12/11/2017 1

How to Get and Keep Credit

Chapter 26

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Applying for Credit

To open a credit or charge account, you

will have to fill out an application form.

The form asks for information about:

where you live

where you work

and what other credit you have received

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Credit Worthiness

Creditors want to make sure you are

worth the risk

When you apply for credit, there are five

primary considerations that affect a

lender's decision to approve or decline

your loan application

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Capacity - your ability to repay the loan

Character - whether your lender thinks you will

repay the loan

Credit History - report that tells whether you

pay your bills on time or have failed to pay debts

Capital - what you are worth

Collateral - What you agree to forfeit if you fail

to repay your loan

The Five Cs

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The creditor will take into account all

these factors to decide how much you

can borrow.

The maximum amount you can spend

or charge on a credit account is called

your credit limit.

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Credit Limit

The maximum amount you can spend

or charge on a credit account.

You will not be able to charge more

than the limit

If you pay your bills on time, the creditor

will often increase your credit limit

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Cosigner

A cosigner is someone other than you

who signs for a loan. The cosigner agrees

to repay the loan if you fail to repay as

promised.

Cosigners are jointly liable for loans,

which means that the lender can look to

them for payment.

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You are under the age of 18

Individuals under 18 years of age who are granted credit can't legally be held responsible for unpaid debt.

You have no credit history

If you're a first-time borrower, you probably don't have much credit history.

You have a poor credit history

Loan applicants who have failed to make payments as promised in the past aren't reliable.

When do you need a cosigner?

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A cosigner does not relieve you of your

responsibility to pay back the loan as

promised. If you don't, it will affect your

credit rating and that of your cosigner's.

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Installment Loans

Down Payment – a portion of the cost

that you pay when you purchase a

product.

Principal – the amount of money you

still owe.

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Secured Loan

A loan that is backed by collateral is a

secured loan

Car loans

Mortgages

Home equity loans

Repossess

If you put up something valuable as collateral on a

loan, such as a car, a creditor has the legal right to

take back the collateral if you miss a payment.

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Unsecured Loan

The loan is not backed by collateral

Interest charges are often higher than on a

secured loan.

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Paying for Credit

Before you take out a loan or apply for a

credit card, you should figure out the

costs to see if you can afford it.

Different cards have different rates.

Also, look to see what the fees are for

various types of transactions.

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Annual Percentage Rate (APR)

This percentage rate determines the

cost of your credit on a yearly basis.

An APR of 18% means that for each $100

you owe, you pay $18 per year.

This amounts to $1.50 per month ($18/12)

The amount of interest you pay a year

depends on the interest rate, the total

length of the loan, and the amount of the

loan.

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A single credit card may have several APRs One for purchases

One for cash advances

And yet another for balance transfers

The APRs for cash advances and balance transfers often are higher than the APR for purchases for example, 14% for purchases, 18% for cash

advances, and 19% for balance transfers

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Tiered APRs

Different rates are applied to different

levels of the outstanding balance

For example

16% on balances of $1–$500

7% on balances above $500.

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A penalty APR

The APR may increase if you are late in

making payments.

For example

your card agreement may say, “If your payment

arrives more than ten days late two times within

a six-month period, the penalty rate will apply.”

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An introductory APR

A different rate will apply after the introductory rate expires.

A delayed APR

A different rate will apply in the future.

For example a card may advertise that there is “no interest

until next March.” Look for the APR that will be in effect after March.

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If you carry over a part of your balance

from month to month, even a small

difference in the APR can make a big

difference in how much you will pay

over a year.

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Fixed vs. Variable APR

Some credit cards are “fixed rate”--the

APR doesn’t change, or at least doesn’t

change often.

Even the APR on a “fixed rate” credit

card can change over time. However,

the credit card company must tell you

before increasing the fixed APR.

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Other credit cards are “variable rate”--the APR changes from time to time.

The rate is usually tied to another interest rate, such as the prime rate or the Treasury bill rate. If the other rate changes, the rate on your card may change, too.

Look for information on the credit card application and in the credit card agreement to see how often your card’s APR may change

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Grace Period

The number of days you have to pay your bill in full without triggering a finance charge.

For example - the credit card company may say that you have “25 days from the statement date, provided you paid your previous balance in full by the due date.” The statement date is given on the bill.

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The grace period usually applies only to

new purchases. Most credit cards do

not give a grace period for cash

advances and balance transfers.

Instead, interest charges start right

away.

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Finance Charges

The dollar amount you pay to use credit.

The amount depends in part on your outstanding balance and the APR.

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Minimum Finance Charge

Some credit cards have a minimum finance charge.

You’ll be charged that minimum even if the calculated amount of your finance charge is less.

For example - your finance charge may be calculated to be 35¢--but if the company’s minimum finance charge is $1.00, you’ll pay $1.00.

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Fees

Annual fee

Cash advance fee

Balance transfer fee

Late payment fee

Over-the-credit-limit fee

Credit limit increase fee

Other

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Keeping Credit

To continue using credit or to get new

credit, you need to maintain a good

credit rating.

Creditors are happy to extend credit to

people with a good rating.

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Making the Minimum Payment

Each credit card statement always includes a

minimum payment you have to make on a

bill.

Many people think that they can get by just

making the minimum payment

It would take over 30 years to pay off a credit

card debt of $2,500 at 18.9% if you only make

the minimum payment.

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Overextending Your Credit

The more credit cards you have, the

more you might be tempted to make

impulse purchases

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Credit Problems

Late payments, missed payments, too much

credit, and other problems can give you a bad

credit rating.

Misusing credit can lead to more immediate

problems.

Garnishment of wages - When creditors take

all or part of you paycheck if you miss a

payment