Credit
What is Credit?
• when goods, services or money is received in exchange for a promise to pay a definite sum of money at a future date
• Credit is derived from the Latin word “credo” meaning “I believe”
Installment Credit (aka Closed-end Credit) A one time
loan that is repaid
in a specified number of equal payment
s
Auto Loans, Mortgages, & Student
Loans
May require a co-signer
Second signer who will pay for the loan if the first
party defaults
Non-Installment Credit (aka Revolving or Open- end Credit)
Credit is extended
in advance with a
specific credit limit
Credit Limit
Maximum dollar
amount loaned
Varies among individuals based upon
Creditworthiness
Borrower pays interest if credit is not paid back in full
each monthExamples are Credit Cards & Department Store Cards
What is a Credit Report?
• Record created by the CRA (Credit
Reporting Agency) that provides a detailed report of an individual’s credit history
• Includes:• Personal Information• Account Summary• Public Records• Credit Inquiries
What is a Credit Score?
• Numeric “grade” of a consumer’s financial reliability
• Most common scoring system is FICO• Range from 300-850, with 850 being the
best
What affects your credit score?
What affects your credit score?
Good
• Pay bills on time
• Length of credit history
• Variety of credit
Bad
• Late Payments
• Too much credit (amount)
• Too many credit cards
• Too many inquiries
• Too much new credit
What are the 3 Credit Bureaus?
Experian, Equifax, TransUnion
How does your credit score affect you?
• Affects what types of loans you can get
• Affects your interest rate
• May affect where you can live (landlords look at it)
Credit Score Impact
THIS IS BASED UPON A 30 YEAR FIXED MORTGAGE RATE FOR A $300,000 LOAN
FICO Score
Interest Rate
Monthly Payment
30 Year Amount
760 5.9% $1,787 $643,320
650 7.2% $2,047 $736,920
590 9.3% $2,500 $900,000
$256,680 saved over the lifetime of this loan
because of a good credit score!
Are Credit Cards Bad?
Yes & No
• Can paralyze you with debt
• Are important for online purchases
• Can build your credit
• Should NEVER be used as your emergency fund
• Bottom line: they must be used responsibly
Credit Cards 101
Rule #1: Don’t buy stuff you can’t afford
• Treat your credit card like a debit card. Make sure you have enough money in your bank account before spending
• http://www.nbc.com/saturday-night-live/video/dont-buy-stuff/n12020
Rule #2: Always pay off your full balance each month
• Minimum payment: the minimum required to pay off each month• Usually only a small percentage (2.5-5%) of the total
balance due
Minimum Payments
Payment Made
~ Time to pay off card
~ Total amount
of interest
paid
~ Total amount
paid
Full Payment
Partial Payment
Minimum Payment
To prepare for her first semester of college, Miranda purchased a new computer for $1000 and textbooks
for $500, spending a total of $1500 on her credit card charging 15% APR. How much would Miranda
pay in interest if she makes the minimum payment?
$1500 1 month $0 $1500
$135 1 year $125 $1625
$30 11 years $1413 $2913
Rule #3: Never make a late payment
• Usually have to pay a fee
• Will lower your credit score
• Will remain on credit report for 7 years
Rule #4: Check your account frequently
• Keep a record of your own (receipts, register, etc.)
• Identify mischarges or fraudulent charges
• Remember online subscription fees
Rule #5: Know your Credit Card
• Schumer box - Credit card issuers are required to disclose the terms and fees of credit cards in an easy to read box format
Credit Card Interest
Interest is charged each month the balance is not paid in full
The cost of credit expressed as a yearly interest rate
Rate at which interest is charged is referred to as:
Annual Percentage Rate (APR)
APR’s
• Fixed-rate APR- cannot change during the period of time outlined in a credit card agreement
• Variable-rate APR- may change depending on other factors (such as economic conditions)
• Introductory Rate- a teaser rate (sometimes 0%) that only lasts a specified amount of time (i.e. 6 mos)
• Good APR? < 12 %
Other terms to know
• Late Payment Fee
• Over-the-limit fee
• Balance Transfers
• Cash Advance
• Annual fees (maintenance fee)
• Minimum interest charge
• Loss of APR or Penalty APR
Benefits Credit Cards May Offer
• Skymiles
• Discount on merchandise or services
• Cash back
• Rewards bonus points (redeemable for cash back, gift cards, discounts)
• Higher cash back on revolving categories