1. Status cards; gold or platinum cards usually have an

Credit card variations: n 1. Status cards; gold or platinum cards usually have an increased line of credit and benefits. May have higher annual fee n 2. Co-branded cards: carry the name of both the card network and company. Shell/Visa United/Visa n

Credit Affinity cards: carries the name of a non-profit or charitable organization. n These

Credit Affinity cards: carries the name of a non-profit or charitable organization. n These groups will receive a small percentage of every dollar charged n Smart cards: have computer chips which store information n

Credit Things to compare between cards will include: n Annual fee, APR (annual percentage

Credit Things to compare between cards will include: n Annual fee, APR (annual percentage rate) n Fixed or variable rate n If you are offered an introductory or teaser rate look at the terms after the rate expires n

Credit Grace period: a period of time during which the balance may be paid

Credit Grace period: a period of time during which the balance may be paid in full to avoid finance charges n Typically grace periods run 20 to 25 days n Also compare minimum payments, fees for late payments, cash advances, annual fees n

Credit Limit: the maximum amount of credit that the creditor will extend to the

Credit Limit: the maximum amount of credit that the creditor will extend to the borrower. n Do not be fooled by incentives and special offers n Truth and Lending Act: Lenders must adequately inform consumers about credit terms and costs n

Credit Use credit wisely, Remember to n 1. Set limits for yourself n 2.

Credit Use credit wisely, Remember to n 1. Set limits for yourself n 2. Pay the full balance when possible n 3. Pay bills on time to avoid late charges or interest rate hikes n 4. $1, 000 will take you over 20 years to pay off if you pay minimum payments n

Credit Fair Credit Act: outlines procedures for settling credit card disputes n You must

Credit Fair Credit Act: outlines procedures for settling credit card disputes n You must contact them within 60 days of finding an error in writing n They must respond in 30 days; 90 days to resolve n

Credit Types of loans: n Mortgages: are closed-end installment loans Home serves as security

Credit Types of loans: n Mortgages: are closed-end installment loans Home serves as security for the loan. Loans can range from 15 to 50 years n Equity: the difference between what you owe on a home and its market value n

Credit Home equity loan: loan that uses the equity in your home as security.

Credit Home equity loan: loan that uses the equity in your home as security. Can be used for a number of purposes n Other loans include, vehicle loans, education or student loans, personal line of credit n

Credit Consumer Finance Company: are business that specialize in making small and personal loans

Credit Consumer Finance Company: are business that specialize in making small and personal loans n The typical borrower is usually a greater credit risk, because of the risk the lenders fees and interest rates are usually much higher than a bank n

Credit Insurance policies can be a source of a loan, as can Payday loans:

Credit Insurance policies can be a source of a loan, as can Payday loans: short term, high interest rate loans, typically must be paid back in a two week to one month period n Interest rates can run as high as 500% n

Credit Concepts and terms to know: n Loan shark: unlicensed lender who operates illegally

Credit Concepts and terms to know: n Loan shark: unlicensed lender who operates illegally and charges excessive interest n Down payment: a portion of the purchase price paid at the time of purchase Ex: $2, 000 down on a $15, 000 auto purchase n

Credit Balloon Payments: a final payment that is much larger than the other installment

Credit Balloon Payments: a final payment that is much larger than the other installment payments n Acceleration clause: gives the seller the right to declare the entire balance due if the buyer misses even one installment payment n

Credit Add-on clause: allows additional purchases to be added on to an installment contract

Credit Add-on clause: allows additional purchases to be added on to an installment contract n Right of rescission: If you are pledging your home as security, you have the right to cancel the loan within 3 business days n Cancellation must be in writing n

Credit Delinquent: over due payments n Default: failure to fulfill the obligations of a

Credit Delinquent: over due payments n Default: failure to fulfill the obligations of a loan, more aggressive action will be taken to collect the debt n Repossession: Taking away property due to failure to make payments n Services can also be shut-off Ex: electric or water n

Credit Collection agency: business that collects unpaid debt for others. They receive a portion

Credit Collection agency: business that collects unpaid debt for others. They receive a portion of what they collect n Collection agencies reflect very poorly on your credit ratings n Lien: a claim upon property to satisfy a debt n

Credit Garnishment: the legal withholding of a specified sum from a persons wages in

Credit Garnishment: the legal withholding of a specified sum from a persons wages in order to collect debt n Credit counseling: programs to help train people to learn to live with-in their means n Debt consolidation loan: combines all existing debt into a new loan with more manageable payments n

Credit Bankruptcy: legal relief from repaying certain debt n Chapter 7 May lose property,

Credit Bankruptcy: legal relief from repaying certain debt n Chapter 7 May lose property, creditors is receive the money from sales n Chapter 13 debtor keeps property, submit plan approved by courts n