It’s All About Buy Now – Pay Later – CREDIT!
What is Consumer Credit?
How would you define the word “credit”?
What does it mean to “take personal responsibility” for something?
Give an example of a situation where you have taken responsibility for
making sure something got done.
Have you ever borrowed money from someone?
What kind of agreement did you make about paying the money back?
Did you keep your promise?
Have you ever loaned money to someone?
What kind of agreement did you make about getting paid pack?
Why do people put such agreements in writing?
What is Credit?
Definition of credit is – the ability of a person or business to borrow money from a bank or other lender with the intent, or promise, to pay the money back. (E.g of credit: loans, credit cards, home mortgages). Credit gives you greater financial flexibility to buy now and pay over time, instead of all at once. However, taking personal responsibility to pay back the money borrowed in a timely fashion, according to you agreement with who you borrowed it from is important. Remember that credit is a privilege!
When ever you borrow money you will be expected to pay interest. Interest is – a percentage of money owed on the balance that you borrowed.
How Does Interest Work?
Interest works two ways. If you are the lender, person or institution lending the money, you get paid a percentage on top of the initial amount you lent out, just for lending the money.
If you are the borrower, you pay the added on percentage of the initial amount to the lender. The interest the borrower pays is higher than the interest paid by the financial institution to its clients.
How much interest you pay depends on the interest rate and how long you’ve chose to pay it back. Interest rates change all the time. So you need to be aware of what rates are good. Interest rate loans are expressed as APR, annual percentage rate. The APR is - the yearly cost of a loan stated as a percentage of the loan amount including the interest rate, the term, and the fees charged by the lender. It reflects the cost of the loan.
In addition, there may also be fees for just getting the loan. Depending on the loan agreement, the borrower may pay these fees when the loan is first taken out, or pay them over time as part of the loan repayment.
For any loan amount and interest rate, the longer you take to pay of the loan, the smaller your monthly payment will be – yet the greater the total cost of the loan. It’s important to borrow only what you can afford to repay. Carefully consider both what you can afford to pay on a monthly basis and the total cost of the loan.
How Do I Establishing Credit?
You will want to make sure that you know how to take advantage of being able to use credit. Remember that credit is given only to those who have demonstrated their ability to manage their money over time and have good credit history.
You establish credit by opening a savings or checking account or getting a credit card and carefully managing it. However, if you are under eighteen you will not be able to get savings accounts, checking accounts or credit cards or loans unless you have a parent or guardian to co-sign. To co-sign means – the person who is the adult or guardian is willing to take responsibility for and repay the account, loan or card if something happens to you. Some examples of how to establish a good credit history are:
Pay bills on time
Pay monthly rent payments on time
Use layaway plans
Get a limited use credit card and pay bills promptly
Establish and use a transaction account
What Are The Three C’s?
Banks and lenders decide who to lend money to by using a process called the Three C’s of Credit. What are the Three C’s?
1. Character – are you stable with your home, income
2. Capital – how much money have you saved and what assets do
you have if you were not able to pay back your debt
3. Capacity – how are you going to pay back the loan with your
current debts and other expenses. (Debt-to-income ratio
– how much you owe compared to how much you earn.)
As you can imagine it takes time to establish a good credit history and prove your character, capital and capacity.
How Do I Maintain Good Credit?
Good credit means – that you have a history of repaying your debts IN FULL and ON TIME. You limit your monthly debt payments to less than 10% of your monthly net pay. You charge NO more than 20% of your monthly net pay on your credit cards. (the 20-10 rule)
Bad credit means – you’re making late payments, paying too little, or exceeding you’re credit limit.
What Can You Do To Find Out If You Have Good Credit Or Bad Credit?
To find out whether you have good or bad credit you can check your credit report. What is a credit report? And what does a credit report cover? A credit report – is an individualized report managed by a private company and sold to banks, credit card companies, landlords and who ever else may be interested in your financial history.
You credit report includes – information about you
Identification and employment data
Public record information
Collection agency account information
Credit history
Payment history
Inquiries
The number of times you applied for credit
Bankruptcy (reported for 10 years)
Unpaid judgments (reported for 7 years or until
their statute or limitation runs out
Criminal convictions (reported without time limits)
Information reported for any application of more
than $ 150,000 worth of credit or life insurance (no time limit)
Your credit report issued to determine if a company will extend you credit, conduct business with you, grant you a job or allow you to live in their building. You can be denied any one of the above if you have a poor credit history.
People who ruin their credit history pay for it for a long time, because it takes more than 7 years to rebuild your credit.
How Do You Keep Your Credit Solid?
To keep good credit, you want solid credit. It do this you can:
Create a personal budget and stay within it
Avoid writing bad checks
Avoid using a credit card to pay for every day expenses
Resist impulse buying with a credit card
Stay under your credit limit and track your credit expenses
throughout the month to know your credit balance
Get professional financial assistance – quickly – if you’re having a
problem managing your credit
What is a credit score and the manner of payment codes?
Your credit score is a numerical summary of your credit standing and is a risk management tool used by financial institutions before giving you a loran or extending you credit.
The higher the credit score, the better the chance is that you will pay your debts. Higher scores often result in lower interest rates for auto, home loans and credit cards.
Fair, Isaac & Company produce the “FICO” scoring system that is used by more than 70% of all financial institutions. It is reported that 75% of all mortgages written in the United States use FICO scoring system for loan approvals.
FICO scores are reported on a scale form 300 (bad) to 900 (excellent). Each individual earns a score. Credit scores are based on five factors: payment history, amount owed, length of credit history, new credit types of credit in use.
What can I do if I have a bad credit report?
How can time affect my credit report?
How do I handle mistakes on my credit report?
Who has my credit report?
Organizations called credit bureaus track your credit history and keep your report. The three primary companies in the U.S. are:
Equifax
TransUnion
Experian
You can request a copy of your credit report, but they may charge you a small fee for it.
Are there Different Types of Credit?
1. Noninstallment Credit
a. Regular
b. 30 day charge accounts
c. Travel and entertainment cards
d. How to use and best time to use
2. Regular Installment Credit
a. Car loan
b. Furniture purchase
c. How to use and best time to use
You borrow the money all at once and pay it back with interest, over time, in equal payments or installments. Once the loan is repaid in full, the loan ends and is NOT renewed.
The interest rates and fees will vary.
If you don’t repay the loan, you’ll damage your credit record and your lender may repossess the property you purchases with the loan.
3. Revolving Credit
a. Department store cards
b. Bank card
c. How to use and best time to use
Let’s say you were considering getting a $ 10,000 bank loan to buy a car. How would you determine whether you could repay this loan?
Besides paying back the principal (the $10,000) what other kind of charges might you have to pay to the lender?
What’s one reason why you might want to pay off a loan as quickly as you could?
What’s one reason why you might want a lender to give you a longer loan tern – in other words, more time to pay back the loan?
Why Do I Need Credit?
Advantages of having credit
1. Buying needed or wanted services and goods using
anticipated future income
2. Not having to carry cash
3. Having a record of purchases
4. More convenient than writing checks for each purchase
5. Consolidating bills
Disadvantages of having credit
1. Interest payments
2. Credit cards can be lost or stolen
3. Membership fees
4. Overspending becomes too easy
5. Financial trouble may arise if card is not managed properly
Why Do Banks Issue Credit?
1. To offer service to customers
2. To make money
Thanks to:
Neffe – p.60
www.practicalmoneyskills.com – Lesson Seven, About Credit, Lesson Eight, Credit Cards
www.handsonbanking.org – Credit and You
www.financialeducation.us - p. 68, Week 6, Understanding Loans, Credit Cards, Credit Reports and Credit Scores
www.bankhs.com – Money, Banking, Credit Cards and Money, Credit