Chapter 9: Credit Learning goals: Explain the benefits and drawbacks of different types of credit, how to maintain healthy credit, and protect your identity
Credit Defined • Credit – money that a lender makes available to a borrower with the understanding that the borrower will repay the money in the future • Better credit cheaper loans • Interest – the price one pays for borrowing the money
3 Types of Credit • Non-installment credit – extended for a short period of time • Typical for department stores & furniture stores • EX = “30 days same as cash” • Don’t pay interest on loan if paid within the time period
3 Types of Credit • Installment Credit • required the borrower to make monthly payments • used for big-ticket purchases like boats, cars, and houses • principal – total amount of money outstanding on the loan(not counting interest)
3 Types of Credit • Revolving open-end credit • Allows consumers to borrow up to a preset amount (credit limit) • Example: credit cards • Credit limit is based on income level, debt level, and credit record • No interest charged if full bill is paid at the end of the month; high interest rates on remaining balance
Math Skills EX 1: Interest Barbara borrowed $2,300 to buy furniture and is paying 15% interest a year for loan. The terms do not required her to pay off any of the principal during the first year, only the interest. How much interest will she pay the 1st year?
Advantages of Using Credit • Make larger purchases you currently don’t have cash for • Eliminates the need to carry cash (convenient and safer) • Establish good credit history (easier to get less expensive loans in the future) • Good credit histories are earned by consistently having loans & paying them off on time.
Disadvantages of Using Credit • Really easy to spend $ you don’t have (credit cards) • Failure to make payments bank can take house or car, can lead to bankruptcy • Bankruptcy – legal process in which the court takes over certain aspects of a person’s financial life, credit is ruined for 7 years • http://www.bankrate.com/calculators/managing-debt/minimum-payment-calculator.aspx?MSA=0460
Math Skills EX 2: Credit Cards Sabrina charged $800 at the local sporting goods store to buy some exercise equipment. The store offers no interest for 90 days if the balance is paid in full, or 24% interest annually of the balance is not paid in full prior to the 90 days. How much interest will she need to pay if she lets the account go for 91 days before paying the bill?
How to Wisely Use Credit Cards to your Advantage • Only make purchases on the card if you have that much money in your account • Pay your ENTIRE bill each month • you pay no interest! • Items costs the same price as paying cash • Builds credit • Installment loans are better for larger purchases(lower interest rates than credit cards)
Credit Rights and Consumer Credit Laws • Equal Credit Opportunity Act – prohibits creditors from denying credit based on gender, age, race, national origin, religion, or marital status • Fair Credit Reporting Act –procedure for fixing mistakes on credit report, limits who can view credit report • Fair Credit Billing Act – prompt credit payments, can withhold payments for defective good
Building Good Credit • Good credit, bad credit, “thin” credit (no or low credit history) • Acquiring loans or bills with reoccurring payments that you pay on time • Mortgage, car payments, phone bills, water and electric bills, credit card payments • late payments, canceling lines of credit, & pulling credit score too many times hurts credit score
Credit Bureaus, Scores, and Reports • Credit bureaus– keep track of your credit history • Equifax, Experian, TransUnion • Provide potential lenders and employers credit report on request • Credit report – shows every time you have applied for credit of any kind, if you paid on time and in full each month, bankruptcies, who has pulled your credit • Review credit report annually to check for mistakes
Sample Credit Report • View page 275 pf the textbook to see a sample credit report
Credit Scores • Model created by Fair Isaac Corporation • Credit scores are also called FICO scores • Range from 300-850(higher = better) • 700 and above is good
Identity Theft = Credit Threat • Identity Theft – someone uses your personal info without your permission for personal gain • Person buys something under your name -> doesn’t pay bill -> hurt credit • Illegal, hard to detect/prove, on the rise
Identity Theft Tactics • Shoulder surfing– someone listens to public conversation, looks over your shoulder, or goes through trash to skim personal info • Skimming– copying credit card # from cards (paying at a restaurant or card readers attached to gas pumps) • Pretexting– posing as someone (business or customer service) who needs data to help you
OnlineIdentity Theft Tactics • Phishing– online version of pretexting • Pharming –uses email virus to redirect you from a legit website to an official looking website that asks for personal info
Protecting against Identity Theft • SHRED anything with personal info • Name, address, SSN, usernames/pw, credit card numbers • Don’t carry your SSN on you, memorize it • Don’t verify info over phone or email unless you initiate contact • Monitor accounts and credit report regularly • Have mail held while on vacation • More ideas on pg 278 of textbook
Assignment: Due Tomorrow Heading: Ch 9 WDYK, Math Skills &Test Prep pg 280 - 285 • WDYK #1, 3b, 6b, 7a, 9a • Math skills #1-8 • Test Prep #1-11 (must write answer, not just letter, don’t write question) • 25 points!