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Credit Laws review and Credit Score

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by

kara siebe

on 21 April 2014

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Transcript of Credit Laws review and Credit Score

Learning Goal: Students will understand the credit laws.
Students will understand credit scores and their impact on financial freedom.

Your credit history information is gathered by a large company called a Credit Bureau
They sell that information to businesses and have a permanent record of all of your transactions.
The information is then stored under your social security number
Who Has My Credit Score?
What Contributes
to Your Score?
Understanding Your
Credit Score…
Revolving Credit:
-Many items can be bought using this plan as
long as the total amount does not go over the
credit user’s assigned dollar limit. Repayment
is made at regular time intervals for any amount
at or above the minimum required amount.
Retail Stores
Financial Institutions that issue credit cards
Gift cards: Gift cards cannot expire sooner than five years after they are issued. Dormancy fees can only be charged if the card is unused for 12 months or more. Issuers can charge only one fee per month, but there is no limit on the amount of the fee.
Minimum payments: Credit card issuers must disclose to cardholders the consequences of making only minimum payments each month, namely how long it would take to pay off the entire balance if users only made the minimum monthly payment. Issuers must also provide information on how much users must pay each month if they want to pay off their balances in 36 months, including the amount of interest.
Limits on over-limit fees: Consumers must "opt in" to over-limit fees. Those who opt out would have their transactions rejected if they exceed their credit limits, thus avoiding over-limit fees. Fees cannot exceed the amount of overspeding. For example, going $20 over the limit cannot have a fee of more than $20. 
Clearer due dates and times: Credit card issuers are no longer able to set early morning or other arbitrary deadlines for payments. Cut off times set before 5 p.m. on the payment due dates are illegal under the new credit card law. Payments due at those times or on weekends, holidays or when the card issuer is closed for business are not subject to late fees.
More time to pay monthly bills: Under the credit card law, issuers have to give card account holders "a reasonable amount of time" to make payments on monthly bills. That means payments are due at least 21 days after they are mailed or delivered. Consumers have complained about due dates that change without notice or are moved up, giving them less time to pay their bills and increasing the likelihood of late fees.
Limited credit to young adults: Credit card issuers are banned from issuing credit cards to anyone under 21, unless they have adult co-signers on the accounts or can show proof they have enough income to repay the card debt. Credit card companies must stay at least 1,000 feet from college campuses if they are offering free pizza or other gifts to entice students to apply for credit cards.
The right to opt out: Consumers now have the right to opt out of -- or reject -- certain significant changes in terms on their accounts. Opting out means cardholders agree to close their accounts and pay off the balance under the old terms. They have at least five years to pay the balance.
Truth in Lending Act (Consumer Protection Act)
Ensures consumers are fully informed about cost and conditions of borrowing
Fair Credit Reporting Act
Protects the privacy and accuracy of information in a credit check
Equal Credit Opportunity Act
Prohibits discrimination in giving credit on the basis of sex, race, color, religion, national origin, marital status, age, or receipt of public assistance
Let’s Recap: Credit Laws
BOOSTING YOUR SCORE…
Stop applying for credit cards when you already have one that works
NEGOTIATE! You can always call your credit card company and try and get a better APR rate or lower finance charges (you don’t need a whole new card!)
Don’t be fooled into applying for Store Specific Credit Cards (i.e. a Gap, Sears, Macy’s, etc.)
10% -
How Much You Search For
or Open New Accounts
Every time you apply for a new card or open a new card it influences your score.
The more you search and change cards, the more it impacts your credit score.
The less you shop around, the better your score.
10% -
How Much You Search For
or Open New Accounts
BOOSTING YOUR SCORE…
It is best to have at least one card handy that is more than 2 years old.
After 15-20 years, the length doesn’t matter any more.
If you are going to cancel a credit card, cancel the “youngest” ones!
15% -
The Length of Your Credit Relationships
BOOSTING YOUR SCORE…
You are in the best shape if you use 20-30% of your available credit.
It is important to pay off cards that are maxed out FIRST.
Who has a better score –
Someone who has 1 card and uses it a lot
Someone who has 3 cards and uses them sparingly
Someone who has a different card for every store
30% -
How Much Credit You’re Using
Let’s say you have a bunch of credit opportunities available to you…
Should you be using all of it?
Your score depends on the percentage you use.
The lower the better!
30% -
How Much Credit You’re Using
BOOSTING YOUR SCORE…
Always pay your bills on time
The more frequently you miss bills, the worse your score.
Which is more damaging to your credit score –
A 60-day late payment in 1 year
Or 15 3-day late payments over 5 years
35% -
How Well You Pay Your Bills
Every time you write a check to pay your bills (or pay them online) your credit score is at stake.
35% -
How Well You Pay Your Bills
You can always go to sites like www.freecreditreport.com to find out your score
You will usually have to submit personal information, which can be dangerous
Credit Scam?
How Do You Measure UP?
It is a snapshot of your borrowing and paying habits
Although your credit record stays with you for your entire life, your score is only based upon the last 2 years…
So you CAN change your score as you go along and repair it if you mess up
What is a Credit Score?
This affects you in terms of…
How much money you can borrow
The interest rate you will pay
The credit limit you will receive
Being able to rent an apartment
Getting a cell phone
Whether you can get a credit card or loan that you are “pre-approved for”
What is a Credit Score?
A numerical representation of the information in your credit report
(or every record of credit transactions you have made)
They range from 300 to 850
The higher the better
Most people have a score between 500 and 700
What is a Credit Score?
If you earn $400/month after taxes, what is your net yearly income?
12 x $400 = $4,800

Calculate 20% of your net yearly income to determine your safe debt load:
$4,800 x 20%(.20) = $960

SO YOU SHOULD NEVER HAVE MORE THAN $960 IN DEBT OUTSTANDING
20% Explained…
Installment Credit:
-Merchandise and services are paid for in two
or more regularly scheduled payments of a set
amount. Interest is included.
Some retail businesses, such as car and appliance dealers
Other Types of Credit
Single Payment Credit:
-Items and services are paid for in a single payment, within a given time period, after the purchase. Interest is usually not charged
Utility companies, medical services
Some retail businesses
Other Types of Credit
Late fee restrictions: Late fees are capped at $25 for occassional late payments; however, the fees can be higher if cardholders are late more than once in a six-month period.
Highest interest balances paid first: When consumers have accounts that carry different interest rates for different types of purchases (i.e., cash advances, regular purchases, balance transfers or ATM withdrawals), payments in excess of the minimum amount due must go to balances with higher interest rates first. Common practice in the industry had been to apply all amounts over the minimum monthly payments to the lowest-interest balances first -- thus extending the time it takes to pay off higher-interest rate balances.
Limited universal default: "Universal default," the practice of raising interest rates on customers based on their payment records with other unrelated credit issuers (such as utility companies and other creditors), has ended for existing credit card balances. Card issuers are still allowed to use universal default on future credit card balances if they give at least 45 days' advance notice of the change.
Limited interest rate hikes: Interest rate hikes on existing balances are allowed only under limited conditions, such as when a promotional rate ends, there is a variable rate or if the cardholder makes a late payment. Interest rates on new transactions can increase only after the first year. Significant changes in terms on accounts cannot occur without 45 days' advance notice of the change
Credit CARD Act of 2009
into law May 22, 2009
Fair Credit Billing Act
Sets up a procedure for the quick correction of mistakes that appear on consumer credit accounts
Fair Debt Collection Practices Act
Prevents abuse by professional debt collectors, and applies to anyone employed to collect debts owed to otherse; does not apply to banks or other businesses collecting their own accounts
Let’s Recap: Credit Laws
BOOSTING YOUR SCORE…
Put things on your credit cards that require frequent timely payments that you know you can afford each month.
If you have large installment debts and DON’T pay them on time, your score will plummet.
10% -
Amount of Credit Debt vs. Installment Debt
Credit debt is sometimes a good thing to have…it builds credit.
RECALL: Installment debts are those that require continuous payments (Like paying a car loan or a mortgage every month)
Installment debt is usually better to have on your cards because it shows responsibility and longevity.
10% -
Amount of Credit Debt vs. Installment Debt
Your score greatly depends on how long you have had your cards.
The longer you have them, the better your score usually is.
15% -
The Length of Your Credit Relationships
Credit Bureaus are the large companies that gather information about you
Trans American
Experian
Equifax
What are Credit Bureaus?
If your take-home pay is $400/month
$400 x 10% (.10) = $40

YOUR TOTAL MONTHLY DEBT PAYMENTS SHOULDN’T TOTAL MORE THAN $40 PER MONTH
10% Explained…
Safe Debt Load = the amount of debt that a person can safely carry


The 20-10 rule…
Never borrow more than 20% of your yearly net income
Monthly payments should never exceed 10% of your monthly net income
Determining Safe Debt Load
Full transcript