What is credit
Credit is when a consumer uses money that they dont have in order to purchase a good or service
Types of Credit
- Unsecured Loans: giving a promise that you will successfully complete payments (Credit Cards, Student Loans, Personal loans (loans for personal needs like expenses and projects)
- Secured Loans: guaranteed payment by putting a lien on an asset (Car loans, mortgages)
The Two Sides to Credit
- Immediate access: don't need the money at the time of purchase, making credit good for emergencies and unexpected expenses
- Security: If a cash is lost, it is gone. If a card is gone, it can be cancelled and companies can fight to recover money lost if stolen
- Organization: Easier to keep record of than cash
- Convenience: Quick and easy transactions
- Rewards: Companies provide rewards depending on the specific card, like earning free flights or gift certificates
- Carelessness: consumers find it easier to spend money from a card than actually handing over cash, causing extra spending
- Fees: Credit cards may have annual fees, high interest rates, late fees, and cash advance fees
- Responsibility: maintaining a good credit score is important and with too many credit cards or inability to pay bills will result in lower scores and higher rates
- Debt: it becomes easier to get into debt because all credit is borrowed money, just with a promise of paying it back
- Fraud: may become a target for credit fraud
OBTAINING CREDIT AND CREDIT SCORES
You can get credit based on your Credit Worthiness (your reliability to pay back a loan) determined by 3 qualities:
The Three C's
Character: Sense of financial responsibility, dependability, and credit history
Capacity: Financial ability to repay a loan, income level, amount of debt
Capital: Value of what you own (savings, investments, property)
A Credit Bureau collects a consumer's credit information such as records of:
- Bounced checks
- Late payments
And compiles the information into a Credit Score, reflecting a consumers creditworthiness.
What is a Credit Score?
- Number between 300 and 850, higher numbers meaning a better score
- Tells lenders how likely you are to repay a loan
- Typically, those with a higher score receive better rates.
- Effects on the score include amount of late payments, amount of debt, credit history, amount of credit cards
Lenders will request a Credit Report from a Credit Bureau with credit history and credit score enclosed to determine a consumer's likelihood of paying back a loan.
WHY DOES IT MATTER?
A consumer's creditworthiness determines whether or not a lender, such as a credit card company or bank, will provide them with a loan. It also determines the APR (amount of interest on the total loan amount that a consumer will pay annually).
The higher the credit score, the better the credit worthiness, meaning better chance of receiving a loan or Credit Card (card allowing consumers to purchase on credit) with a low interest rate.
The time during which you are allowed to pay your credit card bill without having to pay interest.
A person who signs an agreement to pay off a loan for someone else if that person defaults
Something pledged as security for repayment of a loan, to be forfeited in the event of a default.
Credit cards are pieces of plastic that identify an account.
Two types of credit card accounts:
Regular Charge Accounts: Must pay the balance in full per billing period (ex: American Express)
Revolving Charge Accounts: Carry balance from month to month (ex: Visa)
Credit cards are accepted in many businesses including stores, restaurants, online, and by service providers
BENEFITS AND COSTS OF CREDIT CARDS
- Freedom: Ability to make purchases without having the money on hand
- Convenience: No need to look for ATM's or exact change
- Circulation: Allows consumers to purchase more goods, providing jobs and therefore money to purchase goods
- Overuse: Digging a debt hole
- Extreme debt: Unable to purchase goods because of outstanding debt.
- Convenience: Easy to spend beyond means
- High interest rates: paying back more than you originally charged
- Fees: Credit companies charge late and annual fees
CREDIT CARD VOCABULARY
Annual fee: Yearly fee to use the credit card account
Credit Limit: The maximum amount the cardholder is able to spend at a time on a card
Interest Rate (APR): Amount of interest on a total loan amount that will be charged annually
Penalty fee: A fee charged to cardholders who are late on their credit card bill
Over the limit fee: A fee charged to cardholders whose purchases exceed the credit limit
Do your research and find cards with the best rates, rewards, and the least fees.
Find a card that will benefit your lifestyle (ex: flight rewards cards).
Don't charge for daily purchases and don't go over what you know you can handle.
Make a budget:
Be aware of what you can afford to spend so you don't drown in debt.
Use cards for good reasons:
Don't use your card to buy the $400 designer handbag you know you can't afford. Use it for emergencies and unexpected expenses.