chapter 6 of intro to personal finance

A loan is usually repaid in equal payments over a set period of time.

Credit cards allow repeated    use of credit as long as regular monthly    payments are made.

Your personal financial success depends on your ability to make the sacrifices necessary to spend    less than you earn   . This means that you should use credit wisely, use credit only when necessary, try to obtain credit with low    interest rates, make payments on time, and try to repay debts as quickly as possible.

Good uses of Credit:

• for convenience

• for emergencies

• to make reservations

• for major purchases

• to take advantage of “free credit”

• for protection against fraud

• to obtain an education

A major disadvantage of credit is that it can lead to overspending. This is often because credit cards make it easy to purchase items immediately that you would have had to save up for if you had not used credit. And once you are used to carrying debt, it may seem easier to keep buying on credit before you have paid off your existing debt.

Interest is the price you pay for using credit; it is the money that you pay to the lender for borrowing the lender’s money. When interest is stated in dollars, interest makes up part of the finance charge, which is the total dollar amount paid to use credit (including interest and other required charges or fees).

The finance charge can be stated either in dollars or as an annual percentage rate (APR). The APR expresses the cost of credit on a yearly basis as a percentage rate

To determine your personal debt limit, you may choose to use the continuous-debt method. To use the continuous-debt method, strive to keep your debt level low enough that you can get yourself completely out of debt (except for a mortgage loan) within four years.

A credit application is a form or interview that provides information to the lender about your ability and willingness to repay your debts. This information comes, in part, from your credit history, which is a continuing record of your credit usage and repayment of your debts.

After receiving your completed credit application, the lender conducts a credit investigation and compares the findings with the information from your application. Lenders want to know about your prior credit usage and repayment patterns, your income, the length of your employment, and your home-ownership status. The lender obtains your credit report from acredit bureau   , which is a firm that collects and maintains records of the credit histories of many borrowers. Lenders will also obtain your credit score, which is a statistical measure used to rate an applicant on various factors deemed relevant to your creditworthiness and the likelihood that you will repay your debt.

The approval or rejection of credit is based upon the lender’s judgment of the willingness and ability of the applicant to repay the debt. If the application is accepted, a contract is created that outlines the rules and terms governing the account. For credit cards, this contract is called a credit agreement. For loans, the contract is called a promissory note.

Lenders often offer lower interest rates to applicants with the highest credit scores. This practice is known as tiered pricing. If your credit score is too low, or if the lender considers your application to be too risky for any reason, the lender may decide to deny your application for credit. However, even people with low credit scores can usually find a lender that will approve credit, although usually at a higher interest rate.

Factors that affect your fico score

• Amounts owed, 30%

• length of credit history, 15%

• taking on more debt, 10%

• types of credit used, 10%

• payment history, 35%

Making late payments usually has a negative impact on your overall credit score because it demonstrates to potential creditors that you are unlikely to make regular repayments on any new credit extended to you.

Chapter 13 bankruptcy

• This plan is designed for individuals with regular incomes who might be able to pay off some or all of their debts

• This plan involves submitting a debt repayment plan in order to pay off your debt in three to five years.

• Under this plan, the court issues an automatic stay preventing collection efforts and wage garnishment.

• Under this plan, the debtor must follow a strict budget; if the debtor makes all scheduled payments, then the debtor is discharged of any remaining amounts due.

Chapter 7 bankruptcy

• This plan provides for immediate liquidation of your assets, which are usually turned over to a bankruptcy trustee or returned to the lender (for assets used as collateral).

• This option is permitted when it would be highly unlikely that you could make substantial repayment of your debts.

• Before you can file for this form of bankruptcy, you must pass a “means test” to ensure that your income is not too high.

Regardless of the type of bankruptcy, you should view declaring bankruptcy as a last resort. Bankruptcy remains on your credit report for ten years. People who have declared bankruptcy often face years of trouble renting housing, obtaining home loans, and getting credit cards. Discharged debtors often emerge from bankruptcy with greater net worth but a very low credit score.