Money borrowed to buy something now – with the promise / agreement to pay for it later (WITH INTEREST)

Credit is a privilege (not a right) that requires responsibility – can lead to financial ruin if not managed properly

Purchasing potential expanded (increased standard of living)

Emergency Funds – (Line of Credit) Convenience – cancel payment if

not satisfied Special offers – Deferred Billing Proof of purchase – more

descriptive Safer than carrying cash

Higher cost for purchases is possible – costs of accepting credit cards passed on to customers

Finance charges Future income is tied up –

strained budget Buying on credit may lead to

overspending

1. Open-Ended Credit: Ability to borrow up to a stated amount limit

and pay back at your convenience (Credit Cards)

Most credit cards / department store cards / gas cards / etc.

2. Closed End Credit: Installment credit – definitive payment for a

definitive period of time – all finance charges, etc. are stated up front (car loan / mortgage)

3. Service Credit Service performed now – payment later

(doctors / utilities / etc.)

Determining whether applicants meet certain standards and qualify for loans (Are they a good risk?)

The 5 C’s of Credit

CHARACTER Will you repay the Debt? (Credit Rating)

CAPACITY Can you repay the debt? (Income Level)

CAPITAL Is the creditor protected if you fail to

repay? CONDITIONS

Any economic conditions that may impact loan?

COLLATERAL What assets are pledged in case of default?

A measure of creditworthiness based on financial history & stability

Point System – scores based on: Amount of current debt Number of late payments Current job Income level Job stability

500 = Bad / 700 = Good

Always pay bills on time if possible Pay more than minimum payment Avoid overextending Avoid BANKRUPTCY Debt Consolidation – BE CAREFUL Get help (Consumer Credit Counseling) if

necessary

Private Label CardsDepartment Store or Gasoline Station

General Purpose Cards (Revolving)Visa / Mastercard / DiscoverMinimum payment option

Charge CardsMust pay full amount each month (American Express)

Prestige (Status) CardsPlatinum or Gold Cards – elite credit scores

Co-Branded CardsReward Cards – American Airlines Visa

Affinity CardsOften associated with a charity – donations usually made

Smart Card

Usually – consumers avoid paying finance charges by paying balances off in full each month

Be sure to understand the following: Annual Percentage Rate (APR) – cost of credit –

usually very high for credit cards 10-21% (variable rate may apply)

Grace (free) Period – avoid paying interest if balance paid during this time period

Annual Fees – research – some will try to charge Transaction Fees & Late Fees – cash advances /

late payment / use of “checks”/ etc. Method of calculating finance charge – may

vary (read & understand all costs in credit card agreement)

Sign cards immediately Carry only cards you need Keep list of all cards and info. in a safe

place Notify bank immediately if lost (phone /

letter) Get your card back immediately after use Do not lend your card Destroy expired card (cut) Don’t give out numbers over the phone

unless verified reputable company Keep receipts and verify billing statements

Deal only with companies you trust & know

Check browser symbol to insure the site is secure – information is encrypted (put into a code) before transmission

Review privacy policy of any online merchants

Banks & Credit Unions Retail Stores Finance Companies Pawnbrokers Private Lenders Other Sources (Life ins /

401k / CD / etc.)

1. Interest Rates2. Amount of time used to pay back loan

The more you borrow & the longer you take to pay back the loan more interest will be paid

3. Ability to repay (creditworthiness) People with better credit pay lower

interest rates

4. Collateral Better collateral = lower rates

5. Economic conditions

Only accept the amount of credit you need Don’t increase credit spending when your

income increases Limit # of credit cards Pay cash for any purchase under $25 Understand the costs & the impact credit will

have on your budget Compare – shop for best rates & fee structures Use credit to beat inflation (discounts & sales) Time your credit purchases to maximize grace

period Take advantage of rebate programs (cash / car

purchases / airline tickets / etc.)

Laws designed to protect consumers from unfair credit practices:

1.Truth in Lending Act 2.Fair Credit Reporting Act3.Equal Credit Opportunity Act4.Fair Debt Collection Practices Act

Consumers must be fully informed regarding credit terms and costs

Lenders must disclose information like APR, variable rates, fees, etc.

Read all disclosures before applying for a credit card

Consumers have a right to know what is in their credit file & who has seen your file – free within 30 days of credit denial

Inaccuracies can be removed / fixed / explained

Only legitimate requests for credit files should be granted

Prohibits discrimination in lending decisions Age / race / marital status / religion / etc.

Credit may not be denied due to a person being on public aid (welfare / unemployment / social sec. / etc.)

Applications may be in writing or oral – BUT -- certain questions are prohibited (What church do you belong to? / Are you planning on having children?)

Creditors may not discourage you for applying for credit due to any reason prohibited by the ECOA

Credit decisions must be made with 30 days – Denials must be in writing & must state specific

reasons -- applicant may appeal Husband & wife responsible for payment – credit

histories are established separately

Designed to eliminate abusive collection practices by debt collectors (internal or external)

No threats / obscenities / false statements to intimidate / etc.

Limits who collectors may contact & what can be said

Restricts times & frequencies that calls may be made

Consumers may clarify & dispute bill appropriately