Credit Card

Credit: Arrangement to receive cash and pay in the future

Consumer Credit: Use credit for personal use, except a home mortgage

Advantage of Credit

  • Current use of goods and services

  • Permits purchases when funds are low

  • Cushion for financial emergencies

  • Easier to return merchandise

  • Can take advantage of float/time grace period

  • Rebates, airline miles, or other bonuses

Disadvantage

  • Temptation to Overspend

  • Does not increase total purchasing power (interest)

  • Credit costs money

    • Only free if pay balance in full

Closed-End Credit

  • One-time only loan for a specific purpose and a specific period

    • Mortgage, automobile, and installment loans for furniture

Open-End Credit

  • Use a line of credit until max is met.

    • Credit card, department store cards, bank credit card

Co-Branding

  • Linking credit cards with businesses offering rebates on products and services.

Travel & Entertainment Cards

  • These are not credit cards

  • Monthly balance is due in full

  • Diners clubs or American Express cards

Debt Payment-To-Income Ratio

  • Monthly Debt Payments / Net Monthly Income

    • Goal is to be under 20% after tax income\

Co-Singing A Loan

  • Being asked to guarantee the debt, so consider if you can afford it if the borrower defaults

Credit Bureaus

  • Collect Information

  • Experian, Trans Union, & Equifax

  • Collect info from banks, finance, companies, merchants.

Fair Credit Report Act

  • Regualtes credit reports

  • Must correct inaccurate or incomplete information

Adverse Data

  • Can be reprted for 7 years; bankruptcy for 10 years

  • Unless for credit application of $75,000 or buying more than $150,000 of life insurance

What if you’re denied credit?

  • Check credit bureau for credit file

  • Ask creditors to clarify reasons for denial

    • Apply for another creditor

    • Take steps to improve your creditworthiness

The 5 C’s

  • Character - Do you pay bills on time?

  • Capacity - Can you repay the loan

  • Capital - What are your assets and net worth?

  • Collateral - What property do you have to pledge that the lender can repossess if you default on a loan?

  • Conditions - What are the economic conditions?

FICO (Credit Score)

  • Free with the Discover credit card

  • 579 or lower

    • Indicator of a very risky borrower

  • 580 - 669

    • Likely to get a loan

  • 670 - 739

    • Good

  • 740 - 799

    • Very dependable borrower

  • 800 + (850 max)

    • Exceptional borrower

How to Improve Credit Score

  • Copies of credit report-review for accuracy

  • Pay bills on time

  • Keep debt low

  • Longer credit history

  • More credit cards might hamper growth

FICO Score Improvement