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Chapter 26 How to Get and Keep Credit

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Why It’s ImportantWhy It’s Important

Credit can enhance your life if used properly, or it can cause major problems if used improperly.

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Applying for CreditApplying for Credit To open a credit or charge account, you’ll have to fill out an application form.

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Applying for CreditApplying for Credit Some details a credit application will want to know about you are:• Address• Employment• Income• Bank information• Other credit you have

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Figure26.1 CREDIT APPLICATION

The information you put on a credit application gives the creditor information about where you live and work. It allows the creditor to access financial information about you from a credit bureau.

How old must you be to apply for this credit card? How do your choices influence your economic situation?

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Applying for CreditApplying for Credit If a company accepts your application, you’ll receive a security agreement.

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Your Credit Worthiness: Your Credit Worthiness: The Five Cs The Five Cs

There are several factors creditors consider before giving you credit, which are usually referred to as the “five Cs of credit.”

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Your Credit Worthiness: Your Credit Worthiness: The Five Cs The Five Cs

The five Cs of credit are:• Capacity• Character• Credit history• Capital• Collateral

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CapacityCapacity One of the first things creditors consider is your capacity to pay.

Creditors will check to see whether you have a job, how much you make, and how long you’ve been employed.

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CharacteCharacterrCreditors might ask for credit references from businesses or people you’ve borrowed from in the past who can testify to your reliability.

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Credit HistoryCredit History The creditor then checks with a credit bureau, an agency that collects information about you and other consumers of credit. The credit bureau report tells whether you pay bills on time and how much you owe.

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CapitalCapital Your capital is how much you have beyond what you owe.

Creditors want to know if you have enough capital so that if you lose your job, you can still pay them back.

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Collateral Collateral Collateral consists of savings, property, or valuables. It’s used as security for a loan.

If you fail to pay back a loan, the creditor can take whatever you put up as security, such as a car or house.

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Your Credit Limit Your Credit Limit The maximum amount you can spend or charge on a credit account is your credit limit.

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Cosigners Cosigners If you don’t qualify for a loan on your own, you can have someone cosign one for you.

A cosigner is responsible for a loan if you don’t make the payments.

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Using Credit Using Credit Loans from banks usually cost less in interest than credit cards or other sources of credit.

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Installment Loans Installment Loans If you buy a car or large appliance in installments, you might have to make a down payment.

The down payment is a portion of the total cost that you pay when you purchase a product.

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Installment Loans Installment Loans The principal is the amount of money you still owe and on which the interest is based.

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Cash Loans Cash Loans Cash loans can be obtained from banks, credit unions, savings and loans, finance companies, and bank credit cards.

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Cash Loans Cash Loans A cash loan can be used to purchase an item anywhere and is paid back like an installment loan.

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Secured and Unsecured Loans Secured and Unsecured Loans If a loan is backed by collateral, it’s called a secured loan.

If a loan is not backed by collateral, it’s called an unsecured loan.

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Annual Percentage Rate Annual Percentage Rate The annual percentage rate (APR) determines the cost of your credit on a yearly basis.

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Finance Charges Finance Charges The finance charge is the total amount it costs you to finance the loan stated in dollars and cents.

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Finance Charges Finance Charges The finance charge includes the interest and any other charges, such as an application fee.

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Changes in Interest Rates Changes in Interest Rates With a variable rate, the rate changes as interest rates in the banking system change.

With a fixed rate, the interest rate always remains the same.

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Changes in Interest Rates Changes in Interest Rates In many cases, a credit card might offer a low introductory rate.

After a few months, the rate might jump up to 20 percent.

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Fees Fees In some cases, you have to pay an application fee for a card to cover the cost of a credit check.

Some companies charge an annual fee to use their card.

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Fees Fees With a cash advance you borrow money on a credit card rather than use it to make a purchase.

There is often a separate fee for a cash advance.

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Fees Fees A late or missed payment fee is charged when you miss a payment or don’t make a payment on time.

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Grace PeriodGrace PeriodThe grace period is amount of time you get to pay off a debt without having to pay interest charges.

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Keeping Credit Keeping Credit If you always make your payments on time, you’ll probably have an excellent credit rating.

If not, your credit rating will be poor.

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Your Credit Burden Your Credit Burden Experts in personal finance say that you shouldn’t use more than 20 percent of your income for credit payments.

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Making the Minimum Payment Making the Minimum Payment Each credit card statement always includes a minimum payment you have to make on a bill.

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Making the Minimum Payment Making the Minimum Payment To pay off a credit card debt of $2,500 at 18.9 percent, it would take over 30 years if you only make the minimum required payment.

The total interest would be more than $7,800.

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Overextending Your Credit Overextending Your Credit The more credit cards you have, the more you might be tempted to make impulse purchases.

You can quickly reach the credit limit on several cards.

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Overextending Your Credit Overextending Your Credit When you overextend your credit, it becomes a struggle just to make the minimum payments on them each month.

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Credit Problems Credit Problems Some credit contracts allow the creditor to take all or part of your paycheck if you miss a payment.

This is called garnishment of wages.

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Credit Problems Credit Problems If you put up something valuable as collateral on a loan, a creditor has the legal right to repossess it, or take back the collateral.