Debit & Credit

Page 1

  • Financial transactions recorded: Debit and Credit amounts

  • Presented amounts indicating various transaction details

Page 2

Debit vs. Credit

  • Debit: Direct access to funds in your bank account, used for purchases without borrowing.

  • Credit: Borrowing ability; use of money with a promise to repay later.

Page 3

Debit Card

  • Received when opening a checking account.

  • Linked directly to the checking account; funds withdrawn immediately.

  • Possible fees for out-of-network usage or overdrafts.

  • Advantages:

    • No annual fees.

    • Avoids debt accumulation.

    • Widely accepted, similar to credit cards.

  • Disadvantages:

    • Higher fraud risk; direct loss of funds.

    • No rewards or benefits.

Page 4

Credit Cards

  • Requires an application for a line of credit.

  • Allow borrowing up to a predetermined limit.

  • Monthly payment requirement, with interest on unpaid balances.

  • Interest rates known as Annual Percentage Rate (APR).

  • May offer rewards, points, or cash back incentives.

  • Responsible use can help build credit history, presenting lower risk to lenders.

Page 5

When to Use Debit

  • Ideal for everyday purchases.

  • Suitable when funds are guaranteed (already in account).

  • Preferable for cash withdrawals (e.g., ATM).

  • Use to avoid debts or online credit card fees.

Page 6

When to Use Credit

  • Suitable for larger purchases (both planned and unexpected).

  • Frequent for recurring expenses.

  • Useful for earning rewards or cashback.

  • Ideal for online transactions.

  • Beneficial for building credit history.

Page 7

Types of Credit

  • Revolving Credit: Continuous borrowing up to a set limit (e.g., credit cards).

    • Payments are made in full monthly.

    • Services already used (e.g., utility payments, cafeteria charges).

  • Installment Credit: A one-time loan paid back over a fixed term (e.g., car loans).

Page 8

Credit Scores

  • Defined as a prediction of credit behavior based on credit report information.

  • Influences decisions on:

    • Interest rates,

    • Lines of credit,

    • Loan amounts and worthiness,

    • Rent evaluations and insurability.

Page 9

Factors Affecting Credit Scores

  • Key components:

    • Payment history,

    • Total unpaid debts,

    • Credit history length,

    • Types of debts and loans,

    • Credit utilization ratio,

    • New credit inquiries,

    • Presence of foreclosures, debt collections, or bankruptcies.

Page 10

Reading a Credit Score

  • Scores range from 300 to 800, with higher being better.

  • Variations exist between different scoring models (e.g., FICO and VantageScore).

  • Scores are crucial for loans, insurance, and rental situations.

Page 11

VantageScore Ranges

  • Very Poor: 300-499

  • Poor: 500-600

  • Fair: 601-660

  • Good: 661-780

  • Excellent: 781-850

Page 12

FICO Score Breakdown

  • Components of the score:

    • Payment History: 35%

    • Amounts Owed: 30%

    • Length of Credit History: 15%

    • New Credit: 10%

    • Credit Mix: 10%

Page 13

FICO Score Ranges

  • Poor: 300-579

  • Fair: 580-669

  • Good: 670-739

  • Very Good: 740-799

  • Excellent: 800-850

Page 14

FICO Score Insights

  • Lower scores lead to higher interest rates and fewer loan options.

  • Higher scores yield better terms and eligibility for loans.

Page 15

Interest Cost Comparison Questions

  1. Difference in interest payment between scores of 660 vs 700.

  2. Difference in interest payment between scores of 640 vs 680.

  3. Difference in interest payment between scores of 620 vs 760.

Page 16

Practice Questions on Credit Scores

  1. Identify Susan's FICO range for a credit score of 778.

  2. Identify Jim's FICO range for a credit score of 689.

  3. Identify Patrick's FICO range for a credit score of 465.

  4. Determine loan types available to Susan and associated interest rates.

  5. Determine loan types available to Jim and associated interest rates.

  6. Determine loan types available to Patrick and associated interest rates.

Page 17

Accessing Your Credit Score

  • Legal entitlement to one free credit score check per year from each of the major reporting agencies at AnnualCreditReport.com.

  • Continuous credit monitoring available via credit card apps; informs changes and provides improvement advice.

Page 18

Improving Your Credit Score

  • Build credit wisely: Spend and pay off credit card balance immediately.

  • Make timely payments: Avoid missed payments.

  • Manage older debts: Pay them off.

  • Limit new accounts: Avoid excessive new credit applications.

Page 19

Consumer Protection Laws

  • Truth in Lending Act (TILA): Protects from inaccurate billing and practices.

    • Mandates uniform scoring methods; provides loan cost comparison transparency.

    • Offers a three-day period to reconsider and back out of loans without penalty.

Page 20

Consumer Protection Continued

  • Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act): Regulates credit card issuers.

    • Enhances TILA protections, limits fees (late and over-limit).

    • Restraints on APR increases for one-year post-issuance.

    • Sets age limit for independent credit accounts (21+).

    • Requires clear term disclosures.