credit and debt

www.lifethenfinance.com

Credit and Debt

www.lifethenfinance.com

3www.lifethenfinance.com

What is credit ?

Credit is a loan from a bank, store or company. The lender makes the purchase for you and

overtime you must pay them back. A credit card is the tool used to make

purchase. The lender of your credit card, charges interest

each month until you pay them back in full. When you use a credit card, if you do not pay off the

card in full each month you are paying more than what you purchased the item for because of fees.


Credit : Cont….

Many credit cards offer bonuses like gifts and airline miles with each purchase.

Credit card users that pay their bills off in full each month can reduce the cost of other purchases.

In some cases, credit cards have a more streamlined process incases of fraudulent charges.


What is a debit card?

This card is linked to a bank account. Automatically deducts purchase amount from

your bank account Cannot make a purchase for more than the

balance in your account If you have $400 in your account and want to

make a $500 purchase you can’t not with a debit card


Debit card: Cont….

Exception: If you have overdraft protection on your account,

you can overdraw your account up-to the maximum amount allowed by your overdraft protection policy.

A debit card is an alternative to carrying cash. When you use a debit card at some stores you can

ask for cash back with your purchase.


What is a credit report or credit history? Credit Report: A detailed report about a person’s credit

history, which outlines payback history, debt owed and paid; to help lenders determine credit worthiness for future lending.


Importance of a good credit score Credit Score: A measure of credit risk determined from on

e’s credit history using a standard form of measurement.

For example: A score of a 740 equals a grade ‘A’, where

as a score of a 550 equals a grade ‘F.’


Financial Reputation:

The worthiness of a person’s personal financial payback history; the lower the reputation the less likely one-will payback debts.


Good Credit:

Purchases $1000 Interest Rate 7% Monthly Payment $10 Years to Pay off amount 12 months Interest Paid $440 Actual Cost $1,440


Bad Credit:

Purchases $1000 Interest Rate 27% Monthly Payment $23 Years to Pay off amount 12 months Interest Paid $2,312 Actual Cost $3,312


Buying with Cash:

Purchases $1000 Amount Saved each month $125 Months to save up $1000 [8] Interest Earned the money in savings $30 Actual Cost $970


Interest Rates:

A rate that is charged for borrowing money from a lender; usually in the amount of a percentage of your total balance owed.

Interest: The fee that is charged by a lender for borrowing money; this

amount is usually determined from an interest rate.

Lender: A company, organization or person that lends money to a

consumer.

Grace Period: The time a lender allows between your purchase and payment

where they do not charge you any interest. This is typically around 30 days.


What is considered Good Debt ? Home Loans: Purchasing a home may be a good investment

because, in many locations, the value can increase over-time

Business Loans: For entrepreneurs looking to expand and grow their

business Education Loans: Student loans and other investments that finance

one’s education.


What is considered Bad Debt ?

Credit Cards: Any type of credit card is considered a bad debt. Credit cards

carry high interest rates, finance charges and other charges. Personal Loans: Cash loans from a bank or company. They carry high interest

rates. Pay Day Loans: These are similar to personal loans, in most cases you guarantee to pay it off with your next paycheck. Auto Loans: Since a car declines in value and offers no income this classifies

it as bad debt.


Auto/Car Loan

A car loan is considered a bad debt since the value of the car declines in value and no income is received (unless driving a limo, cab or bus)

** Your credit report score determines the type of car loan you will qualify for. The better the credit the better the loan you will be able to get**


What is identity theft ?

This is when someone who uses your personal identifying information to commit fraud or other crimes, usually for personal gain.


Personal Identifying information: Examples: Social Security Number/ Taxpayer ID

number Driver’s License Number or State

Identification Card Number Credit Card Numbers Bank Account Information


Incase of identity theft....

Contact: The three credit bureaus: Trans Union, Equifax,

Experian The Federal Trade Commission The IRS Internet Crime Complaint Local Police department ** You can check it at www.annualcreditreport.com

for free once per year**


What is collateral ?

Collateral: Lenders estimate the value of the collateral

offered to reduce their risk. if you are purchasing a car and get an auto

loan—your collateral would be the car. If you don’t pay back the loan the lender will

take the car.


Determining the value of the collateral ? The collateral is determined by calculating

the difference between the cars’ value and how much a person pays down.

For example: if someone purchases a $20,000 car and

puts down $10,000—the lender would have $10,000 in collateral—a safer loan.


High and low risk loan

Low-risk loan: A friend borrows $200 but gives you his laptop

valued at $400 until he repays you. If he doesn� ’t repay you then you can sell the laptop

and get your $200 back plus make some money. High-risk loan: A friend borrowed $250 and gave you a bike valued

at $50 even if you sold the bike at full value you would still lose $200.


Finding a mortgage that’s right for you … How long do you plan to keep the property? What are your real estate market predictions over

that time? What payments can you afford? What is your risk tolerance? If it’s a rental property, what kind of cash flow are

you looking to achieve? Are you trying to pay down the principle balance? How does this property fit into your overall financial

plans?


What lenders are looking for?

Credit: Maintain an excellent credit status and qualifying for

a home loan will be much easier. Equity: On a home purchase, equity is equal to the amount

of money you put down on a property. Assets Lenders want to see on average at least three

months of mortgage payments in an account.


What lenders are looking for? Cont… Debt to Income Ratio Shows the lenders you have the ability to

afford monthly loan payments. If you make $3500 per month and your

mortgage payment is $3000, that doesn’t look good for you.

The lender will be thinking, “How can they afford to pay me??” This is why you make a sensible budget plan—to avoid getting into indebted situations.

credit and debt

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