Ch. 6

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need in some better way? • Can I postpone this purchase? What are the opportunity costs for postponing this purchase? • What are the dollar and psychological costs of using credit for this purchase? Shopaholics and young adults are most vulnerable to misusing credit, especially college students. ● ● Advantages of Credit Immediate access to goods and services Permits purchase even when funds are low • A cushion for financial emergencies Advance notice for sales • Easier to return merchandise Convenient when shopping One monthly payment Safer than cash • Needed for hotel reservations, car rentals, and online shopping • Can take advantage float time and grace period • Rebates, extended manufacturer's warranties, or emergency medical evacuation for traveler's, etc. • Indicates financial stability Disadvantages of Credit Temptation to overspend 2 Lesson 6 • Failure to repay loan may result in loss of income, valuable property, and your good reputation • Misuse can create long-term financial problems, damage to relationships, and slowing progress toward financial goals • It does not increase total purchasing power • Credit costs money Types of Credit Objective 2 Closed-End Credit One-time loans that the borrower pays back in a specified period of time and in payments of equal amounts.Also known as installment credit. Vocab: Installment cash credit- a direct loan of money for personal purposes (i.e. home improvements) Single lump-sum credit- a loan that must be repaid in total on a specified day (30-90 days) Examples: mortgage loans, automobile loans, installment loans Installment Sales Credit- this is a loan fir usually high priced merchandise like appliances or furniture. You make a down payment, then make monthly payments. Installment- monthly payment Open-Ended Credit A line of credit in which loans are made on a continuous basis and the borrower is billed periodically for at least partial payment. Also known as revolving credit. Vocab: 3 Lesson 6 Line of credit- the dollar amount, which may or may not be borrowed, that a lender makes available to a borrower Interest-refers to a periodic charge for the use of credit Revolving check credit- a prearranged loan from a bank for a specified amount; also called a bank line of credit Examples: credit cards, department store cards, bank credit cards -You pay interest and finance charges if you do not pay the bill in full when due Credit Cards • 7 out of 10 U.S. households carry one credit card • About 1/3 of credit card users are convenience users and pay balances in full each month • Others are borrowers, carrying a balance over and paying finance charges • Cash advances accrue interest from the moment you accept the cash in addition to the transaction fee Vocab: Co-branding- linking a credit card with a business trade name offering points or rebates on products and services Smart Cards • Have an embedded computer chip • Combined credit cards, a driver's license, a health care ID with your medical history and insurance information, etc. Debit Cards . Often called bank cards, ATM cards, cash cards, and check cards Electronically subtracts from your account the moment you make a purchase (no delay in payment) 4 Lesson 6 Stored-Value or Gift Cards • Are prepaid cards • Resemble a debit card and use magnetic stripe technology to store and track funds • Used in lieu of paper gift certificates • Used for business purposes (payroll, travel expenses, government benefit payments) • Retailer bankruptcy can make the cards worthless Travel and Entertainment Cards • These cards are not really credit cards • Monthly balance is due in full • Diner clubs or Carte Blanche cards Annual fee allows you to replace lost passports, buy airline tickets, find doctors, and access airport lounges around the world • Provides some identity theft assistance and rental car discounts Smartphones Most smartphones are able to make purchases, called mobile commerce Home Equity Loans A loan based on the current market value of a home less the amount still owed on the mortgage • Borrow up to 85% of the appraised value of the home less amount still owed Interest on loan tax deductible • It is set up like a revolving line of credit Protecting Yourself Against Debit/Credit Card Fraud • Sign new cards as soon as they arrive • Treat cards like money and keep them in a secure place 5 Lesson 6 Shred anything with your account number on it • Don't give your card number over the phone or online unless you initiate the call and don't write it on postcards • Get card and receipt after every transaction and check for billing system errors • Notify the card issuer if you don't get your billing statement of if your card is lost or stolen Protecting Your Credit Information on the Internet • Use a secure browser • Keep records of online transactions • Review monthly bank and credit card statements • Read polices of the websites you visit • Keep personal information private • Give payment information only to businesses you know and trust • Do not download files sent to you by strangers or click on hyperlinks from people you don't know When you make purchases online • Use a secure browser Keep records of online transactions • Review monthly statements-can do so online • Read policies of the websites you visit concerning refunds, site security, and privacy • Keep personal information private unless you know who is gathering it and why • Shop at businesses you know and trust • Never give out your password to anyone online • Don't download files sent by strangers Measuring Your Credit Capacity 6 Lesson 6 Objective 3 Before you take out a loan, ask yourself: -Can you afford the loan? -What do you plan to give up in order to make the payment? -Are you prepared to make this trade-off General Rules of Credit Capacity Debt payments-to-income ratio: monthly payments / net monthly income -consumer credit payments should not exceed a max of 20% of your net income (not including house payment which is a long-term liability) Debt to equity ration: total liabilities / net worth = should be > 1 (excluding home value) -If your debt-to-equity ratio is about 1, that is, your consumer installment debt equals your net worth and you have probably reached upper limit on debt obligations -The larger this number, the riskier the situation for lenders and borrowers. Lower the ratio by paying off debts. Co-signing a Loan The creditor will give you a notice that tells you... -You are being asked to guarantee the debt, so consider if you can afford if it the borrower defaults. -If the borrower does not pay, you may have to pay up to the full amount and also any late or collection fees. -If a payment is missed the creditor can collect the debt from you without first trying to get it from the borrower. If you do co-sign consider... -Can you afford to pay the loan? If not, your credit rating could be damaged. -Liability for this may prevent you from getting other credit that you want. 7 Lesson 6 -If you put up collateral, you could lose it if the loan goes into default. -Check your state's law to learn about cosigner's rights. -Request that a copy of overdue payment notices be sent to you. Building and Maintaining Your Credit Rating • Limit your borrowing to your capacity to repay • Live up to the terms of contracts . Check to see what is in your credit report Credit Bureaus Credit bureaus collect information and other information about consumers There are 3 main credit bureaus in our country: -TransUnion -Equifax -Experian • The Federal Trade Commission receives more consumer complaints about credit bureaus than about any other industry, on average about 12,000 a year Who Provides Data To Credit Bureaus? Bureaus get information from banks, finance companies, credit card companies, merchants, other creditors Vocab: Fair Credit Reporting Act- this act regulates the use of credit reports, requires the deletion of obsolete information, and gives consumers access to their files and the right to have erroneous data corrected Time Limits on Information On a Credit Report -Most information on a credit report is there for 7 years -Bankruptcy can stay on your credit report for 10 years 8 Lesson 6 -You can get your credit report for free once a year Incorrect Information in Your Credit File If you are denied credit, insurance, employment, or rental housing based on the information in your credit report, you can get a copy of your credit report free within 60 days of your request -You should review your credit reports yearly Applying for Credit Objective 4 What Creditors Look for: 5C's Character- do you pay your bills on time? • Capacity- can you repay your loan? Capital- what are your assets and net worth? • Callateral- what property do you have to pledge that the lender can repossess if you default on the loan? • Conditions- what economic conditions could affect your ability to repay the loan? FICO Credit Score The FICO credit score is a number generally between 350-850 and rates how risky the borrower is. The higher the score the better the interest rate on loans. What If You Are Denied Credit First check your credit file at one of the consumer bureaus. If your credit application is denied you have the right to know the specific reason for the denial. Remember if you are denied credit, insurance, employment, or rental housing based on the information in your credit report, you can get a copy of your credit report free within 60 days of your request 9 Lesson 6 How To Improve Your Credit Score 1. Get copies your credit report and review for accuracy 2. Pay your bills on time 3. Understand how your credit score is determined 4. Learn the legal steps to improve your credit report 5. Beware of the credit repair scams Avoiding and Correcting Credit Mistakes Objective 5 Fair Credit Billing Act Sets procedures for promptly correcting billing mistakes, refusing to credit card or revolving credit payments on defective goods, and promptly crediting your payments • Notify creditor of an error in writing within 60 days • Include your explanation of the error and your account number to the billing inquiries address • They must respond within 30 days • Credit card company has two billing periods but no longer than 90 days to correct your account or tell you why they think the bill is incorrect • Your credit rating is not affected while item is in dispute • You can withhold payment on damaged or shoddy goods or poor services if you have paid for them with a credit card, if you make a sincere attempt to resolve the problem with your creditor 10 Lesson 6 11