Section 1

The Basics of Credit - Marissa Gutierrez

CREDIT

The ability to borrow $$ in return for a promise of future payment


• aka “Buy Now…Pay Later”


Forms of credit can be Loans or Credit Cards.

Creditworthiness

• To get credit, you must demonstrate your creditworthiness

-Your reliability to pay back a loan


• Lenders judge this using 3 factors…


-Character

• Dependability

• Steady job

• Residence (long term)

-Capacity

• Financial ability to repay loan

• High enough income

• Major expenses & debt

-Capital

• Value of what you own

• Savings, investments,

property

How To Get Credit...

  • Establishing credit

now will allow you to

use credit easily in the

future.


• Begin when you turn 18.

• Start Small

-Store Credit Card

-Easier to get approved

-Co-Signer

-Promises to pay debts

-Preferred Cards DO NOT COUNT

CREDIT BUREAU

Has a record of every adult.

Bounced a check?

Missed a rent payment?

Been sued?

Bankruptcy?

BAD CREDIT

Funny car commercial. Scary finance manager negotiating used car finance with bad credit people.

SECTION 2 Vocab You Should Know...

CREDIT - The ability to borrow $$ in return for a promise of future payment.

CREDITWORTHINESS - Your reliability to pay back a loan.

CREDIT RATING - Score between 300 & 850 (The higher, the better)

CAPITAL - Value of what you own.

CAPACITY - Financial ability to repay loan.

CHARACTER - Sense of financial responsibility.

SECTION 3: CREDIT CARDS

CREDIT CARD

Common cards: VISA, MasterCard, Discover, AMEX

• Incentives: cash back, points, airline miles

• Regular charge accounts

-Must pay balance in full

- Ex. American Express

• Revolving charge accounts

-Can carry balance from month to month

- Ex. Visa, Mastercard

COSTS

• Annual Fee

-Required annual $ amount you must pay

- $15 - $100


• Interest (APR)

- 0% to 29%

- Pay entire balance by due date = no interest


• Credit Limits

- Max amount you can spend using card

- Over limit = penalty fee or declined

- Approx $30 for each charge made beyond limit

FEES

Over-the-limit

- Going over credit limit


• Late Fee

- Making payment late


• Penalty Fees

- Additional fee due to late payment, over credit limit, returned payment, etc.

- Could also result in an increase in interest rate

Positive

• Credit allows consumers

to purchase more goods

• More goods = more

people to make goods =

more jobs

• People w/jobs are able to

spend more money

• Use credit to purchase

even more goods

Negative

People overuse credit

• Fall into heavy debt

• Can no longer purchase

goods – must pay debt

• Decrease demand for

goods = decrease need

for jobs

• No job = less spending

• Less spending = lower

demand for goods = job

cuts

WORDS TO KNOW...

● Annual Fees - fee associated with having a credit card is a separate fee from interest rate on purchases.

● Credit Limit - maximum amount of credit that a financial institution.

● Interest Rate (APR) - he percentage of a sum of money charged for its use.

● Penalty Fees - Fees charged if you violate the terms of your cardholder agreement or other requirements related to your account.

● Over-the-limit fee - For each month that their balance exceeds their loan limit, borrowers are charged this type of fee.

Section 4: Smart Consumers: Don’t Fall Into the Credit Card Trap!!!

Bad Credit

  • 580 to 619
    Not too bad, but not great either. Scores in this range are leaning toward bad, but you can still find lenders that will work with you. However, the interest rates you get won't make you happy.

  • 500 to 579
    FICO scores in this range are "bad" credit scores. You'll have few options for credit, and if you do find them, they'll cost you in terms of interest rates, upfront fees, and arbitrary payment schedules.

  • 300 to 499
    Bad credit score. Very bad. Scores in this range mean that you haven't managed your credit responsibly, you've been very, very unlucky, or a combination of both. You have some work to do, and it'll take a while before things get any better.