Applying for Credit

Developing a Credit History

• Credit can have a major impact on a consumer’s life.

• If a consumer uses credit responsibly, it can make life easier in a number of ways

• How do you prove to others that you can handle credit responsibly?

  • First, develop a credit history.

    • Most people start by getting a credit card in their own name (if they are l8 years of age or older) or getting one with an adult family member.

Selecting a Credit Card

• There are several things to consider when choosing a credit card.

  • The five main factors to consider are the interest rate, extra fees, whether the interest rate will change, whether a cosigner is needed, and whether there is a grace period.

• To gauge the cost of credit, first look at the annual percentage rate.

  • The annual percentage rate (APR) determines the cost of credit on a yearly basis.

• It is important to note if the interest rate will change on a credit card

• Credit card companies charge different fees for different services.

• Some charge an annual fee.

• There is usually a fee for a cash advance.

  • A cash advance is a loan given in cash by a credit card company in anticipation of the borrower’s being able to repay

• A cosigner is someone who agrees to be responsible for a debt if the main applicant does not repay it.

• A grace period is an amount of time allowed to repay a debt without having to pay interest charges.

Applying for a Credit Card

• To secure a credit card, a consumer has to fill out an application form and submit it to the credit card company.

• Before creditors give a consumer a charge or credit account, they want to make sure the consumer is worth the risk.

• They consider the applicant’s capacity, character, and capital, commonly referred to as the “three Cs of credit.”

  • Capacity is the applicant’s ability to repay the loan.

  • An applicant’s character shows whether he or she has proven to be trustworthy in repaying debts.

  • An applicant’s capital is the amount of money the applicant has beyond his or her debts.

• Creditors also consider capacity, character, and capital when determining the amount of a card holder’s credit limit.

  • A credit limit is the maximum amount a card holder can charge on a credit card.

• Credit card companies usually send card holders a monthly statement of their charges, the balance they owe, and the minimum amount due.

Maintaining Credit

Understanding Loans and Mortgages

• Many of the principles of owning and using a credit card also apply to other types of credit.

• A loan is money lent by one party to another at interest.

• Similarly, a mortgage is a loan agreement secured by property

• With installment loans and mortgages, the interest rate is the same for the period of the loan except when the loan has a variable rate.

  • A variable rate is an interest rate that fluctuates or changes over the life of the loan.

  • With a fixed rate, the interest rate always remains the same.

• When purchasing an appliance, automobile, or home with an installment or mortgage loan, the applicant usually has to make a down payment.

  • A down payment is a portion of the total cost that is paid when a product or service is purchased.

• The principal is the amount of borrowed money that is still owed and on which interest is based.

• According to the Truth in Lending Law, the lender must provide the borrower with the APR and all the finance charges of the loan.

  • The finance charge is the total amount it costs the borrower to have the lender finance the loan.

    • It includes the interest and any other charges, such as the application fee.

• When you receive an installment loan or mortgage, you must sign a written agreement to repay the loan within a certain period of time.

• If the loan is backed by collateral, it is called a secured loan.

• A loan that is not backed by collateral is called an unsecured loan.

Keeping a Healthy Credit Record

• To continue using credit or to get new credit, you need to maintain a good credit rating or score.

  • Consumers with low credit ratings are usually given higher interest rates and more restrictions

• You need to know the amount of credit you can afford to have.

  • Experts say consumers should not use more than 20 percent of their income for credit payments.

• Credit card companies can obtain a court order to take all or part of a debtor’s paycheck if he or she stops making payments.

  • This is called garnishment of wages.

• If an item was offered as collateral and you stopped making payments for it, the creditor has the legal right to repossess or take back the item.