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Using Credit#6

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The Basic Concepts of Credit

Why we use credit• Avoid paying cash for large outlays• Meet financial emergencies• Convenience• Investment purposes

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Improper Uses of Credit

• Meet basic living expenses

• Make impulse purchases

• Purchase non-durable goods

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Rule of Thumb!

Product should outlive the payment schedule

Watch your use of increasingcredit!

Minimum Payments means Maximum Years

Calculations here are based on a minimum 3 percent payment and 15.0 percent annual interest rate.

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Establishing Credit

Build a good credit history by• not getting overextended• fulfilling all credit terms • paying on time• notifying creditors if unable

to pay• being truthful

• Open checking and savings accounts

• Get one card and make small purchases

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How Much Credit Can You Stand?

Monthly consumer credit payments (excluding mortgage) should not exceed 20% of monthly net income.

Debt Safety Ratio =Monthly consumer credit obligations

Monthly take-home pay

Credit Guidelines Based on Ability to Pay

Monthly Consumer Loan Payments and Debt Safety Ratio

Monthly Consumer Loan Payments and Debt Safety Ratio

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Credit Cards and Other Open Account Credit

• Credit extended to consumer in advance of a purchase

• Consumer can buy up to the specified credit limit

• Offered by financial institutions and retailers

• Monthly credit statements• Pay balance in full to avoid interest

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Bank Credit Cards

• Most popular open account credit

• Features include:– Line of credit depends on applicant’s financial

status and ability to pay– Cash advances and balance transfers– Interest rates and fees

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Other Fees

• High interestPrime rate + a percentage

• Annual fees• Transaction fees• Late-payment fees• Over-the-limit fees• Balance transfer fees• Foreign transaction fees

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Special Types of Bank Credit Cards

• Reward cards– Frequent flyer programs– Auto rebate programs– Other merchandise rebates

• Affinity cards• Secured credit cards• Student credit cards

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Retail Charge Cards

• Second largest category– Department stores– Oil companies

• Build loyalty• Preset credit limits

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Debit Cards

• Looks like a credit card but works like writing a check—accesses checking account

• No line of credit

• Greater liability exposure if fraudulently used

Prepaid card is a debit card with fixed amount available—does not access checking account

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Revolving Credit Lines

• Open account credit offered by banks or other financial institutions

• Usually offer higher credit lines and lower interest rates than credit cards

• Access money by writing checks

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Forms Of Revolving Credit

• Overdraft protection lines

• Unsecured personal credit lines– Available on as-needed basis

• Home equity credit lines– Secured by equity in owner’s home– Interest tax deductible (if deductions are

itemized)

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Obtaining and Managing Open Forms of Credit

Steps in opening an account:

1. Credit card application

2. Credit investigation

3. Credit bureau

Computing Finance Charges

Lenders must disclose• Annual percentage rate (APR)

– true rate of interest over life of loan– includes all fees and costs

• Method used in computing finance charges

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Average Daily Balance (ADB) - balance to which interest rate is applied is determined by

• ADB excluding new purchases - most consumer friendly

• ADB including new purchases - most frequently used, no grace period on new purchases balance is carried

Computing Finance Charges

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Managing Your Credit Cards

• Review statements monthly to verify entries

• Pay by due date– minimum monthly payment – entire amount to avoid

finance charges

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Shop Around for the Best Deal

• Annual fees

• Rate of interest

• Length of grace period

• Method of calculating balances

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Avoiding Credit Problems

• Use discipline when purchasing• Reduce number of cards • Be selective in accepting

preapproved credit • Limit new charges• Pay more than the minimum• Pay off cards with highest finance charges first• Transfer balances to card with lowest rate

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Credit Card Fraud

• Don’t give account number to someone who calls you

• Use secure internet sites • Never put credit card info

on checks • Destroy old cards and

shred old statements• Report lost or stolen cards immediately

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Bankruptcy – The Price for Credit Card Abuse

File Bankruptcy• Chapter 13 - wage earner plan

-- debt restructuring• Chapter 7 - straight bankruptcy

-- wipe the slate clean

Use credit counselors!