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What is Credit?
Transcript of What is Credit?
What to consider before using credit:
Is this purchase a need or a want?
Will I still have this item when I finish paying for it?
How will this credit payment affect my household budget each month?
How much will this purchase increase your total debt?
The decision whether to utilize credit or not depends on the level of urgency for your need of the intended purchase.
This is because, saving your money and paying cash for an item is less expensive than using credit.
However, having credit allows you to get goods and services immediately. Understanding the trade off is important when considering your financial plan of action.
Understanding Credit Risk:
Credit risk refers to the risk that a borrower will default on any type of debt by failing to make obligated payments. In evaluating whether, and on what terms, to grant credit, banks assess the risks against expected return.
Pros and Cons of Credit
Increased purchasing power
What is Credit?
Credit is money that is generally extended to borrowers whose credit risks are low.
Banks assess the risk/reward relationship when considering granting credit as well as the overall profitability of the account.
There is usually a cost associated with borrowing money, which is called the interest.
The amount and type of credit that lenders grant you is determined by whether or not you have proven yourself to be financially trustworthy.
Stop!! Think About It!!
vs. Using Credit:
Types of Credit :
Allows you to borrow money at any time up to a set limit. The most common types are credit cards.
loan that must be repaid over a specific period of time.
This type of credit is common for larger purchases such as a home, car, or education.
Non- Installment Credit
Allows you to pay for a used service at a later date usually without an interest charge ( i.e. utility bill
Requires you to provide something of value to guarantee that you will repay your debt.
It is usually used for installment loans. If you fail to repay, the lender takes your item as repayment.
Does not require a guarantee ( collateral).
Non- Installment Credit
Easy to loose track of budget
Helpful for Emergencies
Credit = Temptation
Credit Costs $$$
Total Amount to be repaid
Add up the cost of the down payment, fees, other charges, and all payments over the life of the loan or contract. Then ask yourself, is this purchase really worth it?
Consider the interest rate and ask yourself if it is reasonable. Compare the rate to that of the product or service’s competitors.
Monthly payment and maturity
Honestly assess if the monthly payments will strain your budget. If you lengthen the maturity, are you comfortable with lower monthly payments for a larger total amount?
Evaluate what you will lose in the event that you are unable to make your payments.
Shopping for Credit
Consider the following as you evaluate your credit options:
Warranties, service and repair
Consider all the “extras” that are included with the purchase. Ask yourself if you truly need the extras.
Remember that the lower price is not always the best purchase. Until you add in the total cost of credit (interest, fees, and taxes) you will not have a good understanding of what that total cost is.
Shopping for Credit Continued...
What is a credit score?
Your credit score is a number, determined by a complex mathematical formula that takes the information on your credit report and ranks you along a scale. The most popular scoring scale is Fair Isaac and Company (FICO) which ranges from 300-850.
A Credit score is determined by the following:
35% Payment History
30% Amounts Owed
15% Length of Credit History
10% Types of Credit in Use
What is a credit score continued..
The credit score suggests your level of risk to lenders:
A low credit score indicates higher risk
A high credit score indicates lower risk
What is a Credit Report?
Your credit report serves as your financial “report card”. It documents your credit history. It is the most important factor that lenders consider when you apply to borrow money. The better the credit rating, the better the terms and lower interest rates tend to be.
Where to Borrow Money
The following explains the difference between non-credit building lending institutions (shown in the first chart) verses institutions that are considered to be credit building (shown in the second chart).
Alternative Finance Services
Mission: These for- profit businesses make consumer and commercial loans. They focus on servicing customers with poor credit histories.
Mission: These for-profit financial institutions are the largest source of deposits and credit in the economy.
Alternative Finance Services usually charge higher interest rates and more fees than Traditional Lenders.
Loans are often short term.
Common Examples: o Payday loans o Car Title Loans o Tax Refund Anticipation Loans
Protects your money because it is insured by the Federal Deposit Insurance Corporation (FDIC)
• Helps increase your money through competitive interest rates
• Offer helpful services ( i.e. Special Savings Plans for College, etc.)
Mission: These non-profit cooperative financial institutions exist to serve their members’ financial needs.
Protects your money because it is insured by the National Credit Union Administration (NCUA)
Typically offer free accounts with no minimum balance requirements.
Interest rates on savings, certificates of deposit, and some checking accounts are often higher than those offered by the banks.
Credits, Products and Terms:
Credit Products and Terms:
Credit Products and terms:
In order to establish a credit history, you need to borrow money and pay it back over time. By making your payments on time, you’ll begin to establish good credit history.
Here are two ways to begin:
1) Apply for a retail store or gasoline credit card
They are usually easier to get than other types of credit. By making a few small purchases and then making timely payments each month, you’ll start to build a credit history.
2) Apply for a major credit card with a secured credit limit.
If you have less than perfect credit or no credit at all, you may still qualify for a major credit card.
Here is how it works....
As collateral (security deposit) you put a certain amount of cash (say $1,000) into a frozen bank account.
The bank then issues you a credit card with a $1,000 credit limit.
Once you’ve established a track record of timely, monthly payments, the card issuer will generally wave the collateral and return the security deposit to you.
Pay your bills on time!!!
Contact your lenders immediately if you foresee a problem!!!
Borrow at a minimum!!!
Do not overdraft accounts!!!
Understand loan terms/agreements before signing!!!
Tips for Improving your Credit:
Protecting your Finances
Keep the original copies of your documents in a safe place
Keep your important computer files safe
Make Copies of all your important documents
Keep a copy of your important papers in a safe or storage that is secure and outside of the home, in case of emergency
Monitor your accounts regularly
Know your rights:
Each of the nationwide consumer reporting companies Equifax, Experian, and TransUnion- is required to provide you with a free copy of your credit report once every 12 months, if you ask for it.
It doesn’t cost anything to dispute mistakes or outdated items on your credit report
No one can legally remove accurate and timely negative information from a credit report.
A yearly fee, typically associated with a credit card or revolving credit plan.
The amount of money outstanding in an account.
Cash charged against a credit card. Since the advance is really a loan, interest is charged from the
date of the advance.
Loans or credit card debt written off as uncollectible from the borrower. The debt, however, remains valid and subject to collection.
Collateral or security:
An asset pledged to ensure payment of debt.
A person who signs a loan agreement along with the borrower and assumes equal responsibility for repayment on extending credit. The three major credit reporting agencies are Equifax, Experian and TransUnion.
Key Financial Terms
Annual Percentage Rate (APR):
The cost of your credit expressed as a yearly rate. APR is generally not the same
as the contract interest rate.
A financial plan to manage the spending and saving of money.
A card that charges no interest, but that requires you to pay your bill in full each month.
A loan in which money is borrowed in one lump sum for a specified period of time.
Interest computed on the balance of a loan, in which the balance includes all unpaid interest.
A promise to pay at a later date for goods or services
A plastic card issued by a bank authorizing payment for purchases. Interest is charged on the outstanding
A record of someone’s credit history,
including debt repayments, late payments and any bankruptcies that is compiled by a credit reporting agency.
A person or business from whom you borrow, or to whom you owe, money
Money owed to another party
Failure to repay a loan or otherwise meet the
terms of a loan agreement.
A company that compiles credit histories
on prospective borrowers and provides credit reports to
lenders. Lenders use these reports when making decisions
The maximum amount of money that may
be charged on a credit card account.
Professional counseling provided by
organizations who help consumers find ways to repay their
debts - through careful budgeting and management of
Credit line (Or personal line of credit):
The maximum loan amount a consumer can borrow against in an account. As a credit line is partially or fully repaid, the consumer can borrow against the account again.
refers to the risk that a borrower will default on any
type of debt by failing to make obligated payments.
A plastic card issued by a bank and used for
making purchases. The purchase amount is deducted directly from one’s checking account.
A strategy sometimes used by consumers to
better manage their debt problems. Rather
than paying off several separate bills each month, a consumer
consolidates his or her debts with a financial institution that will
arrange for one lower monthly payment extending over a period of
Failure to make payments on time.
Individual or family earnings not
allocated for necessities such as food and shelter.
Equal Credit Opportunity Act:
A federal law prohibiting
lenders from discriminating against applicants for credit.
The market value of a person’s home or real estate, less the value of all existing liens.
Fair Credit Reporting Act:
A federal law giving consumers
the right to learn what information credit reporting
agencies have on file about them, and to dispute any
inaccurate data in the file.
Employment credit checks are legal under federal law
Employers are required to provide the credit report used and a written summary of the consumers rights
Nearly half of all employers use Credit Checks to determine employment eligibility
Poor and/or declining credit is associated with households experiencing job loss, lack of health coverage and/or having medical debt
Credit Discrimination and Employment
Employers are required to notify individuals before taking action
Credit Discrimination is negatively impacting many communities of color with securing employment.
The Fair Credit Reporting Act (FCRA) allows employers to request credit checks for applicants and existing employees-with written permission
Employers must give job applications a short time to dispute the errors-employers can still take adverse action but should wait until the grace period
Positions that require credit checks can range from office staff, home health aids, delivery workers, or local fast food restaurants.
Extended unemployment increases the percent of individuals with lower credit scores (below 620)
Often credit reports have negative reports as a result of medical bills, loss of a spouse, foreclosure
Credit Discrimination and Employment Chart
Credit Discrimination and Employment
65% of white low to middle income people have good/excellent credit
44% of African-Americans have good/excellent credit
Over half of all African-Americans have bad credit who are low to middle income
Working-age indebted families more likely to be unemployed then non-indebted families (at least 2 months)
About 39% of indebted families had at least 1 member who didn’t have health insurance
Non-indebted households are more likely to be homeowners then indebted households
Families that have less assets to cover emergencies have more credit card debt
Some families who have no credit must turn to predatory lending products such as payday loans, car title loans, etc
14% of people living in America had or have debt in collections-Average of $1500-Source-CFPB.gov
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