I\e.,.,TenusAfter studying this chapter, you will be able to

discuss the advantages and disadvantages of using credit.

describe four major types of credit.

list ways to begin building a credit history.

describe a person whom creditors would view as a goodcredit risk.

explain the importance of a good credit rating.

list ways to protect yourself from identity theft.

f1) There are both advantages and disadvantages to using credit.

~ There are four major types of credit.

2!J People with good credit ratings are viewed as good credit risks.

You can protect yourself from identity theft.

450

ResourceReinforcing Vocablliary, Activity A,WB. Students complete an activityusing.key terms-from the chapter.

DiscussDo you thiok people do abetterjob of keeping track of their moneyif they spend cash rather than use .

"credit? Do you know families whodo not use credit cards?

ResourceCredit Ad~antages andDisarfvantages~'ActiYityB,WB. Students apply theirknowledge of credit advantagesand disadvantages to theirobservations and personaldecjsions~'"

Part Six Managing Your Money

Making aDifference

l'twestigate how veucan use a credit cardto make a rnicroloan.Micr%ans aresmall loans that helppeople in nee-a startbusnesses end encl' the'c¥cle of pCiverty·.Visitwww,kiva,org for moremtormanon Write areport about the 'stepsinvolv-ed' in the process(9,flending and ire,payin{S_Jthese kinds. O,f loans.

Common Uses of CreditBillboards and store windows are covered with signs that

say, "Buy now, pay later!" Newspaper ads read, "Easy creditterms with no down payment!" Radio and TV commercialsadvertise offers for "one-day credit approval." These arefamiliar slogans. They encourage people to buy on credit.They make buying easy-sometimes too easy. They don'tmention the fact that credit ends up making items cost more.

Credit can be good. It can help people buy homes, cars,and furniture. It can help people live more comfortably.

Credit, however, can be dangerous. It becomes dangerouswhen it is overused or abused. It can cause financial problemswhen people can't make the payments they owe. In somecases, financial problems may lead to other problems. Theymay cause family arguments. They may also cause stress,which can affect health.

Credit used wisely can enrich your lifestyle. Credit usedpoorly can create major problems. You need to know whenand how to use credit.

Advantages of CreditWhen used properly, credit has the following advantages:

• Credit is a convenience. You can shop and travel withoutthe worry of carrying large amounts of cash, 27-1.

• Credit allows you to use goods and services while payingfor them. Saving enough money to buy expensive itemscan be difficult. Credit helps you buy such items and payfor them over a period of time.

• Credit helps you meet financial emergencies. Unexpectedcosts due to sicknesses, accidents, and repairs can behandled through credit.

Disadvantages of CreditCredit has some drawbacks, especially if it is overused.

The following disadvantages of credit can become problems ifcredit is used unwisely:• Credit encourages impulse buying. Youmight buy more than

you need. Youmay overspend and have trouble repaying.

Chapter 27 Credit

• Credit can get you into serious debt. Many people lose itemspurchased with credit if they can't make the payments. Theitems are repossessed or taken back by the sellers.

• Credit makes the cost of goods and services higher. It isusually cheaper to pay cash than to use credit.

• Credit ties up your future income. Any raises you get mayneed to be used to payoff past credit charges.

When to Use CreditYou should always think carefully before using credit to

make a purchase. Ask yourself the following questions: Canyou do without the item now? Will you have problems payingback the debt? Are you already spending more than 20 percentof your take-home pay on installment debt? Ifyou answer"yes" to these questions, try to avoid more credit at this time.It is likely that you cannot handle any more payments. Creditshould work for you, not against you.

People often usecredit cards while trav-eling to avoid the needto carry a lot of cash.

ResourceOooJtGet Caught in the·Credit . ~,Trap, color transparency CT~2"7, .lR'Students dlscuss examples 'of consomers who get involved in:credit misuse.

Activity

Create a billboard poster thatadvf?rtfses the advanta.ges anddisadvaniages'of credit Displeythe posters in class.

,";-'

Reflect

Would you r'at~er carry' cash o~a credit card? Would you spendmore it you carried only a-creditcard? .'

Discuss

Explain what this mea~'s: creditties up future iacome. .

YourReading

How can credit affectyour lifestyle?

451

452

Discuss

How many dlfterent types of creditcards exist, to your knowledge?

:'"

Resource

Four Kinds of Credit, reproducible" master 27-1, TH. Studentscompare and contrast the fourtyP'es of credit discussed in thetext.

Resource

The Costof Credit, Activity C, WB.'Students figure tDe costs of using .various fqrms of credit"

credit lineThe maximum amount that canbe charged on a credit card.

ExampleIf a credit line is ~1,OOO,and$900 worth of purchases weremade during the month, the creditcard company will notapprovetransactionsfthat increase theacco"unt beyond $1,000. If this'customer tries to buy a $200TV set using the card, thesalesperson wifl notbs able tocomplete the transaction.

Activity

Make a list of the departmentstores tr\ ~Qurarea w\iere~tudenis might shop. Find out ifthese stores also have their owncredit cards.

Part Six Managing Your Money

Types of CreditAs a consumer, you should be aware of the following

of credit available to you:• charge accounts

• credit cards

• installment credit

• loans

Charge AccountsA charge account is the oldest type of credit offered by

business to consumers. Usually no down payment isnor is any interest charged. The consumer agrees to pay at alater date. If the consumer does not pay by the assigned date,a fee is usually added to the amount owed. An example of abusiness offering this type of credit is a utility company thatprovides natural gas or electricity.

Credit CardsBanks, stores, and many other types of companies issue

credit cards. See 27-2. When you apply for one, the issuer setsa maximum amount you can charge, called a credit line. Thisamount is based on how much you earn and your ability torepay. For example, your maximum credit line may be $2,000.You can make any number of purchases as long as the totaldoes not exceed $2,000.

Once a month, you receive a bill. You can pay the entirebill by the due date, which involves no added interest. Theother option is to make monthly installment payments. Youthen have to pay interest on the unpaid balance.

Installment CreditMany expensive household items, such as computers and

refrigerators, are purchased with installment credit plans.In such a plan, you agree to make set payments over a givenperiod of time. For this convenience, you pay the goinginterest rate plus any service charges. Ifyou fail to makepayments, the company can repossess the goods.

Chapter27 Credit

LoansBanks and other lending institutions offer credit in the

form of loans. People take out loans to borrow money to payfor the following types of expenses:

453

Department storesissue credit cardsfor consumers touse when buyingclothing and house-hold purchases.

• cars

• homes

• further education

• outstanding bills-

• home improvements collateral

• start-up expenses for a business Somethingofvalueheldby alendinginstitutionincasea

• vacations loanisnotrepaid.

The important point to remember about loans is that youhave to pay back what you borrow plus interest. You can geta signature loan, which is a loan backed by your signature orpromise to repay. Many loans, however, require you to put upcollateral before you get the money. Collateral is somethingof value held by a lending institution in case you fail to repay.For instance, a bank may hold the title for your car until youhave repaid your car loan. See 27-3.

When you need a loan, find out more about the differenttypes of loans available to you. The interest charged and therepayment terms can vary considerably.

YourReading

What are the four typesof credit?

454

Any car you pur-chase does not le-gally belong to youuntil you have paidfor it completely. Thecreditor keeps thetitle as collateral.

Reflect

Would you p~efera used car thatis more affo,c~ableor-a new ear ~that)s mpre expensive a~dw()uld"require much bigger 'or !onger"credit payments? What are your .:reasons for Y,ourdecision? .'"

Discuss

Do ~ou own anything- that could.be used.as collateral? What are J"

examples otlterns that. are useo'~scolla{eral~ .. .

Discuss

'What do YO~Jhink w9u1dhappen ,to tlie ec'onotTIyff credit cards did "not exist? How would this' changelives? What impact would it have00 the economy?

Part Six Managing Your Money

How to Obtain Credit

s

If you have never used credit, you have no creditIf this is the case, you need to begin building a creditThe following suggestions may help you:• Establish a steady work record.

• Pay all bills promptly.

• Open a savings account and a checking account, andthem. This shows creditors that you can handle money.

• Ifyour place of employment has a credit union, join it.Credit unions make loans available to their members atlower interest rates than some sources of credit.

• If you drive, apply for a gasoline credit card. Makeoccasional gas purchases on the card. Make sure youthe total due on time.

• Purchase an item in a local department store using a lay-away plan. Make payments on time to develop a goodcredit record.

• Apply for a local department store credit card. Use thecard for items you need. Stay within your budget plan.

Chapter 27 Credit

Creditors Look for Good Credit RisksCreditors want to issue credit to people whom they feel

are good credit risks. These are people who repay their debt.Therefore, creditors look for certain traits in people, 27-4.From a creditor's point of view, a good credit risk is a personwho has the following traits:• is honest

• has a job with a steady income

• made regular payments on past loan or credit purchases

• lived in the same community for a few years

• has assets

Assets are valuable possessions you own, such as a houseor a car. Assets also include money you have in bank accountsand the value of stocks and bonds you own.

Getting a First LoanAs a minor, it is difficult to borrow money. Generally,

a person must be at least 18years old. Even then, it may bedifficult to borrow without a cosigner. A cosigner signs theloan agreement with the person who is borrowing the money.The cosigner must have a good credit history and guarantee

DiscussWf{y do you thjnk steadyemploymentis,an important'conSideration when creditorsdecide who may haV€ one oftheft''Credih5ards? What happsns .if you take a job transfer? If thecompany moves Y~,llto anotherlocstlon, is that considered steaoyemployment?

assetsThe valuable possessions aperson owns, such as a houseor a car.

455

cosignerA person who signs a loanwith a borrower and is heldresponsible if the borrowerdoes not pay back the loan,

Most creditors con-sider steady employ-ment a requirementfor someone whowants to obtaincredit.

ReflectHow many people do you knowwho would b,ewilling to be a sss

cosigner tor you? "EnrichInvestigate the humber of loanstaken out in the United States in ayear. Hnd out how many loaris are ,~not repaid. Do you think lendersneed to have, tougher standardsfor people who apply for loans?

456

Discuss

When you lend another studentmoney, is this a form of credit?

,:-$. •. ~

Activity

Divide the class into three groups:borrowers, lenders, and creditbureau employees. Have eachgro~p,~elect a spokesperson toexplain the responsibilities of eachperson in the credit system.

Discuss

H0wmany students havereceived credit card applicationsin their name? How do you thinksomeone under age 18 got on thelists to receive these applications?

Activity

Res~arch credit bureaus. Find outwhat they do. Find out how theycan help consumers. Write aboutwhat you learned.

Discuss

Wbat information is asked on acredit application? Do you knowall of the answers to the questionson the application? Could you fillouf'fhe application on your ownright now?

Enrich

Credit bureaus keep records ofnega;tive credit ratings for manyyears. Find out exacUy how longthey keep these records on file.

credit bureauAn organization that gathersfinancial information onindividuals for businesses touse as a credit reference.

~

Part Six Managing Your Money

repayment of the loan. In the event the borrower doesmake the payments, the cosigner must make them.

You might need to ask a relative or friend to cosignfirst loan. Be sure you make your payments. Before youfor a loan, figure out whether you can afford to pay itItwould be unfair to the cosigner if you failed to live upyour responsibility. It could also damage your ability tocredit in the future.

Credit ApplicationsBefore credit is granted to anyone, the person's job

history, credit history, and ability to repay are checked.When you apply for a credit card or loan, you must filla credit application. You will be asked to give theinformation:• name, address, and previous addresses

• current and former employers, including their

• current job title (or military rank), salary, and numbyears employed

• sources of additional income

• name of a close relative who is not living at your

• existing sources of credit, including credit cardand loans

• all financial accounts, their account numbers, andnames and addresses of the financial institutions

Credit Bureaus and Credit RatingsComplete all credit applications honestly. The

on your applications will be checked by credit bureaus.Businesses depend on credit bureaus to gather financialinformation on individuals. Businesses make their W:: ....1.:>1\J,

to grant or deny credit based on information in reportscredit bureaus.

Don't lie or try to hide information. If you give falseinformation, you run the risk of being denied credit. Credibureaus keep track of all your loans and lines of credit. Thnot only know how much credit you already have, they alsknow if you repay your debts on time.

Chapter 27 Credit

A credit bureau reports your credit rating. Your creditrating is an estimate of how likely you are to pay your billson time. The rating is based on past records of your creditbehavior. Your credit rating reflects your level of risk. Themore credit cards you have, the lower your credit rating willbe. This is because creditors view the cards as potential debts.

If you handle credit well and pay your bills on time, youwill have a good credit rating. However, if you abuse creditand fail to repay your debts, you will have a bad credit rating.If you have a bad credit rating, you may have trouble gettingcredit in the future. Creditors often do not lend money topeople who have a history of not paying their bills. If theydo lend money, it is at a higher rate. Credit ratings are alsoused to determine car insurance rates and car and home loaninterest rates. Ifyou have a poor credit rating, you will paymore. Work hard to protect your credit rating. Use creditwisely. Don't abuse it.

There may be times when you may not be able to makeloan payments. If that happens, call your creditors and tellthem the facts. Be honest. You may have lost your job. Youmay be very ilL Special arrangements could be made untilyour situation improves. When it does improve, make everyeffort to meet your obligations.

It is wise to check your credit report periodically to ensurethat all the information is accurate. The FACT Act (Fair andAccurate Credit Transaction Act) entitles each u.s. residentto one free copy of his or her credit report from each credit-reporting agency once every 12months.

Examine All Credit AgreementsAlways read a credit agreement before you sign it. A credit

agreement is a contract. It legally binds the lender and theborrower to the credit terms defined. It is important for youto read and understand what you are signing. Some commoncredit terms you might encounter on credit agreements arelisted in 27-5.

Don't be rushed into signing a credit agreement. Study theagreement before you sign it. Never sign a credit agreementthat has blanks. Make sure that all numbers are correct. Don'toverlook the finance charges.

457

credit ratingAn estimate of how likely aperson is to pay bills on timebased on past records.

ResourceThe Cfedit Game, Activity D,WE. Students review factors thatreview credit ratings,

credit agreementA written contract that legallybinds a lender and a borrowerto specific credit terms.---~.-..IActivity

Make a list of ways a student canestablish a credit rating. Put a

~star by the items on your list ·thatwould be easy for you to' do.

458

Before you sign acredit agreement,know what theseterms mean.

ActivityCollect various credit agreementforms and make an informative."postet'Have students ~valuate \~the information presented.

Resource

What Does It Take to Get a CreditCard?{eproducible master 27-2,'"TR. Use the adapted worksheetto reiQJorcechapter concepts in""students who a.r~ low functioning,'

YourReading

Why is a good creditrating important?

identitytheftTheft that occurs whensomeone uses your personalinformation, such as yourname, social security number,or credit card number withoutyour permission to commitfraud or othercrimes.

Part Six Managing Your Money

Credit Termsnual fee: A flat, yearly charge similar to a membership. (Many companies offer "no annual fee" cards, an.tt

lenders who do charge annual fees are often willing to.~~~m to keep your business.) "'~Finance charge: The dollar amount you pay to use ctedit.(I~ addition to interest costs, this may include other CRitch as cash advance fees, which are charged agai~st.cqrd when you borrow cash from the lender. You generally.~ ~t?ay higher interest on cash advances than on purch~ses. I& ~AI,lnual percentage rate (APR): The yearly percentageoflhe finance charge. ;",~

period: A time period, usually about 25 days, dch you can pay your credit card bill without paying a

finance charge. (Under most credit card plans, the grace.p(;l,Jiodonly applies if you pay your balance in full eap_hmonth. It does not apply if you carry a balance forward. AIthe grace period does not apply to cash advances.) sss._ ""'FiXedrate: A fixed annual percentage rate of the fin~ncecharge.V~~iable rate: Prime rate (which varies) plus an addldpercentage. (For instance, your rate may be the primeprus 5.9 percent.) ,~Introductory rate: A temporary, lower APR that usually

for about six months before converting to the normalfixed or variable rate.

Ask questions if you are not sure of something in theagreement. You could also seek advice from someoneknowledgeable in money matters. Ifyou are in doubt, youshould write no.When you are satisfied with the contract,sign it. Then be sure to live up to the agreement.

Identity TheftProtecting your credit may be more important than

establishing credit. Identity theft occurs when someoneyour personal information, such as your name, socialnumber, or credit card number, without your permissioncommit fraud or other crimes. An identity thief may rentan apartment, obtain a credit card, or establish a telephone

Chapter 27 Credit

account in your name. You may not find out about the theftuntil you review your credit report or a credit card statementand notice charges you didn't make-or until you arecontacted by a debt collector. Some identity theft victims canresolve their problems quickly, while others spend a great dealof time and money trying to repair damage to their nameand credit records. Some people who are victims of identitytheft may lose out on job opportunities, or be denied loans foreducation, housing, or cars because of negative informationon their credit reports. In some cases, they may even bearrested for crimes they did not commit.

Tips for protecting yourself from identity theft are listedin 27-6. Ifyour identity is stolen or compromised, file a policereport, notify creditors, and monitor financial records.

Protect Yourself from Identiaware if someone is looking over your shoulder when

,h,.'W1~k;>"flreusing an ATM or making store purchases. '"q_on'tleave your receipt behind at the ATM. This could

vulnerable to fraud.give your credit card number over the phone un

initiated the call. Avoid giving your card number outa cordless phone. Radio scanners can eavesdrop

on cordless phones.certain you get your card back after you make a

rchase. A good way to do this is to leave your walletr hand until you have the card back.

41ways keep a list of your credit cards, credit card num .";., it card company numbers in case your card is lost or

red bank and credit statements and credit card offersthrowing them away. Don't mail checks from your

. ailbox. Drop them off at the post office. Also, have nevyto your bank, not your home.

your credit reports and scores. Make sure youI the account information listed.

010se out unused credit cards. Cutting them up is notAvoid giving out your social security number. It is thet~rget of identity thieves. Never put your social securityOJ)your checks or your credit receipts.

a firewall and buy Virus-protection software. lfyoua computer, remove data with a disk wipe utility pn't use the same password for all your accounts. Avoid

identifiable words or numbers.

459

YourReading

What is identity theftand how can it affectyou?

Answers toReviewing Key Concepts

1. (List three: Studentresponse.)2. (List four: Student response.)3. false4. pay the entire bill by the due

date or make monthly paymentsthat include paying interest on theunpaid balance5. true6. to hold the rights to an item

of value in case a person fails torepay the loan7. (Name three:) Open a

savings account and a checkingaccount. Join a credit union. Applyfor a gasoline credit card and paythe balance each month. Makea lay-away purchase. Apply fora local department store's creditcard and pay the balance.8. (List five: Student response.)9. If the borrower does not make

the payments, the cosigner mustmake the payments.10. You should file a policereport, notify creditors, andmonitor financial records.

~

PartSi~ ManagingYourMoney

DIarY-=7-Gredit is,.easily available in today's society. Used wisely, it can

h'elpful. If abuse~, it can be dangerous. Always think carefully beforeusing credit. Be sure you will be able to pay for it later.

Four major types of credit are charge accounts, credit cards,installment credit, and loans. Before using them, you shouldunderstand how they work. K'now what costs and responsibilities areinvolved.

Although you may not need credit now; you should start thinkingabout building a credit history. Learn about credit applications,ratings, and agreements. Become familiar with the different types ofcredit and credit terms.

Avoid becorninq a victim of identity theft. An identity thief cansteal information to obtain credit in your name. There are ways toprptect yourself from identity theft.

Reviewing Key Concepts1. List three advantages of credit.2. List four disadvantages of credit.3. True or false. A charge account usually involves a large down

payment and a high interest rate.4. When you receive a monthly credit card bill, what are your two

options?5. True or false. To buy something using an installment credit plan, a

person agrees to make set payments over a given period of time.6. Why might a lending institution ask for collateral before making

a loan?7. Name three ways to begin building a credit history.8. Describe five traits of a person who is a good credit risk.9. What risk does the cosigner of a loan take?10. What should you do if your identity has been stolen or

compromised?