Terms The person or company who loans money or extends credit to you. CREDITOR DEBTOR The person who borrows money or uses credit. CREDIT – obtaining the use of money that you do not have
The yearly fee some companies charge for using their card
APR – annual percentage rate
The interest rate you pay in a single year on the money you borrow
The time you have to pay the credit card balance owed without being charge interest
The maximum amount you can charge
The original amount of the loan
Fee charged for the use of money
The 3 C’s of Credit
C haracter - responsible attitude toward living up to agreements
Will the applicant be responsible and repay the loan?
C apacity – financial ability to replay with present income
Does the applicant have enough discretionary income to comfortably make the payments on the loan amount requested?
C ollateral – property pledged to assure repayment of loan
Will the loan be secured, or guaranteed, by collateral that can be used to repay the debt in case the borrower defaults on the loan?
Capacity, Character, or Collateral What is your salary? Capacity Do you have a savings account? Collateral Have you used credit before? Character How long have you been at your present job? Character Do you own your own home? Collateral What are your current living expenses? Capacity How long have you lived at hour present address? Character
Common Forms of Credit
Credit Advantages Disadvantages Helps people acquire valuable assets Helps people lead happier lives Helps people in emergency situations People may use too much credit in relation to their income Misuse of credit can lead to paying more to obtain credit in the future Misuse of credit can hurt the ability of people to obtain credit in the future
Credit rating - Measure of creditworthiness based on analysis of financial history.
Scores range from 300 – 850
700 – 850 Excellent
650 – 700 Average
Below 650 Needs Work
Range may vary from lender to lender
What’s in a Credit Score?
Identifying information – Name, address, date of birth, social security number, employment information used to identify you
(Not part of your credit score)
Trade lines – Your credit accounts.
Type of account
Credit limit or loan amount
Credit inquiries - Everyone who accessed your credit within the last two years.
Voluntary inquiries – inquiries you authorize
Involuntary inquiries – when financial institutions access your information in order to offer “Pre-approved” credit offers
Public Records and Collection Items
Public information from state and county courts
Public information such as bankruptcies, foreclosures, suits, liens, garnishments
Company that gathers, stores, and sells credit information to business subscribers
Three larges credit bureaus
Under Fair Credit Reporting Act, individuals have the right to get a copy of their credit report from each credit bureau free of charge each year .
How to Establish a Good Credit History
Always pay bills on time.
Never borrow more than you can comfortably pay back.
Borrow only amount you need.
Contact lenders immediately if you expect to have a payment problem.
Develop good savings habits to handle financial emergencies.
Report lost or stolen cards
Do not apply for too many credit cards.
Kinds of Credit
Agreement to lend the borrower an amount up to a stated limit and to allow borrowing up to that limit again, whenever the balance falls below the limit
Borrower usually has choice of repaying the entire bill or making smaller payments over a period of time
Examples: Credit Cards
Open 30-Day Accounts
Consumer promises to pay the full balance owed each month.
Examples: American Express, Diner’s Club
Revolving Credit Accounts
Consumer has option each month of paying in full or making payments at least as high as the stated minimum.
Examples: VISA, MasterCard, Discover, department stores, gas company cards
A loan for a specific amount that must be repaid, in full, including all finance charges, by a stated due date.
Loan is repaid with fixed payments, or installments , that include principal and interest.
Down payment is usually required.
Product purchased usually becomes collateral.
Examples: loans for cars, furniture, major appliances
Agreement to have a service performed now and pay for it later.
Terms are set by individual businesses.
Some may impose finance charges on unpaid account balances, but do expect regular payments be made until the bill is paid in full.