Using Credit What is Credit and How Much Can I Afford?

1. Using Credit What is Credit and How Much Can I Afford?

2. Objectives • Identify Advantages and Disadvantages of Credit • Determine How Credit is Obtained • Identify Steps to Get Out of Debt • Explain What is Included on a Credit Report

3. Advantages • Interest cost may be deducted if you itemize deductions on your tax return. • During inflationary times, you repay a debt with cheaper dollars. • It’s possible to buy some goods at a lower price now than in the future.

4. Advantages (Cont.) • Credit cards are convenient to use. • Credit cards are safer than carrying large amounts of cash. • Credit allows you to buy items you need, but can’t afford to pay for immediately.

5. Disadvantages • May buy more than you need. • Shop where you have credit. • Can form credit-card habit. • Can pay up to 20% or more for goods and services. • Can end up paying more for items on sale than at regular price after interest.

6. Types of Credit • Consumer Loans • Credit Sales • Credit Cards

7. Types of Credit Cards • Bank Credit Cards • Travel and Entertainment Cards • Retail Store Cards • Oil Company Cards

8. Debit Cards • Not Credit Cards • Acts as Checks • Immediately deducts money from your checking or savings account

9. Lost or Stolen Cards • Notify the credit card issuer immediately. • Have information easily available and in a safe space. • Card holders will be charged a maximum of $50 of unauthorized purchases that occur before the card company is notified of the loss.

10. Types of Credit • Consumer Loans • Credit Sales • Credit Cards

11. Sources of Credit • Credit Unions • Commercial Banks • Savings and Loan Associations • Consumer Finance Companies • Life Insurance Companies

12. Sources of Credit (Cont.) • Retail Stores • Pawnbrokers • Friends and Relatives • Check-Cashing Stores • Payday Loans • Rent-To-Own

13. Types of Credit Offered

14. Cost of Credit • Fees • Interest *Annual Percentage Rate (APR) based on finance charges, amount borrowed and repayment schedule. • Interest Rates can vary from 0% from friend to more than 250% per year from a rent-to-own store.

15. Interest • Interest on a $1,000 loan borrowed for 1 year: APR Total Interest Loan Total 9% $50.00 $1,050 18% $100.00 $1,100 27% $146.00 $1,146 250% $1,700.00 $2,700

16. Can I Afford It? • Use the 15-20% Rule • Use the Credit Signal Light Work Sheet • Consider Realistic Needs

17. Getting Out of Debt • Know to whom you owe and how much. • Look for ways to increase income or decrease spending. • Do not use any more credit. • Contact your creditors if you cannot make all your payments. • Contact a Credit Counseling Service if you need help.

18. Making Your Payments • Take the shortest repayment period you can. • Make the highest monthly payments you can afford. • Make sure you have enough money to cover current expenses. Don’t create a situation where you stretch yourself too thin.

19. 10 Danger Signals • Unable to save money. • Always out of money before payday. • New monthly credit charges are more than the monthly credit card payment.

20. 10 Danger Signals (Cont.) 4. Longer time or loan needed to pay account balance. 5. Juggling payments to creditors. 6. Borrowing to pay fixed costs such as insurance.

21. 10 Danger Signals (Cont.) 7. Credit card cash advances used to pay everyday expenses. 8. Receive creditor calls and letters. 9. Unsure of how much you owe. 10. Regularly late in paying bills.

22. Avoid Credit Card Blues • Trouble meeting your monthly payments? Cut back on credit card use. • Impulse buyer? Leave the credit card at home. • Keep track of what you charge. • Include the entire family.

23. What is a Credit Report? • A report of your credit use is created by a credit bureau. • The bureau gathers information from companies who have granted you credit. • The bureau also gathers public records in state and county offices and courts.

24. What is on a Credit Report? • Current and Previous Addresses • Social Security Number • Date of Birth • Current and Previous Employers • Public Records (bankruptcies, tax liens and mortgages) • Description of Bill Paying History and Rating

25. How Your Credit Works • Your Ability to Borrow Depends on: • Availability of Money • Payment History • Current Interest Rates • Credit History (must have established a credit record)

26. How Your Credit Looks • Request records at least once a year. • Records are available free of charge at: www.annualcreditreport.com • Incorrect Information? • Call or write the Credit Bureau if you have a dispute about your credit.

27. Credit Scores • Payment History – 35% • Amount You Owe – 30% • Length of Credit History – 15% • New Credit – 10% • Credit Mix – 10%

28. Getting Your Credit Score • To get your Credit Score, go to: www.equifax.com or www.fairisaac.com • Credit scores range from 375 (worst) to above 925 (best) • Prime borrowers have scores in the 620 - 660 range.

29. Who Might Need Your Files? Persons/Businesses Who: • Extend you credit. • Consider offering you employment. • Rent to you. • Underwrite insurance. • Determine eligibility for certain licenses.

30. Who Might Need Your Files? Persons/Businesses Who: • Evaluate legitimate business needs. • Determine child support payments. • Provide information about current residence of individuals.

31. Tips for Good Credit • Pay Your Bills on Time. • Pay at Least the Minimum Amount. • Keep Credit Card Balances Low. • Establish Credit if You Have None.

32. Summary • Identified Advantages and Disadvantages of Credit • Determined How Credit is Obtained • Identified Steps to Get Out of Debt • Explained What is Included on a Credit Report