Credit

Good, Bad, or Ugly???

What is Credit?• When goods, services, or money is

received in exchange for a promise to pay at a future date, usually with interest

Who is the Lender? Who is the Borrower?

• Lender – The person or organization who has the resources to provide the individual with a loan.

• Borrower – The person or organization that is receiving the money from the lender.

How does credit work?• Interest – The amount you pay to use

someone else’s money.• Annual Percentage Rate (APR) – The

amount it costs you per year to use credit, expressed as a percentage rate.

• Annual Fee – A yearly charge for the privilege of using credit.

How does credit work?• Credit Limit – The maximum amount of

money you can spend on a particular credit card.

• Minimum Payment – The least amount you must pay each month in order to stay in good standing with the credit card company and avoid a late payment.

• Grace Period – The number of days you get to pay off your card before the company begins to charge you interest.

What types of credit can I get?• Installment – A one time loan which the

borrower repays the amount in equal payments.– Examples – Home mortgage, car loan, student

loan, etc.• Non-Installment – An amount given in

advance, don’t have to use it all, payments fluctuate– Examples – Credit Card, Store Card

Advantages of Credit• Convenience• Take advantages of sales and promotions• Emergencies• Make reservations or purchase things on

the Internet

Disadvantages• Very high interest rates• Add-on Fees• Danger of over-spending and unable to

repay loan

STOP!

How do I improve my credit score?

1. Have a checking and savings account – do not bounce checks or overdraft the account

2. Apply for credit early in life and always repay your loans on time

3. Pay off all loans, if unable contact your lender and ask for more time

What happens if I have too much debt?

• First – – List all the debt you have, including your

balance and the interest rate. – Always pay at least the minimum payment on

all debt. Then, whatever you have left over start paying the highest interest rate debt first.

– Continue doing this until it is all gone

Which debt should I pay first?Debt Amount Interest Rate

Student Loan $14,000 5.5%

MasterCard $1,500 18.2%

Car Loan $9,250 6.1%

Visa $750 20.5%

Best Buy Card $500 14%

1st – Visa2nd – MasterCard3rd – Best Buy Card4th – Car Loan5th – Student Loan

What happens if I have too much debt?

• Second – – Contact a credit counselor. They can many

times reduce your payments or get you more time.

– Make sure you are using a non-profit organization. Some credit counselors are trying to get more money from you. They work for the credit cards.

What happens if I have too much debt?

• Third – – Last Resort – Declare Bankruptcy

– Bankruptcy - a legal process in which the borrower erases all debt.

– 1.4 million Americans filed for bankruptcy last year.

What happens if I do declare bankruptcy?

• Gives you a horrible credit rating• Bankruptcy – Stays on your credit report for

10 years• Loan Default – Stays on your credit report

for 7 years

What can bad credit do to you?• Keep you from getting loans• Force you to have higher interest rates• Unable to rent• Unable to get electricity, water, or gas• Keep you from getting a job

– Employers look at credit scores as a sign of your responsibility

What are the two types of bankruptcy?

• Chapter 7 – All debt is erased. Must be unemployed or have very low income. Must go through financial counseling.

• Chapter 13 – Erases most of the debt or extends the amount of time to repay. A court typically oversees the repayment process, such as taking your wages directly from you.

What are the 2 main reasons people file for bankruptcy?

1. Irresponsible spending and borrowing

2. Unforeseen and Unavoidable misfortunes