Chapter 6 - consumer credit

Home equity loan

A loan based off of your home equity. Used on big purchases (ex. college). Missed payments = they may take ur home.

Credit rating

A measure of a person's ability and willingness to make credit payments on time.

What to do if credit is stolen?

Close the accounts immediately & call bank/credit card company ASAP. Stop payment of checks. If you tell company within two days of stolen credit, you can only legally be charged up to $50 for the damage. This ensures that you don't purposely allow a thief to take your card.

Excellent, good/average, poor/bad, and trash credit scores

720+, 620-719, 500-619, equal to or less than 500 (lowest is around 300).

Collateral

A form of security to help guarantee that the creditor will be repaid, ex. if you can't pay the loan, what kinds of property or savings do you have the you'd agree to give up if you can't repay.

Defective product

File dispute, tell your credit card company what happened and they'll fight the company you're against for you. Think of the gym membership story.

Who gives out credit?

Financial institution: credit cards; Retailers: Sears, L.L. Bean; Banks: loans, mortgages

Credit history

Lenders review whether you have used credit responsibly in the past ex. do you pay bills on time? have you ever filed for bankruptcy?

How to pay off credit cards

Pay them in full right away = good credit score and zero interest

Interest

Price that is paid for the use of another's money

Home equity

The difference between the value of your home and the amount you still owe on your mortgage

Net Income

The income you receive after taxes

Advantages of credit

1. Allows you to use goods now, pay later 2. Allows you to combine several purchases and pay one bill 3. Some purchases require credit card (renting cars, hotel room, online shopping) 4. Shopping and traveling w/o a lot of cash is safer 5. Building credit = other borrowers view you as a responsible person

Disadvantages of credit

1. Credit costs money 2. Temptation to buy more than you can afford 3. Misuse = bad credit history 4. Your income does not increase, don't be fooled

Equal Credit Opportunity Act

All credit applicants have the same basic rights. Lenders can't discriminate against age, race, nationality, gender, marital status, public assistance (welfare, social security). If you are denied, you have the right to know the reason why the lenders denied your loan application.

Importance of good credit

Allows you to buy things you would have to save for years to afford

Credit bureau

An agency that collects info on how promptly people/businesses pay their bills. This is where lenders get your credit history. Ej. Experian, Transunion, Equifax

Credit

An arrangement to receive cash, goods, or services now and pay for them later

State the 5Cs of Credit

Character, capacity, capital, collateral, and credit history

Capacity

CAN you repay the loan? Includes your current income, debts, and your income vs debts. Also includes what your job is, salary, and if you have any other sources of income.

Open-end credit

Credit as a loan with a certain limit on the amount of money you can borrow for a variety of goods and service. Can keep adding to that loan ej. Credit cards

Close-end credit

Credit as a one-time loan that you will pay back over a specified period of time in payments of equal amounts. Only get enough money to cover specific cost ej. Mortgage loan

The 30% rule

Experts suggest you pay no more than 30% of your net income on debt payments

How may people get into using your credit?

If they use your info (such as from an ID left somewhere or social security number) to sign up for a car from a dropped wallet.

Secured loan

Lower interest rate on your loan if you pledge collateral

The average cardholder had how many credit cards?

Over 9

How to handle billing errors?

Send written email or letter to creditor, not a telephone call. Include evidence you have and pay the portion of the bill not in question. Your creditor must acknowledge your letter within 30 days.

Borrower

Someone who does not pay off their credit card balance in full each month

Convenience user

Someone who pays off their credit card balance in full each month

How to pay off loans

The sooner you pay, the better = less interest you have to pay in the end

Consumer credit

The use of credit for personal use

Online Security

Use safe browser, keep records of online transactions, review your monthly statements online, read privacy and security polices of sites you use, keep personal info as private as possible, never share your password, and do not download files sent to you buy strangers

Character

WILL you repay the loan? May ask for personal reference or professional reference as well as how long you've had your job (ex. if you are starting a business or to make sure you have a stable job).

Capital

What your assets and net worth (aka what do you own ej land, car, boat . . .)?

When is credit appropriate to use?

When you are sure that you have, or will have, enough money to pay off credit in the near future

Cosigning a loan

Whoever cosigns is agreeing to be responsible for loan payments if the other person fails to make them. The lender would not need a cosigner if the person was considered a good risk. Cosigning may allow for better deal in terms of interest because there's a more insurance that the bank will get its money back from the credit.