credit records and laws
DESCRIPTION
17. Credit Records and Laws. 17.1 Establishing Good Credit 17.2 Evaluating Credit and Laws. Lesson 17.1 Establishing Good Credit. GOALS Discuss the purpose of credit records. Describe the concept of creditworthiness. Explain how to get started using credit. Credit Records. - PowerPoint PPT PresentationTRANSCRIPT
Chapter
© 2010 South-Western, Cengage Learning
Credit Recordsand Laws
17.117.1 Establishing Good Credit
17.217.2 Evaluating Credit and Laws
17
SLIDE 2
Chapter 17
© 2010 South-Western, Cengage Learning
Lesson 17.1
Establishing Good Credit
GOALSDiscuss the purpose of credit records.Describe the concept of creditworthiness.Explain how to get started using credit.
SLIDE 3
Chapter 17
© 2010 South-Western, Cengage Learning
Credit Records
Before granting you credit, a creditor will check into your past credit performance:Did you pay your bills on time? How much total credit did you receive? How much do you owe now and how large
are your payments?
SLIDE 4
Chapter 17
© 2010 South-Western, Cengage Learning
Credit History
Your credit history is the complete record of your borrowing and repayment performance.
This record will provide answers to these questions and thus help the creditor determine your ability to pay new debts.
SLIDE 5
Chapter 17
© 2010 South-Western, Cengage Learning
Your Credit File
Every person who uses credit has a credit history on file at a credit bureau.
A credit bureau is a business that gathers, stores, and sells credit information to other businesses.
SLIDE 6
Chapter 17
© 2010 South-Western, Cengage Learning
National Credit Bureaus
TransUnionExperianEquifax
SLIDE 7
Chapter 17
© 2010 South-Western, Cengage Learning
Credit Report
A credit report is a written statement of a consumer’s credit history, issued by a credit bureau to businesses.
You can order a copy of your credit report online at the credit bureau’s web site or by writing to the bureau.
When you are denied credit, you can get a free credit report if you ask within 30 days of being denied.
SLIDE 8
Chapter 17
© 2010 South-Western, Cengage Learning
Services Available Related to Your Credit Files
Credit guard servicesCredit freezing services
SLIDE 9
Chapter 17
© 2010 South-Western, Cengage Learning
How Information Is Gathered
Credit bureaus gather information from businesses, called subscribers, that pay a monthly fee to the credit bureau for access to this information.
Each subscriber supplies information about its accounts with customers including: Names Addresses Credit balances On-time payment record
Credit bureaus also gather information from many other sources.
SLIDE 10
Chapter 17
© 2010 South-Western, Cengage Learning
How Information Is Used
When someone applies to a business for credit, the business (subscriber) asks the credit bureau for the applicant’s credit report.
Information in the credit report is then used as the basis for granting or denying credit. Usually credit grantors (banks and retail
businesses), employers, landlords, and insurance companies have an interest in credit reports.
Before entering into a financial agreement with someone, they want evidence that the person is financially responsible.
SLIDE 11
Chapter 17
© 2010 South-Western, Cengage Learning
Types of Information Stored
Public information becomes part of your credit record. Examples of activities that result in public information:
Failing to pay your property taxes Filing for bankruptcy Filing for divorce Applying for a marriage license Announcing the birth of a child Announcing a job promotion Being involved in a lawsuit
Information you provide on a credit application becomes part of your credit record.
SLIDE 12
Chapter 17
© 2010 South-Western, Cengage Learning
Creditworthiness
Before potential creditors will grant credit to you, they must determine whether you are a good risk—that you are creditworthy.
A person who is considered creditworthy usually meets five basic qualifications, called the five Cs of credit: Character Capacity Capital Conditions Collateral
SLIDE 13
Chapter 17
© 2010 South-Western, Cengage Learning
Character
Will you repay the debt?Character is a responsible attitude
toward honoring obligations, often judged on evidence in the person’s credit history.
Creditors often use stability as a measure of character as well.
SLIDE 14
Chapter 17
© 2010 South-Western, Cengage Learning
Capacity
Can you repay the debt?The financial ability to repay a loan with
present income is known as capacity. Before lending you money, creditors want
to make certain that your income is sufficient to cover your current expenses each month plus the payments on the new loan.
SLIDE 15
Chapter 17
© 2010 South-Western, Cengage Learning
Capital
Do you have sufficient assets to support the debt?
Capital refers to financial assets (bank accounts, investments, and property) you possess that are worth more than your debts.
When you add up all that you own (assets) and subtract all that you owe (liabilities), the difference (net worth or capital) should be sufficient to ensure payment of your debt.
SLIDE 16
Chapter 17
© 2010 South-Western, Cengage Learning
Conditions
What affects your ability to repay the debt? There may be “external” conditions that affect
your ability to repay a debt. Therefore, creditors want to know the following:
How secure is your job? How secure is the firm for which you work? How is the employment situation in your geographic
location and in your occupation?
SLIDE 17
Chapter 17
© 2010 South-Western, Cengage Learning
Collateral
What assets are pledged to support the debt? Collateral is property pledged to assure
repayment of a loan, such as the house, car, or furniture being purchased.
Collateral protects creditors, making them more willing to lend to you.
If you do not repay your debt as agreed, they can sell the collateral to collect on the debt.
SLIDE 18
Chapter 17
© 2010 South-Western, Cengage Learning
Getting Started with Credit
Begin with a savings account. Open a checking account. Open a store credit account.
Many stores will allow you to open a small account with a responsible adult as a cosigner.
A cosigner is someone who promises to pay if the borrower fails to pay.
Get a small loan. Apply for a credit card.
SLIDE 19
Chapter 17
© 2010 South-Western, Cengage Learning
Lesson 17.2
Evaluating Credit and Laws
GOALSDescribe credit ratings and a point
system used for evaluating credit.Outline the contents of a credit report.Discuss major credit laws and explain
how they protect consumers.
SLIDE 20
Chapter 17
© 2010 South-Western, Cengage Learning
Evaluating Credit
Credit bureaus evaluate each consumer based on his or her credit history, amount of credit, and ability to take on additional debt.
There are two major classifications used to evaluate consumers:Credit ratingCredit score
SLIDE 21
Chapter 17
© 2010 South-Western, Cengage Learning
Credit Rating
Your credit rating is a measure of creditworthiness based on an analysis of your credit and financial history.
This process rates consumers according to how reliably they pay back money borrowed or charged. Excellent credit rating Good credit rating Fair credit rating Poor credit rating
SLIDE 22
Chapter 17
© 2010 South-Western, Cengage Learning
Credit Score
Credit bureaus as well as some larger creditors have point systems on which credit ratings are based.
In a point system, the credit bureau assigns points based on factors such as amount of current debt, number of late payments, number and types of open accounts, current employment, and amount of income.
When your points are added up, they result in a credit score that tells potential creditors the likelihood that you will repay debt as agreed.
The higher your score, the greater the chance you will be a good credit risk.
SLIDE 23
Chapter 17
© 2010 South-Western, Cengage Learning
Credit Score
Your FICO scoreHow errors are madeCredit inquiriesImproving your FICO score
(continued)
SLIDE 24
Chapter 17
© 2010 South-Western, Cengage Learning
Credit Reports
Credit files are updated continuously.Information stays in the file for seven years.Bankruptcy information stays in the file for
ten years.
Credit reports are requested for credit applications, employment applications, and insurance reasons.
SLIDE 25
Chapter 17
© 2010 South-Western, Cengage Learning
Credit Reports
Formats vary, but credit reports contain sections similar to these:Summary of informationPublic record informationCredit informationAccount detailRequests for credit historyPersonal information
(continued)
SLIDE 26
Chapter 17
© 2010 South-Western, Cengage Learning
Credit Laws
Consumer Credit Protection ActIt is also known as the Truth-in-Lending Law.It requires lenders to fully inform consumers
about all costs of a credit purchase before an agreement is signed.
Fair Credit Reporting ActIt gives you the right to know what is in your
file and who has seen your file.
SLIDE 27
Chapter 17
© 2010 South-Western, Cengage Learning
Credit Laws
Fair Credit Billing ActIt requires creditors to resolve billing errors
within a specified period of time.
Equal Credit Opportunity ActIt was designed to prevent discrimination in
the evaluation of creditworthiness.Discrimination is treating people differently
based on prejudice rather than individual merit.
(continued)
SLIDE 28
Chapter 17
© 2010 South-Western, Cengage Learning
Credit Laws
Fair Debt Collection Practices ActIt was designed to eliminate abusive
collection practices by debt collectors.A debt collector is a person or company
hired by a creditor to collect the overdue balance on an account.
(continued)