7.0 OBJECTIVEUNDERSTAND WAYS TO PROTECT PERSONALAND FAMILY RESOURCES. 7.02 C-students will be able to understand how to establish credit and maintain good credit
ESTABLISHING CREDITCreditors lend to people who can reasonably be expected to pay them back – all questions asked relate to “ability to repay” 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
ESTABLISHING CREDIT Credit rating reflects the consumer’s credit history Credit ratings are based on 3 Cs (review objective 6.03 housing options) 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
CONSIDERATIONS WHEN SHOPPING FORCREDIT Choosing the Right Grace period Lender Minimum finance charge Annual fees to keep card Any other fees Annual percentage rate Cash advance (APR)--- Late fees the amount Credit limit whether it changes Special features and Method used to calculate services interest Rebates, earning points, Previous balance free air miles Adjusted balance Minimum payment amounts
Non-preferred lenders May take advantage ofLOAN SOURCES people with poor credit; typically charge high interest Preferred lenders rates Most reliable lenders Examples: Examples: “payday” lenders Banks Pawnbrokers Credit unions loan sharks Savings & loan auto title loan lenders associations tax refund loan Consumer finance companies* May accommodate lower credit rating for higher APR Insurance policy loans *-usually higher interest rate Credit card companies **- if family, may cause tension Private loans**
CREDIT DOCUMENT- THE CONTRACT Creditcontracts Know the content of the are legal binding credit contract before signing documents that such as: allow debtors to $ Amount of finance charges use credit to Repairs covered obtain goods and Add-on features Reduction of finance charge if services. contract paid in full prior to READ the agreement ending date BEFORE signing! Receive a copy of the contract Who is your best Repossession conditions advocate? Know what you are signing!
JUMPSTART PRINCIPLE: YOUR CREDIT PAST IS YOUR CREDIT FUTURE What do you think this means? PSA videos on http://www.ftc.gov/freereports PSA = Public Service Announcement 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?
Credit Reporting 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
Credit Reporting Provide information about employment history, credit accounts, balances, Three national credit payment patterns reporting agencies: Equifax Consumers should check each of the three credit Experian reports annually to verify TransUnion accuracy 500- poor credit score The Fair Credit Reporting 700+ good credit score Act---can get a free copy of credit reports every 12 months The FTC site http://www.ftc.gov/freereport s explains how to obtain the free reports
CAUTIONS WHEN Typically, must provideSEEKING LOANS 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?
CAUTIONS WHENSEEKING LOANS Always “read the fine print” and know the terms of loans before signing watch for issues like balloon payments 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
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
video link: signs of debt problemsSIGNS OF A DEBT PROBLEM Consumers find Relying on credit cards to themselves stressed and purchase day-to-day constantly worrying over items like groceries and their finances fast food Having no savings Relying on credit cards to Having reached the credit pay monthly bills limit on most of their Opening new credit card credit cards accounts in response to Skipping payments on reaching the credit limit some bills in order to pay on others others Regularly receiving Using cash advances on contacts from one credit card to pay creditors/collection another agencies trying to collect unpaid debts
STRATEGIES FOR GETTING OUT OF DEBT video link: tips for getting out of debt Actively deal with the problem; ignoring it will only make it worse Stop using credit; focus on repaying the Get help from trained debt owed people---a credit counselor or credit Contact creditors counseling service immediately, let them know your situation, Develop a spending plan ask to have credit that includes living terms adjusted expenses and debt repayment funds Get credit card with “teaser” rate Learn to live within your budget! Pay bills automatically through EFTs! video link: credit counseling Spend smarter!
video link: when to file bankruptcyBANKRUPTCY…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 EXCLUSIONS No Bankruptcy Forgiveness for: Taxes owed including fines & penalties Court ordered debt Alimony Child support Liability from lawsuits College loans video link: filing personal bankruptcy
Chapter 7 Bankruptcy ProcedureChapter 7---must sell most personal belongings of value, use proceeds to repay debts1. File the following with the US District Court: a. List of all creditors and amounts owed b. List of all property owned c. Statement about financial affairs d. List of current income and expenses e. Trustee is selected-independent party2. Sale for cash (liquidation) of non-exempt assets by trustee3. Proceeds (Cash) used to pay each creditor same %4. Money left over, if any, returned to debtor5. Creditors cannot sue for additional claims after filing 21
CHAPTER 7: PROPERTY- EXEMPT &NON-EXEMPT Exempt Property – can keep Up to $7500 equity in home Up to $1200 in vehicle Up to $500 in jewelry Up to $750 in tools of trade Up to $200 per item of household goods, max $4000 Rights to social security benefits All amounts in excess, subject to sale for cash Nonexempt property- cannot keep everything else included in liquidation and distribution to creditors, examples: Bank Accounts Stocks Bonds 22
CHAPTER 13 BANKRUPTCY Extended Time Payment Plan or Reorganization Applies to individuals with regular income (currently working) Trustee handles future earnings of debtor Trustee handles payment of bills Unsecured debts less than $250,000 and/or secured debts of less than $750,000 Submit reasonable plan for repayment of debts within three years May be extended to five years 23
PRINCIPLES OF FINANCIAL PLANNINGFROM THE JUMP$TART COALITION Map your financial future Money doubles by the “Rule of 72” Your credit past is your credit future Start saving young Stay insured Budget your money Don’t borrow what you can’t repay Don’t expect something for nothing High returns equal high risks Know your take-home pay Compare interest rates http://www.jumpstartco alition.org/files2010/20 Pay yourself first 10_J$_Calendar.pdf