chapter 10 credit you’re in charge · 2015-10-22 · credit card costs annual fees $15 to $100...

ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10

WHAT’S AHEAD

10.1 What Is Credit?

10.2 How to Qualify for Credit

10.3 Sources of Consumer Credit

10.4 Credit Rights and Responsibilities

10.5 Maintain a Good Credit Rating


LESSON 10.1

What Is Credit?

GOALS►Identify reasons to borrow and the trade-offs you make

when you borrow.

►Discuss how to plan when and how much to borrow.

© 2010 South-Western, Cengage LearningSlide 2


KEY TERMS

credit

Equity

Credit Video:

http://www.youtube.com/watch?v=83wtyEqD1fc

Funny Money Credit Video





Consumer Action►Ryan lives at home with parents. His take-home pay

from a part time job is $1,700 a month. He gives his

parents $300 each month to help out with expenses.

He would like to buy a new car that he saw at a local

dealership. To buy it, he would have to get a loan with

payments of $400 a month. He really wants the car.

►Should he buy it?



What is Credit? ►The ability to borrow money in return for a promise of

future payment is credit.

►Future repayment usually includes interest.

► Example: Suppose you use credit to buy a jacket for $100. If

your interest rate is 15% per year, you must repay $115 at the

end of the year.

► 100 X .15 =$15

► 100 + 15 = 115

►You give up future spending for the ability to purchase

now.



Why Borrow?►For your goals

►For a home

►A home as an investment

►Equity: The difference between the amount owed on a

home and the homes' value.

►Taxes and homeownership

►For your education

►Student-loan borrowers average debt in 2011 was

$26,500!

►For your health



Plan Your Borrowing►When to borrow

►Is it important that I buy the good or service I want now?

►Do I have to borrow to buy the product?

►Can I afford to make the payments on the loan

►Will I be able to buy other products I want more if I borrow to buy this product?

►How much to borrow

►Basic rule to borrowing is that your total debt payments (excluding housing costs) should be no more than 20 to 25 percent of your net pay

► Example: If you make $500/month your total debt payment should be no more than $125/month

► 500 X .25 = $125



LESSON 10.2

How to Qualify for Credit

GOALS►Explain how lenders judge your creditworthiness.

►Describe the factors that determine your credit

rating.



KEY TERMS

creditworthiness

character

credit history

cosign

capacity

capital

credit bureau

credit rating



Your Creditworthiness►Creditworthiness is a measure of your reliability to

repay a loan

►How you can establish creditworthiness

►Find and keep a job with steady income, either part-time or full-time

►Establish a checking and savings account at a financial institution. Do not overdraw your accounts

►Apply for a credit card through a local bank or institution. Charge only what you can afford and pay it off on a monthly basis

►Apply for a loan and make all payments in full and on time.



Your Creditworthiness►The Three C’s of Credit

►Character

► A measure of your financial responsibility

► Credit History: A record of your past borrowing and repayments

►Capacity

► A measure of your financial ability to repay a loan

►Capital

► The value of what you own (assets) including savings,

investments and property



Your Credit Rating►Loan applications

►Credit bureaus

►A company that collects information such as your

borrowing and repayment history and sells it to lenders.

►Three largest credit bureau companies

► Experian, Transunion, Equifax

►Credit ratings

►Fair Isaac Corporation, which created the most widely

used scale referred to as FICO® scores.

►Between 300 and 850 (Best)



Credit Rating FactorsBook Pg. 334 Weighting of factors that affect

FICO® credit scores Payment history

Current debt

Length of credit history

New accounts and

inquiries

Types of credit used



What are the three C’s of credit? Character

Capacity

Capital

What is a credit rating? A measure of your creditworthiness

What kinds of information is a credit bureau

collecting about you? Your past borrowing

Your repayment history



LESSON 10.3

Sources of Consumer Credit

GOALS►Explain differences between a secured and an

unsecured loan.

►Describe benefits and costs of using credit cards.



KEY TERMS

secured loan

collateral

installment loan

unsecured loan

regular charge account

revolving charge account

grace period

credit limit



Types of Consumer BorrowingLoans Credit Card Accounts

You receive an amount of

money all at once to make

your purchase

Specific payments to repay

the loan with interest by a

certain date

The amount of your

purchase is added to your

account

Pay at least the minimum

payment each month

No specific payoff date



Consumer Loans►Secured loan

►Backed by something of value pledged to ensure payment

► Example: Home loans

►The property pledged to back a loan is called Collateral

►Installment loan

► Repaid in a certain number of payments with a fixed interest rate for the term of the loan

► Example: Vehicle Loans

►Unsecured loan

►Not backed by collateral

►Based on your creditworthiness alone

►Usually higher interest rates



Sources of Loans►Banking institutions

►Banks, savings and loan associations and credit unions

►Other sources of consumer loans

►Finance companies

►Payday loans

►Life insurance companies

►Credit card cash advances

►Pawnbrokers

►Rent-to-own companies


Book Pgs.

337-338


Credit Cards►Regular charge accounts

►Account balance must be paid in full each month

►No stated interest rate

►American Express, Diner’s Club, some department stores

►Revolving charge accounts

►Allows you to carry a balance from one month to the next.

►Pay interest on the account balance

►Sources of credit cards

►Visa, MasterCard, American Express, Discover

►Charities, gas companies, universities, credit unions,

►Credit card incentives

►Example: Free gas, airline miles etc.© 2010 South-Western, Cengage LearningSlide 20


Did you know??►The first widely accepted plastic charge card was

issued in 1958 by American Express.

►Average credit card debt per household with credit card debt: $15,799*

►Each American household receives approximately 6 credit card offers a month. The typical response rate is .33% (one third of one percent).

►Total U.S. consumer debt: $2.5 trillion, as of December 2011

►The average age at which a U.S. consumer under the age of 35 first adopted a credit card is 20.8 years



Credit Card Costs►Annual fees

►$15 to $100

►Many cards do not have annual fees

►Interest

►Credit Card Balance Calculator

►Grace period- the time between the billing date and the

payment due date when no interest is charged.

►Limits and penalties

►Credit limit-the maximum amount you are allowed to charge

►Fees if you go over your credit limit


http://www.bankrate.com/calculators/managing-debt/minimum-payment-calculator.aspx


Control Credit Card Costs►A loan as an alternative

►The minimum payment trap

►Choose the least expensive card



LESSON 10.4

Credit Rights and Responsibilities

GOALS►Discuss ways that laws protect your credit rights.

►Describe how to take responsibility for your own

financial health.



KEY TERMS

finance charge

annual percentage rate (APR)



Consumer Credit Rights►Truth in lending

►Truth in Lending Act of 1968

► Requires all banks to calculate credit costs the same way

► Provide the finance charge and annual percentage rate

► Finance charge: the total cost a borrower must pay for a loan, including interest and fees

► Annual percentage rate: the finance charge calculated as a percentage of the amount borrowed

►Equality in lending

►Equal Credit Opportunity Act of 1975

► Made it illegal to refuse credit based on the basis of race, color, religion, national origin, gender, marital status or age.



Consumer Credit Rights►Protect your credit history

►Fair Credit Reporting Act of 1971

► Requires lending organizations to identify the credit bureau

that supplied information used in lending decisions

► Allows people who are refused credit 30 days to request a free

copy of their credit report

► Requires credit bureaus to give consumers one free copy of

their credit report a year.



Consumer Credit Rights►Act if you are refused credit pg. 346

►Resolve billing and product quality problems

►Within 60 days write to company that issued your card

►Company must reply within 30 days and resolve the dispute within 90

►Protection from abusive collection practices

►Fair Debt Collection Act of 1977

►A debt collector may not:► Call before 8 am

► Call after 9 pm

► Call your place of work if they are aware that your employer doesn’t approve

► Lie or harass you

► Ignore a written request to a stop contact



Consumer Credit Responsibilities►Accept responsibility

►Know your debt capacity

►Take Home pay –Fixed expenses (rent , insurance)- Other

expenses (food, gas, etc) = What's left?

►Credit and family

►Self-control with credit

►Pay more than the minimum

►Avoid too many credit cards

►Pay cash

►Keep accurate records



LESSON 10.5

Maintain a Good Credit Rating

GOALS►Explain how to establish a positive credit history.

►Discuss how to avoid credit problems and get help if

you need it.



KEY TERMS

identity theft

debt consolidation loan

bankruptcy



Establish Your Credit History►Start small

►Never miss a payment

►Save Regularly

►Charge small amounts and pay them off immediately

►Establish your own credit

►Avoid common credit mistakes

►Read what you sign

►Be aware of identity theft

►Identity theft: using someone else’s identity to get cash or buy products using credit, or to access financial accounts that belong to the victim. ► Businesses are responsible for debts, but records of the transactions

can ruin your credit history!



Identity Theft►How “They” Become “You”

►Social security #, Driver’s license # or Credit Card #

►How to protect yourself

►Never give out your Social Security number unless absolutely necessary

►What to do if you identity is stolen

►Call the 3 major reporting agencies – Equifax, Experian, & Trans Union. ► Have them to put a fraud alert on your file and ask that they call you before any new

accounts are opened or existing accounts are changed

► Report the theft to law enforcement agencies

► Contact your bank or other organizations that have extended you credit

► Call the Federal Trade Commission (FTC) ID hotline or visit the FTC’s website.


http://www.ftc.gov/index.shtml


Help for Credit Problems►Debt consolidation loans

►Designed to pay off all the smaller loans and give you one payment to make each month

►Cost of a debt consolidation loan

► Lower monthly payment, but you pay more in interest

►It’s a bandage, not a cure

►Credit counseling services

►Bankruptcy

►A legal process in which people who cannot pay their debts must surrender most of their property.

►Stays on your credit report for 10 years.


chapter 10 credit you’re in charge · 2015-10-22 · credit card costs annual fees $15 to $100...

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