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					      Credit
You’re in Charge!
     Chapter 10

Homework: Read Section 1 & 2…Watch
TV commercials
  A Look at Credit Card Debt


    •There are currently 1.2 billion
 cardholders of all ages with a total of
         $650 billion in debt.


•Americans charged $1.3 trillion to credit
  cards and $400 billion to debit cards
                 Students & Credit Cards
  Some                 recent statistics
            78% of undergraduate students (18-25) have
             credit cards (up from 67% in 2002)
            32% of students have four credit cards or
             more
            One in four students owes more than $3,000
            Nearly 10% owe $7,000 or more
            In 2002 more than 100,000 people under the
             age of 25 filled for bankruptcy
2004 Nellie Mae Study
What is the average rate
  for a credit card?

     15.39%
What is the highest interest
rate currently charged on a
        credit card?

         41%
What is the average #
of credit cards a person
          holds?

         14
        What is the Average
       Household Credit Card
               Debt?

                       $8,000

http://www.comcast.net/data/fan/html/popup.html?v=911903823
              True or False?
 You can easily get credit if you have never
  borrowed before and have not had any credit
  problems.
 FALSE
 You can help yourself to obtain larger amounts
  of financing if you use small amounts of credit
  first and repay them as agreed.
 TRUE
             True or False?
 Interestrates can vary greatly from lender
  to lender.
 TRUE
 Applying for as many credit cards as
  possible will improve your credit rating.
  (ex. AE credit card, Best Buy credit card)
 FALSE
            True or False?
 Credit  cards are convenient but can be
  risky if not used carefully.
 TRUE
 If you pay your balance in FULL each
  month, you will never pay interest.
 TRUE
            True or False?
 When   making a decision on a loan
  application, a lender does a full review of
  the applicant’s income, existing
  commitments and expenses, and past
  credit experience.
 TRUE
 Credit bureau information is available to
  anyone who will pay to receive a report.
 FALSE
            True or False?
 The  most important thing to do when
  borrowing is to read and understand the
  loan agreement before you sign.
 TRUE
 If you have trouble paying bills, you should
  call your creditors to explain the situation.
 TRUE
                 True or False?
 Paying your credit card bills on time each
 month is both a necessary and sufficient
 condition for having good credit.
     Paying your bills on time is necessary for
      good credit, but not sufficient.
     All the credit account information in your
      credit report affects your credit rating.
 FALSE
What is Credit?
                                         Section 1

           What is Credit?
 TRUE   or FALSE
 Supplying of money, goods, or services in
  exchange for the promise of future
  payment (which usually includes interest)

 Examples  of Credit - loan from the bank,
 using electricity in your house, credit
 cards.
  How do Credit Cards Work?
 Stores, retailers, and merchants must pay
  a fee to use (accept) credit cards.
 Example:
   The store makes a $1000 sale on a Chase
    Visa card.
   Chase then pays the store $960.

   The fee the store pays the bank is 4%.

  (Merchandise may then be overpriced.)
               Why Borrow??
 TRUE    or FALSE
 Credit can help you buy the things you
  want earlier than you could get them by
  savings.
     Buying a home (look at the equity)
     Furthering your education
     For your health
      Total Credit Payments
 TRUE   or FALSE
 Your total credit payments should not
  exceed 20 to 25% of your monthly take-
  home pay!
    What is the true cost of paying the
                “minimum”
                                   How long would it take to
   Suppose:
                                    pay it off?
       Credit card balance =
        $8,000                         647 months / 54 years

       Interest rate (APR) =          Total interest paid =
        18%                             $22,931

       Minimum payment =              This assumes you STOP
        2% of balance                   using the credit cards!
                                         It will take even longer if
                                        you don’t stop!
                                     Section 2

          Creditworthiness???
 TRUE   or FALSE
 To get a loan, you must demonstrate your
  creditworthiness to lenders.
     Character
     Capacity
     Capital
     Collateral
     Conditions
   5 C’s of Credit – Getting Credit
1st four deal with a borrower’s Ability to Pay
 Character – Measure of your sense of
 financial responsibility. How trustworthy are
 you? Credit record. Willing to repay?
 Capacity – Measure of your financial ability to
 repay a loan. Ability to meet financial
 obligations. Steady job? How long have you
 worked? How much debt to you currently
 have?
  5 C’s of Credit – Getting Credit
 Capital – Value of what you own, including
  savings, investment and property. (net worth)
 Collateral – Additional forms of security
  you can provide the lender. (your assets)

Last refers to general business conditions
 Conditions – What is the intended purpose
 of the loan? What are the current economic
 conditions and how does your company fit
 in?
          Loan Application
 TRUE    or FALSE
 A Credit Application consists of…name of
  employer, salary, years worked at present
  employer, address and length of time living
  there, home ownership, credit reference, &
  bank references
Go to the loan
application on
page 20 in
your packet
and fill it out
             Credit Report
 TRUE    or FALSE
 When applying for an apartment, buying a
  car or even applying for a job, they will run
  your credit report to check what kind of
  person you are.
What is a Credit Report?




                           college – lesson 4 - slide 4-F
                        payment codes




Status type of account code       Status timeliness of payment
                                  0 Approved not used; too new to rate
-O Open (entire balance due       1 Paid as agreed
    each month)                   2 30+ days past due
-R Revolving (payment amount      3 60+ days past due
    variable)                     4 90+ days past due
                                  5 120+ days past due; collection account
-I Installment (fixed number of   6 Making regular payments under wage
    payments)                     earner plan or similar
                                    arrangement
                                  7 Repossession
                                                         college – lesson 4 - slide 4-G
                                  8 Charged off to bad debt
            Your Credit Score
 TRUE   or FALSE
 A company that collects information about
  consumers’ credit history and sells it to
  lenders are called Credit Bureaus
     Trans Union
     Equifax
     Experian
       What’s a credit score?
A credit score is:
 A numerical forecast of the likelihood you’ll
  successfully repay a future loan (300-850)
 Based on credit account information in your
  credit report
 An automated credit evaluation tool
 Comparable to your “credit GPA”. . .you want the
  highest possible score!
What factors affect your score?

       10%
                         Payment History (35%)
 10%
                   35%   Amounts Owed (30%)


                         Length of History (15%)
15%
                         New Credit (10%)


             30%         Account "Mix" (10%)
                     Question
 What types of inquiries impact your credit
 score?
  A. Inquiries that you request (“Soft” inquiries)

  B. “Hard” inquiries

  C. Inquiries by lenders who want to solicit you for a
     new credit card (“Soft” inquiries)

  D. Inquiries by prospective employers or landlords
     (“Soft” inquiries)

  E. All the above would impact your score
“Hard” inquiries occur when a lender requests your credit
report because you have applied for credit from them
                       How do people score?
                     35%
                                  29%
                     30%
Percent with Score




                     25%
                                            20%
                     20%                              16%
                     15% 11%                                              13%
                                                                11%
                     10%
                     5%
                     0%
                           800+   750-799   700-749   650-699   600-649   Below
                                                                           600
                                        Credit Score Range
     Estimating Your Score
     Isaac & Co. and Bankrate.com jointly
 Fair
 developed credit score estimator:
     www.bankrate.com/brm/fico/calc.asp

       score range is estimated based on
 Credit
 answers to 10 questions about credit use
 and payment behavior
 What’s the score?
   A Typical Student                           675 to 725
How many credit cards?                                  2-4

When was first loan borrowed?                         2 - 5 yrs.

How many accounts applied for in past year?               2

How recently was new account opened?                  3 - 6 mos.

How many accounts have balances?                        5-6

How much debt? (other than mortgage)                  $20,000+

When did you miss a payment?                            Never

How many accounts are past due?                         None

What percent of credit card limits are used?         20% - 29%
 What would happen to typical
  student’s credit score if…
Missed one payment within   Score DROPS
      past 3 months           590 - 640

Missed one payment within   Score DROPS
    past 3 – 6 months         595 - 645


   Original score was 675 to 725
 What would happen to typical
  student’s credit score if…
Owe at least 50% of your      Score DROPS
available credit card limit     640 - 690

Owe at least 90% of your      Score DROPS
available credit card limit     615 - 665


   Original score was 675 to 725
      To Maximize Your Score…
   Don’t procrastinate – pay all your bills on time

   Avoid owing more than 30% of your available
    revolving credit

   “Less is more” – keep your revolving debt as low
    as possible

   “Older is better” – older accounts score more
    favorably

   Minimize the opening of new revolving accounts
       How to check your credit
 Asof March 1, 2005 you can now get your
 credit report for FREE!!!
  https://www.annualcreditreport.com
Overhead Projector   $3,000.00
Screen to show Power Point   $250.00
Consumer Ed Textbook   $60.00
Pen to take notes   $1.00
  Having class with Mr. Kelley…
            Priceless




For some things money can’t buy…for everything else,
           there’s Consumer Education Class
              QUICK REVIEW
 Commercials
     What is the overall feeling?
       • Makes you want to spend money!!!!


 Junk    Mail
     What is the overall feeling?
       • Makes you feel like you are getting a deal.
       • Throw it right in the garbage!
                QUICK REVIEW
   There are different            What are the 5 C’s of
    types of Credit Cards           credit and what do
       Credit cards from           they mean???
        Banks                          Capacity
       Retail Credit Cards            Character
       Travel and                     Capital
        Entertainment Credit           Collateral
        Cards
                                       Conditions
       Gasoline Credit Cards
                                         Section 3

 Types of Consumer Borrowing
 TRUE   or FALSE
 There are 2 different types of consumer
  spending
     Unsecured loan (Open-End Credit)
     Secured loan (Closed-End Credit)
 Unsecured   loan         Secured   loan
 (Open-End Credit)         (Closed-End Credit)
   Not backed by            Loan that is backed by

    collateral.               something of value
   Based on your
                              pledged to ensure
    creditworthiness          payment
                             Collateral
   Pay higher interest

    rates                    Installment loan**


   Credit Cards
                              • Repaid with a certain
                                amount of payments
                                with a certain interest
                                rate
                              • Down payment needed
    Where do you get loans?
 TRUE   or FALSE
 You can get a loan from banks, S&L
  associations, Credit Unions, Finance
  Companies, Life Insurance Companies,
  Credit Card Cash Advances,
  Pawnbrokers, Rent-to-Own Companies.
      Regular Charge Accounts
 Must   pay entire amount each month
     Often within 25-30 days after billing date.
 No  stated interest rate…Do not pay
  interest
 Must come in grip with credit problems
  every month

 Examples:     _________________
    Revolving Charge Accounts
 Carry a balance from one month to the next.
 Minimum payment due or more
 APR is the annual percentage rate of interest
  the is charged for credit.
 The maximum rate that may be charged is
  controlled by state law.

   Buy when the time is right…and pay when the
    time is right.

   Examples: ____________________
                 Credit Card Costs
   Costs:
       Interest
       Grace period (time when no interest is charged)
       Annual fees
       Penalty (late payment, over credit limits, etc.)
   Features:
       Credit limit
       How widely the card is accepted
       What services and features are available
   Advantages of Credit Cards

 Temporary  expansion of income
 Reduced need for cash
 Provide convenience and security
 Establishes credit
     a credit rating is a record, kept by a credit rating
      agency that tells prospective creditors how good
      a person is at paying off debts
 Advance notice of sales
 Reduced sale prices
    Disadvantages of Credit
            Cards
 Interest/Finance Charges
 Can lead to overspending (customers spend
  20 to 30% more using credit cards than they
  would with cash)
 Can give you bad credit rating (not making
  payments on time, incurring excessive debt)
 College students (with limited or no credit
  history and income) are charged higher interest
  rates.
                                              Section 4

Credit Rights and Responsibilities
 TRUE    or FALSE
 The Truth in Lending Act of 1968 requires
  creditors to adequately inform consumers
  about the costs and conditions of borrowing.
     Finance charge – Total cost a borrower must pay
      for a loan, including interest and fees.
 TRUE    or FALSE
 The Fair Debt Collection Practices Act (1977)
  states it is illegal to threaten, harass, or abuse
  a debtor
     Consumer Credit Rights
 TRUE     or FALSE
 The Equal Credit Opportunity Act of 1974
  says it is illegal to discriminate against
  applicants on the basis of the applicant's
  sex, marital status, race, national origin,
  religion, age, or receipt of public aid.
      Consumer Credit Rights
 TRUE    or FALSE
 The Fair Credit Billing Act (1974) states you
  have the right to fix any errors in your credit
  card statement.

 TRUE   or FALSE
 The Fair Credit Reporting Act (1970)
  protects the privacy and accuracy of
  information in a credit report.
        Credit Card protections
 Prompt    credit for payment
     Issuer must credit your account on the day
      they receive payment
 Refunds    of credit balances
     You have option of keeping the credit
      balanced or receiving refund
           Credit card protections
   Unauthorized charges
       If you report your card lost before it is used, you
        cannot be held responsible for any unauthorized
        charges
       If you card is used before you report it lost, you are
        liable for $0 if reported within 2 business days. After
        that, you are liable for no more than $50.00
   Disputes about merchandise
       In some circumstances, you have the right to withhold
        payment for unsatisfactory merchandise or services.
Consumer Credit Responsibilities
 Credit     is a privilege, not a right!
     Accept responsibility
     Know your debt capacity
     Self-Control with Credit
       •   Pay more than the minimum
       •   Avoid too many credit cards
       •   Pay with cash
       •   Keep accurate records
                                         Section 5

How to establish a good Credit History
 TRUE    or FALSE
 Ways to establish a good credit history are to
  start small, not missing a payment, save
  regularly, get your own card (not a
  parent/guardian or spouse), and avoiding
  Bankruptcy
Make sure to read the small print…
   you are legally bound by the contract you sign

       Payment Clause - when the last
 Balloon
 payment is much higher than the previous
 payments.



 Acceleration Clause - gives the seller the
 right to declare the entire balance if the
 buyer misses even one installment
 payment.
                        Bankruptcy
 TRUE or FALSE
 Using credit until you
  cannot possibly pay
  off the debt is the
  worst credit mistake
  you can make.
       Chapter 7 (‘straight
        bankruptcy’)
       Chapter 13 (‘wage
        earner bankruptcy’)
           Help for Credit Problems
 Debt   Consolidation Loans
     One large loan made to enable debtors to pay
      several debts at once.
     Hope to get a consolidation at a lower rate than
      your are paying currently.


 Credit   Counseling Services
     Non-profit service that helps consumers create
      budgets to pay their bills.
     Make sure to check them out on the BBB.
             True-Name Fraud
A True Story…
   Person accidentally left purse on public transit

   Purse was taken by someone; trouble began

   More than $10,000 charged within 24 hours on
    credit cards

   New account opened that was never paid

     What do you think happened to her credit?
              True-Name Fraud
What’s her score?
   Has taken a lot of work to clear credit history

   Most recent corrected credit report has credit
    score of 737 – a Very Good credit score

   BUT — one credit reporting agency still is
    reporting the fraudulently opened account with
    charged off debt – that score is 599

        What can you do to protect yourself?
            Protecting Yourself
     Suggestions from the Identity Theft Resource
                    Center (ITRC):

   Shred sensitive papers/documents

   Protect your SSN

   Check your credit reports at least once a year

   Block your name from pre-approved credit card lists

   Guard your personal information

   Use firewall software to protect your computer
    For more information, visit the ITRC Web site at
                www.idtheftcenter.org
          Another Scam
 ATM   SCAM
Fair and Accurate Credit Transactions Act of
            2003 (“FACT Act”)
     Provides new protections to consumers to help
      protect them against identity theft, including:
     Free credit reports annually
     Notification when derogatory information is reported
     Notification when offered credit terms are less
      favorable
     Must be implemented by December of 2004
     Watch for more details
                            Credit Card Don’ts
   Don’t get a card with a high limit
   Don’t get more than 1 card
   Don’t use them for cash advances
   Don’t charge more than you can pay off
    in a month
   Don’t let banks increase your credit limit



Source: USA Funds Life Skills -Module 1
          Credit Card Do’s
 Limitthe number of cards you have
 Use a debit card vs. a credit card
 Use a card that has no annual fee and
  lower interest rates
 Know all of your card’s hidden fees
 Always pay more than the minimum
  amount each month
 Pay on time, all the time.

				
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