The Fundamentals of Credit Key Terms Credit Debtor

The Fundamentals of Credit Key Terms Credit Debtor Creditor Trust Loan Credit Sales Credit Trade Credit References Character Capacity Capital Credit Rating Collateral Secured Loan Interest Rate Principal Time Factor Simple Interest Maturity Date Annual Percentage Rate Credit Insurance Service Fees Truth-in-Lending Law Equal Credit Opportunity Act Fair Credit Billing Act Fair Credit Reporting Act Debt Repayment Plan

What Is Credit? • The privilege of using someone else’s money for period of time • This privilege is based on the belief that the person receiving credit will honor a promise to repay the amount owed at a future date

What Credit Is • Debtor • Anyone who buys on credit or receives a loan • Creditor • The one who sells on credit or makes a loan • Many consumers plan to use credit as a substitute for cash and pay the balance in full at the end of the month— but only 20 percent do so consistently

Trust • The creditor believes that the debtor will honor the promise to pay later for goods and services that have been received and used, without this, our credit system could not operate • Written agreement signed by the debtor stating time frame and interest that will be charged on the outstanding balance

Loan Credit • Money borrowed for some special purpose • Car • Home Improvement • Loan Credit is offered by Banks, Credit Unions, Savings and Loan Associations, and Consumer Finance Companies

Sales Credit • Type of credit issued at the time you buy the good or service • Charge Accounts • Credit Cards • Sales Credit is offered by most retail and wholesale businesses

Trade Credit • Used by businesses when it receives goods from a wholesaler and pays for them at a later specified date • 2/10 n/30 • This means that the business can take a 2 percent discount if the bill is paid within 10 days from the billing date or the full or net amount must be paid within 30 days $20, 000 Merchandise Order $400 Saved If Paid In 10 Days

Users Of Credit • The American Consumer will use credit for many purposes • • New Car House Big Ticket Items Vacations

Credit References • Businesses or individuals from whom you have received credit in the past and / or who can help verify your credit record The business that is considering you as a credit risk will generally ask you about your financial situation and request credit references

Credit Information • The answers to the financial questions and the information received from your credit references will help the business decide whether loan or sales credit should be extended to you • What can they ask me? • How much do you earn? • How long have you workd for your current employer • What property do you own • Do you have any other debts?

The Three C’s of Credit • Character • Refers to your honesty and willingness to pay a debt when it is due • (how you will pay your bills in the future usually can be predicated by how you have paid them in the past) • • • Utility bills Home Mortgage Rent Payment Car Loan Home Improvement loan

The Three C’s of Credit • Capacity • Refers to your ability to pay a debt when it is due • The lender must consider whether your income is large enough to permit you to pay your bills. If your income is too small or unsteady, granting you additional credit may not be wise even though you have had a good credit record in the past

The Three C’s of Credit • Capital • The value of the borrower’s possessions COLLATERAL • Car • House/Property • Checking / Savings Account

Benefits Of Credit • Convenience • Credit can make it convenient foryou to buy, you can carry no cash with you • Immediate Possession • Allows you to have possession of the item immediately • Savings • Allows you to buy an item when it goes on sale, possibly at a much lower price

Benefits Of Credit • Credit Rating • If you buy on credit and pay your bills when they are due, you gain a reputation for being dependable • Emergencies • Access to credit can help you in an emergency

Precautions For Use Of Credit • Over Buying • You may purchase something that is more expensive than you can afford, as a credit customer, you may be tempted to buy items that you do not really need • Careless Buying • You may stop checking advertisements carefully, making comparisons based on price or quality, and causing you to buy at the wrong time or the wrong place

Precautions For Use Of Credit • Higher Prices • Stores that sell only for cash are able to sell at lower prices than stores that offer credit, extending credit is expensive, when customers do not pay as agreed, there are collection expenses, these costs are passed on to customers in the form of higher prices • Overuse of Credit • Buying now and paying later may sound like a good idea, but if too many payments are to be made later, the total amount that must be paid can become a problem

FYI • Credit card issuers lure consumers with more than 25, 000 different kinds of special offers • • Varying Interest Rates Fees Frequent-Flyer Miles Merchandise Discounts

Questions To Ask • Before making a final decision whether to buy on credit, there are some questions you as a consumer should answer: 1. How am I benefiting from this use of credit? 2. Is this the best buy I can make or should I shop around some more? 3. What will be the total cost of my purchase, including the cost of charging the item? 4. 5. What would I save if I paid cash? Will the payments be too high considering my income?

Teenage Charge Accounts • Under contract law, minors cannot be held liable for their personal debts • (In the state of Nebraska you may not have a credit card in your name until you are 19 years of age-Age of Majority) • A parent or guardian may cosign for a credit card which means that if the teenager becomes default in payment, the parent or guardian must pay any unpaid balance • Charge accounts for teenagers are usually regular or revolving • Limits on the amount that can be charged are set at a lower end than those for adults

Consumer Loans • Collateral • Property that is used as security • Car • House • Jewelry • Secured Loan • A loan that is guaranteed with collateral (you give the lender the right to sell the collateral to get back the amount of the loan in the event that you do not repay it)

Interest Calculations • The amount of interest you must pay on a loan or charge account should be clearly understood. To determine the amount you have to pay it is necessary to know three things: • Interest Rate • The percentage that is applied to your debt expressed as a fraction or decimal 4. 9% 5. 9% 9. 0% 13. 2% 18. 8% 22. 3%

Interest Calculations • Principal • The amount of debt to which the interest rate is applied $2, 000 $25, 000 $10, 000 $35, 000

Interest Calculations • Time Factor • The length of time for which interest will be charged 6 Months 1 Year 5 Years 15 Years

Interest Calculations • Simple Interest • An expression of interest based on a one-year period of time • The formula for computing simple interest is? ? ? I (interest) = P (principal) x R (rate) x T (time) If $1, 000 is borrowed at 9. 9% for one year how much interest will you owe ? ? $99

Interest Calculations • Interest is expressed as part of a dollar. This part of a dollar, or percentage, is called the interest rate. Before using a percentage rate in a problem, you must change it to either a common fraction or a decimal. 15. 6% . 156 9% . 09

FYI • In a recent year, the average credit card holder who paid finance charges spent $453 in interest!!!

Interest Calculations • When a loan is made for a certain number of days, such as 30, 60, or 90 days, the interest is determined by days. To make the computation easy, a year is often considered What 360 would days. the interest on a loan for $100 at 12 % for 60 days be? ? Principal = $100 Rate = 12% Time = 60 / 360 $100 x. 12 = $12 60 / 360 = 0. 1666666 $12 x 0. 1666666 = $2

Interest Calculations • Maturity Date • The date on which a loan must be repaid • When the time of the loan is stated in months, the date of maturity is the same day of the month as the date on which the loan was made • When the time of the loan is given in days, the exact number of days must be counted to find the date of maturity DO WEEKENDS COUNT IN THIS CALCULATION? ?

Finance Charges • Annual Percentage Rate (APR) • A disclosure required by law stating the percentage cost of credit on a yearly basis • All credit agreements, whether for sales credit or loan credit, require disclosure of the APR

Finance Charges • In addition to interest, the APR includes other charges that might be hidden • --Service Fees—Charge for time and money it takes a creditor to investigate your credit history, process your loan or charge account application

Finance Charges • Uncollectible accounts are frequently referred to as bad debts or doubtful accounts • Credit Insurance—Special insurance that repays the balance of the amount owed if the borrower dies or becomes disabled prior to the full settlement of the loan • • --Some lenders may not grant credit if you do not agree to credit insurance --Credit Insurance costs you the borrower

Credit Card Fraud Ø Avoid giving card numbers or expiration dates over the telephone unless you initiate the call • --Giving your card number to someone who calls you about winning a prize often pretends to need your card number to verify your identity so you can claim the prize ØTry not to give out your birth date or your social security number --Both pieces of information can be used to apply for a credit card in your name, you may not know about it until you receive the bill

Creditworthiness • What do lenders to know? How much do youwant earn? What kind of savings and investments do you have? Do you have any other sources of income? How long have you worked for your employer? How long have you lived at your present address? Do you own or rent your home?

Credit Records • Information stored in credit databases contain some of the following information about you Ø Your Income Level Ø How many credit cards you have been issued Ø What the balances are on your credit card accounts Ø Where you are employed and for how long Ø Where you live and whether you are a renter or owner Ø Whether you have ever been in bankruptcy Ø Whether you pay your utility and other bills on time

You Have Rights • Truth-in-Lending Law (1968)—Requires that you be told the cost of a credit purchase in writing before you sign a credit agreement • • --APR / Total Finance Charge must be clearly stated --Liability to $50 for unauthorized credit card purchases made prior to notification of the issuer NOTIFY THE CREDIT CARD COMPANY IMMEDIATELY!!!

You Have Rights • Dealing With Stolen Credit Cards • You can notify the company by telephone, but you should also put your notification in writing, citing the date of the phone call

You Have Rights • Equal Credit Opportunity Act—Prohibits creditors from denying credit based on the age, race, sex, or marital status of the potential applicant • • --Age of Majority in the state of Nebraska --Women may establish credit in their own name

You Have Rights • Fair Credit Billing Act—Requires prompt correction of billing mistakes when they are brought to the attention of a business in a prescribed manner • What Do You Do If There Is An Error? Ø Notify the creditor in writing within 60 days after your statement was mailed Ø While waiting for an answer you are not required to pay the amount in question Ø Your complaint must be acknowledged by the creditor within 30 days unless your statement is corrected before that time Ø You do not pay finance charges on any amount in error Ø If no error is found, the creditor must bill you again and may include finance charges that have accumulated plus any minimum payments that were missed while the statement was being questioned

You Have Rights • The Fair Credit Billing Act also provides that you may withhold payment of any balance due on defective merchandise or services purchased with a credit card

You Have Rights • Fair Credit Reporting Act—Law that gives consumers the right to know what specific information credit bureaus are providing to potential creditors, employers, and insurers • --If credit is denied on the basis of information in a credit report, the applicant must be given the name, address, and phone number of the credit bureau that provided the information

You Have Rights • If you find something untrue in your credit report you can have it removed and in its place a brief statement giving your side of the disputed bill payment

Sources Of Help • If you find that you cannot pay your bills when they are due, what should you do? ? ØContact your creditors and explain your situation Ø Make a realistic proposal for when and what you can pay, don’t say “I can’t pay” ØKeep any promises you make ØMake a written copy of your agreement to avoid disagreements later

Sources Of Help • Debt-Repayment Plan—An agreement developed cooperatively by a creditor and a debtor to reduce payments to a more manageable level and still pay off the debt

Review 1. The privilege of using someone else’s money CREDIT for a period of time 2. Type of credit offered by most retail and wholesale businesses SALES CREDIT 3. What are three C’s of credit? CHARACTER CAPACITY CAPITAL

Review • 4. The one who sells on credit or makes a loan CREDITOR 5. Money borrowed for some special purpose LOAN CREDIT 6. Anyone who buys on credit or receives a loan DEBTOR 7. Businesses or individuals from whom you have received credit in the past and / or who can help verify your credit record are called? CREDIT REFERENCES

Review • 8. When you buy on credit and pay your bills when they are due you are developing your? CREDIT RATING 9. How old must you be in the state of Nebraska to have a credit card in your name with no cosigner? 19 -AGE OF MAJORITY 10. Property that is used as security COLLATERAL (CAR / HOUSE / JEWELRY 11. The formula for computing simple interest is? INTEREST=PRINCIPAL X RATE X TIME

Review • 12. A disclosure required by law stating the percentage cost of credit on a yearly basis ANNUAL PERCENTAGE RATE-APR 13. Special insurance that repays the balance of the amount owed if the borrower dies or becomes disabled prior to the full settlement of the loan CREDIT INSURANCE 14. A law that requires that you be told the cost of a credit purchase in writing before you sign a credit agreement TRUTH-IN-LENDING LAW (1968)