7.00 OBJECTIVE UNDERSTAND WAYS TO PROTECT PERSONAL AND FAMILY RESOURCES.

7.02 students will be able to understand ways to protect personal credit.

ESSENTIAL QUESTIONS

What are the types of credit? How does one establish, shop for, and

maintain good credit?

WHAT IS CREDIT?

•An agreement to obtain money, goods, or services now in exchange for a promise to pay in the future.-When buying on credit, you are simply delaying the payment for an item

-Credit is a temporary money substitute

“Buy now and Pay Later”

WHO USES CREDIT?

1. Consumer CreditCredit used by people for personal reasonsconsumer loans, mortgage loans, credit cards, charge cards

2. Commercial CreditCredit used by businessescommercial loans, corporate bonds

3. Government CreditCredit used by local, state, federal governmentsmunicipal bonds, treasury bonds, T-bills, T-notes

WHO ARE PARTIES TO CREDIT?

Credit involves two parties, a lender and a borrower Lender/Creditor:

A person or business who supplies money, goods, or services to debtors

Borrower/Debtor: A person or business who borrows money, goods, or

services from creditors

CREDIT TERMS

Principle- amount of money borrowed Interest – charge for use of money

aka finance charge, loan fees Maturity date- when payment is due

aka due date Late fees – additional fees due if payment is

not made by due date Grace period – time between purchase and

payment due when credit uses goods without payment

OPTIONS FOR LOAN REPAYMENT Installment loan

Ford Motor Credit provides money for Traci to buy a car. She pays monthly installments of $247.98 for 36 months until the loan is repaid.

Single payment Gabe borrows $4000 for his fall semester at college. The

contract agreement requires one lump sum payment of the $4000 plus interest by March 10th of next year.

Revolving Credit Master Card provides a $1000 credit limit to Don. He can

spend up to $1000 as long as he pays the minimum payment every billing cycle. His available credit is difference between the credit limit and his current amount due. The balance constantly changes with purchases and payments.

TYPES OF CONSUMER CREDIT

credit to purchase goods and services from retailers Regular charge account Installment account Revolving credit account

Lennox dealer MTB Inc. provides up to $15,000 credit for installation of HVAC heating or air conditioning unit.

HomeBoys Car Depot advertises financing on all vehicles sales with monthly payments guaranteed only $99 a month. Note: does not advertise the #

of payments!

Belk provides a revolving charge card for purchases at their stores. Monthly billing cycle allows payments and additional purchases.

Sales Credit

Examples

CHARGE ACCOUNTSAllows debtors to receive goods or services from

suppliers and pay for them at a later date

◦ Regular Charge Accounts Require that you pay for purchases in full within a certain

period of time EX: charge account with an electrician who wired your house

◦ Revolving Charge Accounts Allows you to borrow or charge up to a certain amount of

money (credit limit) and pay back a part or the entire balance each month

EX: home equity line of credit

◦ Budget Charge Accounts Allows you to pay for costly items in equal payments spread

out over a period of time EX: a charge amount with Progress Energy utility company to

keep bills even all year

CASH CREDIT

Money granted to use for a variety of purposes;

may be secured or unsecured;

may be installment, single-payment, or credit card/check credit loans

Examples: Car loan from bank Home loan from

mortgage company College loan due after

graduation Furniture loan from

bank Credit card limit of

$2000 for purchases of user’s choice

TYPES OF CASH CREDIT

Installment loans Car, mortgage

Single-payment loans Lump sum pay back

Company or retail store credit card Belk, Penney, BP gas

card

Travel & entertainment credit cards Diner’s Club American Express

General-purpose credit cards MasterCard VISA

CREDIT CARDSRetail store, Single Purpose – aka charge cards

Balance and payments vary Can only be used to buy goods or services at the business that

issued the card Examples: JC Penney, Sears

Multipurpose, Bank cards Revolving credit accounts Balance and payments vary May be used at different locations Examples: Visa, Master Card

Travel and Entertainment Similar to charge accounts Must be paid in full each month Example: American Express, Diner’s Clubcompare credit cards

*Unsecured Loans

CONSUMER LOAN EXAMPLE

Marty borrowed $450 for 12 months from First Federal Bank to buy a bike at 8% APR. The contract requires monthly payments by the 8th of the month or an additional 5% will be charged.

1. Who is the creditor?2. Who is the debtor?3. What is the interest rate?4. What does APR stand for?5. What is the maturity date?6. Which type of loan does Marty have?

Revolving credit card? Installment? Single payment loan?

7. When does the late fee kick in?

REVIEW:

SIMPLE INTEREST FORMULA

Using information from the previous slide on Marty’s loan…

I=PRT What do the letters stand for? I= P= what is Marty’s P? R= what is Marty’s R? T= what is Marty’s T?

How much will Marty owe in interest?

How much will Marty’s monthly payment be on his motorcycle?

What will interest be if Marty pays off the loan in only 6 months?

JUMPSTART PRINCIPLE:

COMPARE INTEREST RATES

Why do you need to compare interest rates?

What else do you need to compare and why?

UNSECURED VS. SECURED LOANS

Require only borrower’s signature as evidence of agreement with terms of the loan

No collateral or cosigner required

Generally available for borrowers with a good credit history

Require some form of guarantee to secure the loan agreement

Collateral: Asset used to secure loan Reduces lender’s risk Can take property if the borrower

does not repay

Cosigner: Agrees to sign loan if borrower has

neither collateral nor good credit Typically has good credit Agrees to pay if borrower fails to

repay

Unsecured loans Secured loans

COSIGNER Responsible for the

repayment of a loan if the original party does not pay

Party who signs with applicant for a loan

Who might co-sign a loan for you?

WHAT IS COLLATERAL? Collateral- an asset used as

security on a loanCan be taken by creditor if loan

payments are not made to creditor

Mortgage loans- real property* *Land & permanent attachments;

commercial buildings, homes, schools Subject to Foreclosure if not paid

Personal loans- personal property* *moveable property; car, motorcycle,

boat, furniture, RV Subject to Repossession if not paid

CREDIT DOCUMENT- THE CONTRACT

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Credit contracts are legal binding documents that allow debtors to use credit to obtain goods and services.

READ the agreement BEFORE signing! Who is your best

advocate?

Know the content of the credit contract before signing such as: $ Amount of finance

charges Repairs covered Add-on features Reduction of finance

charge if contract paid in full prior to ending date

Receive a copy of the contract

Repossession conditions Know what you are signing!

CLOSED VS. OPEN ENDED CREDIT Closed-end credit

Used for a specific purpose

Loan of a definite amount of money

Loan balance reduced with each payment

Example: car loan for $20,000 is a specific, one time amount of money

Use String examples*

Open-end credit Gives a credit limit -

maximum $ you can borrow

Loan balance varies for purchases/payments made

Example: credit card with $500 limit.

You might spend $50 and pay $10, spend 30 and pay $25.

The loan amount “revolves” as you make purchases and pay back all or part of the loan.

CREDIT CARD TERMINOLOGY

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Cash Advance Borrow money on a

credit card Costs more than

regular credit card purchases

*read your contract before signing application or taking a cash advance!

Grace Period Time period during

which no finance charges will be added to an account. From monthly statement cutoff until payment is due!

Maturity (due) date is at least 14 days from statement date. If you pay account in full by due date, you will not usually owe interest.

ESTABLISHING CREDIT

Creditors only lend to people who can be expected to pay them back

Creditors look at credit-related information to determine if one is a good risk

A creditor’s evaluation of one’s ability and willingness to repay debts is a credit rating

Credit ratings are based on 3 Cs Character---a person’s reputation for being

honest and their financial history Capacity---a person’s employment history and

ability to earn money Capital---a person’s financial worth

HOW TO ESTABLISH GOOD CREDIT

Take out a small, short term loan Make EVERY payment ON TIME! Pay off on time OR early Examples:

Low limit credit card – $500 MasterCard Car loan – may have to be co-signed by parent

Pay ALL your bills ON TIME! Rent to your landlord Premiums to your auto insurance Cell phone bill Utility bill Medical bills with doctor, hospital

JUMPSTART PRINCIPLE:

YOUR CREDIT PAST IS YOUR CREDIT FUTURE

What do you think this means?

Psa videos on http://www.ftc.gov/freereports

Go to http://www.ftc.gove/freereports Find information on how to obtain a credit report What are the 3 major credit reporting bureaus? What do they do?

LOAN SOURCES

Preferred lenders Most reliable lenders

Examples: Banks credit unions savings & loan

associations consumer finance

companies* insurance policy loans credit card companies private loans**

Non-preferred lenders

May take advantage of people with poor credit; typically charge high interest rates

Examples: “payday” lenders Pawnbrokers loan sharks auto title loan lenders tax refund loan

*-usually higher interest rate**- if family, may cause tension

CONSIDERATIONS WHEN SHOPPING FOR CREDIT Annual fees to keep

card Annual percentage

rate (APR)--- the amount whether it changes

Method used to calculate interest Previous balance Adjusted balance

Minimum payment amounts

Grace period Minimum finance

charge Any other fees

Cash advance Late fees

Credit limit Special features and

services Rebates, earning

points, free air miles

Before approving loan, loan officer or underwriter will run credit report (credit check)

A credit report is like a report card of how people manage their credit

Report reflecting how well a person has used credit resources

Three national credit reporting agencies: Equifax Experian TransUnion

Provide information about employment history, credit accounts, balances, payment patterns

Consumers should check each of the three credit reports annually to verify accuracy

The Fair Credit Reporting Act---can get a free copy of credit reports every 12 months

The FTC site http://www.ftc.gov/freereports explains how to obtain the free reports

Credit Reporting

CAUTIONS WHEN SEEKING LOANS

Always “read the fine print” and know the terms of loans before signing

Consider if this would be wise or unwise use of credit

Remember that, once signed, borrowers are bound by the terms of the agreement

Consumers can apply for loans in person, online, over the telephone or in writing

CAUTIONS WHEN SEEKING LOANS

Typically, must provide information related to ability to repay loan: Income Employment history Residence Credit history Savings

The lender will likely run a credit check (report).

If approved, borrowers may

have right to rescission (cancel) within three days if they choose; a provision of the Truth in Lending Act*

* How else does Truth In Lending Act protect consumers?

WHAT DO YOU THINK?

How can having bad credit negatively affect a person?

If bills are not paid, what items can be repossessed?

If bills are not paid, what items can be foreclosed?

If bills are not paid, what items can be turned off?

http://whatsmyscore.org/contgest/videos.php

MAINTAINING GOOD CREDIT Evaluate the need to borrow

Can the purchase be avoided, delayed or bought on lay-away?

Identify and use the right type of credit for the intended purchase

Shop for the best terms Know how you will pay it back before you borrow Only use the amount of credit that you can afford to

repay Meet all the terms of credit contracts and agreements Keep accurate records of charges, statements, and

payments Consult creditors immediately if you cannot pay on time Resolve billing errors promptly

JUMPSTART PRINCIPLE:

Don’t borrow money that you can’t repay!

Create a tip sheet/brochure on: Credit card use Establishing and maintaining good credit Getting out of debt Knowing when and why to borrow

SIGNS OF A DEBT PROBLEM Consumers find

themselves stressed and constantly worrying over their finances

Having no savings Having reached the

credit limit on most of their credit cards

Skipping payments on some bills in order to pay others

Using cash advances on one credit card to pay another

Relying on credit cards to purchase day-to-day items like groceries and fast food

Relying on credit cards to pay monthly bills

Opening new credit card accounts in response to reaching the credit limit on others

Regularly receiving contacts from creditors/collection agencies trying to collect unpaid debts

STRATEGIES FOR GETTING OUT OF DEBT

Actively deal with the problem; ignoring it will only make it worse

Stop using credit; focus on repaying the debt owed

Get help from trained people---a credit counselor or credit counseling service

Develop a spending plan that includes living expenses and debt repayment funds

Contact creditors immediately, let them know your situation, ask to have credit terms adjusted

Learn to live within your budget!

BANKRUPTCY…A LAST RESORT

Legal relief or forgiveness from repaying certain debts

Try to deal with debts using ALL MEANS available before filing for bankruptcy

Bankruptcy carries serious, long-term consequences---part of one’s credit report for ten years Chapter 7---must sell certain personal belongings, use

proceeds to repay debts Chapter 13---can retain most personal property, but

must propose a repayment plan, go to credit counseling, receive financial management education, and be employed

BANKRUPTCY LIMITS

No Bankruptcy Forgiveness for: Taxes owed Court ordered debt

Alimony Child support Liability from lawsuits

College loans

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