7.00 o bjective u nderstand ways to protect personal and family resources. 7.02 students will be...
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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
21
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
FEFE 1.41G1
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