Money Mangement-How To Manage Credit by AsimiyuOyediranKola


									                                                                                                         H.E. 5-103

MONEY                              MANAGEMENT
How to
                                                            Types of Credit
                                                                  Credit is available in several forms: home equity
Manage Credit                                               loan, service credit, loans, installment credit, and credit
                                                                  You may borrow money to purchase a home. That
                                                            is called a mortgage. A mortgage is a debt used to
Credit is a service that lets                               purchase property. It has two parts, the note and the
                                                            mortgage. The note is the IOU that states the terms
you buy now and pay later.                                  under which you promise to repay the borrowed
                                                            money. The mortgage, or deed of trust, is the property
You use someone else’s                                      you pledge as security to the lender. That means he or
                                                            she can take over your mortgage if you fail to make your
money to buy something you                                  payments.
want to use now. Credit                                           A home equity loan is a modern version of the
                                                            second mortgage. Your home is used as security for a
means using your money                                      loan for items that require a sizeable amount of cash.
                                                            This type of loan may be used to finance expenses such
from future paychecks to pay                                as major home improvements, college expenses or large
                                                            medical bills.
for something you buy now.                                        You use service credit when you use your
                                                            telephone, electricity or gas for a month. You don’t
                                                            have to pay for using the services until the end of the
When you borrow,                                                  A consumer cash loan is a type of credit that
you promise to do the following:                            involves three parties. You borrow cash from a second
s pay back the amount of money you borrow plus the          party (ABC Bank) to buy an item from a third party (the
additional charge for using that money for several          XYZ Department Store). Let’s say you want to buy a
months;                                                     stereo that costs $1,200. You don’t have $1,200 in cash,
                                                            so you borrow the money from your local bank. You, in
s pay back your debt regardless of personal crises or       turn, give the borrowed money to the XYZ Department
unexpected situations;                                      Store for the stereo.
s make your payments on time;                                     A consumer cash loan or personal loan may be
                                                            secured or unsecured. Unsecured loans are loans
s not sell any item that has been used as collateral        you can get on the basis of your signature and good
until all payments have been made;                          credit rating. These loans are generally under $3,000.
s give back what you are buying if you can’t finish               Secured loans are made by pledging personal
paying for it;                                              assets or by cosigning with another person. A loan that
                                                            is secured with personal assets such as stocks, bonds, a
s take responsibility for any damages done to the item      car, or the item you purchase provides the lender with
that you bought on credit if it has to be returned to the   property in case you fail to make your payments. If you
store.                                                      cosign, the person who signs the loan with you agrees
to pay off the loan if you don’t. Consumer loans are              The finance charge is the total price you have
available through banks, credit unions, small loan          to pay to borrow money. The finance charge is made
companies, insurance companies, friends, or relatives.      up of two parts, interest and carrying costs. Interest
     With installment credit, you can borrow                is the portion of the finance charge you pay for actually
money and repay in equal weekly or monthly amounts.         borrowing the money. Carrying costs are the
You can also arrange your payment so the loan is due        expenses the lender has to charge for the service of
in 30, 60 or 90 days. Revolving charge accounts allow       providing credit to you. Some of the lender’s charges
you to borrow at any time, in any amount up to a            include bookkeeping, credit investigation, and mainte-
maximum credit limit such as $300.                          nance fees. If you choose to carry credit life, credit
     Credit cards are a popular form of credit.             accident and health, or credit property insurance, that
Credit cards may be divided into two types:                 is also added to the borrowing cost.
- Single purpose cards such as retail department                  Because credit costs vary so much from lender to
store cards and major oil company cards are limited to      lender, the annual percentage rate (APR) is used
use in that store or with the oil company.                  to state the cost of credit. The APR gives a way to
- Comprehensive cards are widely accepted by                compare credit costs on an equal basis.
hotels, motels, restaurants, airlines, major department
stores, and other businesses. Examples of comprehen-
sive cards are American Express, Visa, and
                                                            Factors Affecting
Mastercard. You are usually assessed a yearly fee for
using the charge card.
                                                            Credit Costs
                                                            The cost of credit depends on the following:
                                                            s who you borrow from,
How Much                                                    s your credit rating,
Does Credit Cost?                                           s how much you borrow, and
     When you buy on credit, you use someone else’s
money so you can buy something now. The price you
                                                            s how long you take to repay.
pay for using that money is called interest. The price
you pay to borrow money varies from creditor to             Who You Borrow From
creditor. So, shop around, and ask the following                Different creditors charge different rates for
questions:                                                  borrowing. Before you borrow, compare costs at three
                                                            or more places.
s What is the annual percentage rate?
s What is the total cost of the loan in dollar amounts?
                                                            Your Credit Rating
s How long do you have to pay off the loan?
                                                                 Your credit rating shows your ability and willing-
s What are the number, amounts, and due dates of
                                                            ness to repay a debt. It is measured by your record of
                                                            paying bills. It is determined by how prompt and
s What is the cost of extending the time period for
                                                            reliable you have been in making past credit payments.
paying back the loan?
                                                                 A good credit rating helps you qualify for credit
s What is the cost of late charges for overdue pay-
                                                            and helps you get credit at a lower cost.
s If you pay the loan off early, are there any pre-
payment penalties?                                          How Much You Borrow
s Does the loan have to be secured? If so, what                  The less money you need to borrow, the less the
collateral is required?                                     credit will cost.
s What is the cost of credit life or other insurance that        For example, let’s say you want to buy a used car
is being offered or that may be required?                   for $6,000. You want to pay for it in two years. The
s Are there any other charges you have to pay?              annual percentage rate is 18 percent. Compare the
                                                            cost of credit between borrowing the entire $6,000 and
      When shopping for credit, remember two terms:         making a $1,000 down payment or a $2,000 down
finance charge and annual percentage rate. If you           payment (see Table 1). As Table 1 shows, if you have
remember these terms, you can find out how much you         no down payment and borrow the entire $6,000, the
will pay for credit and can compare the costs of credit     finance charge is $1,189. If you borrow $5,000, the
among the various lenders.                                  finance charge is $991. If you borrow $4,000 the cost is
                                                            $793 — $396 less than with no down payment.
                                                                 So you see, the bigger the down payment you
                                                            make, the lower the finance charge you have to pay.
                                                            A bigger down payment reduces your
                                                            monthly payment.
Table 1.                                                                                 s Credit life insurance pays off the loan if the
How Down Payments Can Reduce the Cost                                                    borrower dies.
of Borrowing $6,000 (18% APR).                                                           s Credit accident and health insurance
______________________________________________________________________________________   insures that your payments will be made even though
   Down            Amount           Monthly               Total              Total
Payment Financed                   Payment            Finance                Cost        you become ill or disabled and can’t work.
                                    (rounded)          Charge                            s Credit property insurance will pay for the
___________________________________________________________________________________      goods if they are stolen or destroyed.
  $ 0          $ 6,000         $ 300 $ 1,189             $ 7,189                               Since credit insurance is relatively small compared
                                                                                         to the loan, it’s an often overlooked item. Read all loan
                                                                                         and credit contracts more closely to see if this insur-
  1,000          5,000           250          991        6,691                           ance is included, under what conditions, and at what
_________________________________________________________________                        costs.
                                                                                               It’s to the lender’s advantage to get you to sign for
   2,000             4,000                200              793             6,793         credit insurance. Lenders are like insurance agents.
_________________________________________                                                They make a commission on each policy sold. But
                                                                                         consumers often don’t want it, may not need it, and
How Long You Take to Repay                                                               often don’t realize they are buying it.
      The longer you take to repay your debt, the more                                         Some consumers quickly sign— but do not read—
you will pay. A longer repayment period may lower                                        their loan contracts because they need the money and
your monthly payment but add to the total cost of                                        do not feel they are in a position to ask questions.
borrowing. For example, let’s say you want to buy the                                    Other consumers may feel that if they turn down credit
same $6,000 car at 18 percent annual percentage rate                                     insurance, they may harm their chances of being
with no down payment. The cost will vary with how                                        approved for credit. So they sign without question.
long you take to pay. Compare the costs for two,                                               A consumer already adequately covered by life,
three, or four years of financing (see Table 2). The total                               health and disability insurance at work or through a
cost over two years would be $7,189. For four years it                                   private plan may not want the extra coverage. If you
would be $8,460. The difference is $1,271.                                               are already covered by one of these plans, payments
      Take the shortest amount of time to                                                will continue to be made on the loan even though you
repay a debt and make the highest monthly                                                may become ill or disabled or die. Similarly, a person on
payment you can safely afford.                                                           social security or in the armed forces would have an
_________________________________________________________________                        income even if disabled, so again credit disability
Table 2.                                                                                 insurance would not be needed.
How Length of Time to Repay Can Reduce the Cost of                                             Review your present insurance coverage. If it is
Borrowing $6,000 (18% APR).                                                              adequate, there is no reason to buy more. If the
_____________________________________________________________________                    amount of the loan is small, you may not need credit
Time             Amount             Monthly               Total             Total        insurance coverage at all.
To              Financed            Payment            Finance              Cost
Repay                               (rounded)          Charge
__________________________________________________________________________               Where to Go for a Loan
2 years $ 6,000                    $ 300         $ 1,189 $ 7,189                              When you need to borrow money, you don’t want
______________________________________________________________                           to just walk into the first lending institution you see and
                                                                                         borrow money. Look around to find the lender who
3 years         6,000           217        1,809       7,809                             can give you the least expensive loan.
                                                                                         Here are the places you can borrow money:
4 years          6,000           176         2,460        8,460
_______________________________________________________________________                     s a credit union,
                                                                                            s a local bank,
                                                                                            s your life insurance company,
Credit Insurance
      When you apply for credit, you will frequently be                                     s a finance company,
offered credit insurance. Credit insurance is often sold                                    s a savings and loan company,
by banks, savings and loan associations, small loan
companies, department stores, automobile dealers,                                           s a pawn shop,
and others at the time they grant credit.                                                   s an illegal lender or loan shark.
      Different kinds of credit insurance protect you in
different ways:

Should You Use Credit?                                                         Will You Be
      Before buying an item on credit, ask yourself if you
can justify using credit rather than waiting to buy the
                                                                               Granted Credit?
item with cash.                                                                     Have you ever wondered how banks or other
__________________________________________________________________________     lending institutions decide if they will lend you money?
The Cost—                                                                           Before a bank or other lending institution will lend
                                                                               you money, they try to determine if you are a good
s Is it worth the extra cost to buy on credit?                                 credit risk. The lending institutions look at the following
s Is this something I really need?                                             factors to judge your ability and willingness to repay
s Is this something I have planned in my                                       your debts:
budget?                                                                                     - income,
s Can I make the payments?                                                                  - occupation,
s Have I tried to be exact in estimating my                                                 - stability in life,
other expenses?                                                                            - credit history,
                                                                                           - age,
                                                                                           - assets.
The Risk—
s What if I get sick or have an accident?
Could I still pay?                                                             s Do you have a steady source of income?
s Is it worth losing the money I have paid if I                                s How large is your income?
miss a payment or cannot finish paying for the                                 s How dependable is your income?
item?                                                                          s What are the demands on your income?
                                                                               s How many dependents do you support?
s Do I want to risk repossession, a bad credit
                                                                               s What are your outstanding debts?
history or legal action if I can’t pay for all of it?
                                                                               s Do you have a good employment record?
The Obligation—                                                                s Are you self employed?
s Can I afford to tie up my future income?                                     s Are you regularly or seasonally employed?
s Am I borrowing from a fair and honest                                        s How long have you been employed?
person?                                                                        s What is your occupation? Businesses have found
                                                                               that people in certain occupations are more likely to
s Do I understand what the contract says?
                                                                               repay debts than others.
s Will I still want to be paying for this item for
the length of the contract?                                                    Stability
s Would it be wiser to save my money and                                       s Do you display stability in your life?
buy this later?                                                                s How long have you lived at your current residence?
                                                                               s How long have you been employed at your present
 _________________________________________                                     job?
                                                                               s Do you own your residence?

                                                                               Credit History
                                                                               s Have you paid your bills in the past?
                                                                               s Do you pay bills on time, late, or not at all?

                                                                               s Are you young (18-24)?
                                                                               s Do you have a poor repayment record?
                                                                               s If you answer yes to both of the above questions,
                                                                               you may not be considered credit worthy. Applicants
                                                                               may not be rejected on the basis of age alone.

Assets                                                     Disadvantages
s Do you have checking and savings accounts?               s The use of credit adds additional cost to the original
s Do you have property or investments that could be        purchase price of an item.
used as security or collateral?                            s With credit, you may buy more than you can afford.
                                                           However, if you do not pay for the items, the store can
                                                           repossess or take them back.
Will You Be                                                s You may be discouraged from comparison shopping
Turned Down                                                to get the best buy. If you only have credit at one store,
                                                           you may miss bargains at other stores where you don’t
for Credit?                                                have credit.
    The Federal Reserve Board is responsible for           s If you don’t understand the credit contract, you may
administering federal credit policy. The board has         agree to something you don’t really intend to.
suggested that creditors offer the following reasons for   s Overuse and abuse of credit can lead to a poor credit
denying credit:                                            rating.
                                                           s The use of credit ties up money out of paychecks in
s credit application incomplete,                           the coming months.
s insufficient credit references,                          s By using credit, you may tie up income needed for
s unable to verify credit references,                      necessities.
s temporary or irregular employment,
s unable to verify employment,
s length of employment (you may not have worked at         Reducing the
one job long enough),
s insufficient income,                                     Cost of Credit
s excessive debts,                                         You can reduce the cost you pay for credit if you:
s inadequate collateral,                                   s Make as large a down payment as possible.
s too short a period of residence,                         s Borrow the least amount possible.
s temporary residence,                                     s Shop around for the lowest annual
s unable to verify residence,
s no credit file,                                          percentage rate.
s insufficient credit file,                                s Pay back the loan as fast as you can; pay
s garnishment, attachment, repossession or lawsuit,        back in less time, such as one year instead of
s bankruptcy.                                              two.
                                                           s Arrange the highest monthly payment you
Buying on Credit                                           can afford.
                                                           s Pay your bills on time, which protects your
Advantages                                                 credit rating.
s If you lack the discipline or time to save money,        s Only use credit when you really need it.
credit is a way to buy consumer goods.
s Credit is handy and convenient.
s Credit allows you to use an item while you are paying    Married Women
for it.
s If the purchased item needs repairing or replacing,      and Credit
you could hold up your finance payment until you                Married women often use credit accounts listed in
receive appropriate action from the seller.                their husband’s name. They think they have credit in
s Establishing a good credit rating will make it easier    their own name. In reality, the credit is only being
for you to get credit for emergencies.                     reported in the husband’s name.
s Credit is a type of forced savings. If you spend $10 a        What about your credit history? Do you have your
week doing laundry outside your home, the $10 could        own credit identity, or is everything reported in your
be used to pay for a washer. After the washer is paid      husband’s name?
for, you won’t have the $10 laundry bill.                       If you were suddenly divorced or widowed, would
s If you carry credit cards, you can carry less cash.      you be able to borrow money, get a credit card, or rent
s You can satisfy immediate needs.                         an apartment? If you don’t have your own credit
s You can take advantage of sales even though you          history, you may find yourself in a financial jam.
can’t pay for items right then.                                 The Equal Credit Opportunity Act gives women a
                                                           way to establish their own credit history and identity.
                                                           Your own credit means a separate account or loan in

your own name— not a joint account with your                                           eligible for a small loan. Remember: pay it back
husband or a duplicate card on his account.                                            promptly!
     You have a right to your own credit, based on
your own credit records and earnings. You may not be
denied credit just because you are a woman, or just
                                                                                       Keep a
because you are married, single, widowed, divorced, or
                                                                                       Good Credit Rating
     Use your own name when you apply for                                                   Pay your bills promptly. If you have trouble
credit. If Mary Ann Jones married Richard Smith, she                                   making payments, visit your creditor. Try to work out a
could choose Mary Ann Jones, Mary Jones, Mary Ann                                      solution. Perhaps you can make smaller payments or
Smith, Mary Jones Smith, Mary Ann Jones Smith or                                       delay payments for awhile.
Mary Smith. Any of these names are legal. Just pick                                         Do NOT avoid your creditor. Don’t act as if you
one and use it consistently so there is no indication of                               have no intention of paying your bill. This will hurt your
fraud. DO NOT use your social title— Mrs. Richard                                      credit rating seriously and make it hard for you to get
Smith. That credit information would go in your                                        credit again.
husband’s file.
     Make sure that accounts you share with                                            Can I Find Out About
your husband are being reported under
BOTH your name and your husband’s name.                                                My Credit Record?
To make sure that all accounts are being credited to                                        Credit bureaus maintain credit records. You can
your history, write your creditors and request that                                    find out your credit record by contacting each of the
credit information also be reported in your name. In the                               three credit bureaus in writing. You will be required to
letter, include your husband’s name as it appears on                                   identify yourself to each bureau’s satisfaction, and you
the billing statement, your address, the account                                       may be charged a small fee. There is no fee within thirty
number, and your name as it should appear in the                                       days if you have been turned down for credit, employ-
credit file.                                                                           ment or insurance because of information contained in
                                                                                       a report. Your written request should include:
Establishing a                                                                         ___ your name,
                                                                                       ___ address,
Credit History                                                                         ___ previous address (if within last two years),
      Here are some steps you can take to establish
                                                                                       ___ social security number,
your credit history and show creditors you are credit
worthy.                                                                                ___ date of birth,
s Open a checking and savings account in                                               ___ current employer, and
your own name. This alone doesn’t prove you are                                        ___ your phone number.
credit worthy, but it does indicate that you can handle
money in a businesslike manner.                                                        If a spouse is also checking, information on both people
s Open a retail charge account. Start an                                               must be included and both must sign the request.
account in your own name at your local drug store or                                         The credit bureau gathers and sells credit informa-
dress shop. Charge some purchases and pay your bill                                    tion about consumers. When a creditor asks a credit
promptly.                                                                              bureau for a report, the bureau sends the creditor
s Apply for a bank credit card. Banks often                                            whatever information it has on file about you. The
require that you have a savings account with the                                       bureau typically reports:
institution or a cosigner before they will issue you a                                 s how many and what kind of credit accounts you
card. They give you a limit on the amount you can                                      have,
charge. This amount increases as your income and                                       s how you pay your bills, and
credit history improve.                                                                s whether you’ve ever filed bankruptcy or been sued.
s Take out a small loan. You may not be eligible                                       The bureau gets its information from creditors who
for enough to buy a car, but you probably will be                                      have accounts with the bureau or from daily court

Adapted from “Money Management: How to Manage Credit,” by Esther McAfee Maddux, Extension Home Economist, University of Georgia
Cooperative Extension Service. Approved for use in Kentucky by Suzanne Badenhop, Family Resource Management Specialist.

Educational programs of the Kentucky Cooperative Extension Service serve all people regardless of race, color, age, sex, religion, disability, or national origin.
Issued in furtherance of Cooperative Extension work, Acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture, C. Oran Little,
Director of Cooperative Extension Service, University of Kentucky College of Agriculture, Lexington, and Kentucky State University, Frankfort.
Issued 4-94; Last Printed 6-96, 2000 copies; 2500 copies to date

Copyright © 1997 by the University of Kentucky Cooperative Extension Service. This publication may be reproduced in portions or its entirety for educational or non-
profit purposes only. Permitted users shall give credit to the author(s) and include this copyright notice.

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