Terms

The person or company who loans money or extends credit to you.

CREDITOR

DEBTORThe person who borrows money or uses credit.

CREDIT– obtaining the use of money that you do not have

Annual Fee The yearly fee some companies charge for using their card

APR – annual percentage rateThe interest rate you pay in a single year on the money you borrow

Grace periodThe time you have to pay the credit card balance owed without being charge interest

Credit limitThe maximum amount you can charge

Principal The original amount of the loan

InterestFee charged for the use of money

The 3 C’s of CreditCharacter - responsible attitude toward living up to

agreementsWill the applicant be responsible and repay the loan?

Capacity – financial ability to replay with present incomeDoes the applicant have enough discretionary income to

comfortably make the payments on the loan amount requested?

Collateral – property pledged to assure repayment of loanWill the loan be secured, or guaranteed, by collateral that can

be used to repay the debt in case the borrower defaults on the loan?

Capacity, Character, or Collateral

What is your salary? Capacity

Do you have a savings account? Collateral

Have you used credit before? Character

How long have you been at your present job? Character

Do you own your own home? Collateral

What are your current living expenses? Capacity

How long have you lived at hour present address?

Character

Common Forms of CreditHome MortgageCar LoansCollege LoansPersonal LoansCredit Cards

CreditAdvantages Disadvantages

Helps people acquire valuable assets

Helps people lead happier lives

Helps people in emergency situations

People may use too much credit in relation to their income

Misuse of credit can lead to paying more to obtain credit in the future

Misuse of credit can hurt the ability of people to obtain credit in the future

Credit ScoresCredit rating - Measure of

creditworthiness based on analysis of financial history.

Scores range from 300 – 850

700 – 850 Excellent650 – 700 AverageBelow 650 Needs Work

Range may vary from lender to lender

What’s in a Credit Score?Identifying information – Name, address,

date of birth, social security number, employment information used to identify you (Not part of your credit score)

Trade lines – Your credit accounts. Type of accountDate openedCredit limit or loan amountAccount balancePayment history

Credit inquiries - Everyone who accessed your credit within the last two years.

Voluntary inquiries – inquiries you authorize Involuntary inquiries – when financial institutions

access your information in order to offer “Pre-approved” credit offers

Public Records and Collection ItemsPublic information from state and county

courtsPublic information such as bankruptcies,

foreclosures, suits, liens, garnishments

Credit BureausCompany that gathers, stores, and sells

credit information to business subscribers

Three larges credit bureausEquifaxExperianTransUnion

Under Fair Credit Reporting Act, individuals have the right to get a copy of their credit report from each credit bureau free of charge each year .

www.annualcreditreport.com

How to Establish aGood Credit History

Always pay bills on time.Never borrow more than you can comfortably

pay back.Borrow only amount you need.Contact lenders immediately if you expect to

have a payment problem.Develop good savings habits to handle

financial emergencies.Report lost or stolen cardsDo not apply for too many credit cards.

Kinds of CreditOpen-ended credit

Agreement to lend the borrower an amount up to a stated limit and to allow borrowing up to that limit again, whenever the balance falls below the limit

Borrower usually has choice of repaying the entire bill or making smaller payments over a period of time

Examples: Credit Cards

Open 30-Day AccountsConsumer promises to pay the full balance owed each month.

Examples: American Express, Diner’s Club

Revolving Credit AccountsConsumer has option each month of paying in full or making payments at least as high as the stated minimum.

Examples: VISA, MasterCard, Discover, department stores, gas company cards

Closed-End CreditA loan for a specific amount that must be repaid,

in full, including all finance charges, by a stated due date.

Loan is repaid with fixed payments, or installments, that include principal and interest.

Down payment is usually required.Product purchased usually becomes collateral.

Examples: loans for cars, furniture, major appliances

Service CreditAgreement to have a service performed now

and pay for it later.Terms are set by individual businesses.Some may impose finance charges on unpaid

account balances, but do expect regular payments be made until the bill is paid in full.

Examples: utility & telephone companies, lawyers, doctors, hospitals

Methods of calculating interest on credit cardsAverage daily balance – the interest rate is

calculated each day on the average of each day’s balance for the billing cycle. This is the most frequently used method.

Adjusted balance – The interest rate is calculated on the opening balance after subtracting the payments made during the month.

Previous balance – Interest is calculated on the opening balance regardless of payments made during the month

Interest = principal x rate x timeI = PRT

Finance Charge = Total Price Paid – Cash Price

APR = 2 x n x fP (N+1)

Where:n = number of payment periods in one yearF = finance chargeP = principal or amount borrowedN - total number of payments to pay off amount

borrowed

Federal ConsumerCredit Protection

Truth in Lending ActFair Credit Reporting ActEqual Credit Opportunity ActFair Credit Billing ActElectronic Fund Transfer ActFair Debt Collection Practices Act

Truth in Lending ActRequires creditors to disclose the cost of credit in

simple terms. Lender mustState percentage cost of borrowing in terms of

the annual percentage rate (APR)Disclose total finance charges for the loan

Protects against unauthorized use of credit cards.If card is lost or stolen, you are liable for no more

than $50 of charges made by someone else. Not responsible for any charges after notifying

the issuer.

Fair Credit Reporting ActGoverns the activities of credit bureaus and

creditorsRequires creditors to furnish accurate and complete

informationIf you are refused credit, you have right to see your

credit report fileRequires credit bureaus to investigate if you

disagree with information on your report. If claim is valid, information must be corrected

Requires that only people with a legitimate business purpose can obtain a copy of your report

Equal Credit Opportunity ActRequires that all consumers will be given an

equal chance to receive credit.

States it is illegal to discriminate against applicants on the basis of sex, marital status, race, national origin, religion, age, or because they receive public assistance income.

Fair Credit Billing ActRequires creditor to mail your bill at least 14

days before payment is due

Establishes procedures for correcting billing errors

Electronic Fund Transfer ActProvides consumer protection to people who use

ATM and debit cards.Limits your liability when card is lost or stolen.How quickly you report the loss determines the

amount for which you are held responsible.If reported lost or stolen within two days of

discovering the loss or theft, your losses are limited to $50.

If you wait up to 60 days, you are liable for up to $500.

If you wait more than 60 days, you could lose all the money that was taken from your account.

Fair Debt Collection PracticesForbids collection agencies from using threats,

harassment, or abuse to collect debts.

Does not apply to creditors who are collecting their own debts.

Extra Credit Question:

In 1958, what two banks began issuing bank credit cards?

Bank of America and Chase Manhattan Bank of New York