Unit Three—Credit ���Types of Credit ���

Standard 4.4.2 & 4.2.3���

Financial Literacy

Riverton High School Mrs. Morrey

Objective Explore and discuss the pros and cons of basic types of credit such as secured vs. unsecured credit,

installment loans, revolving credit, student loans and predatory

lenders.

Your Credit Responsibilities •  Borrow ONLY what you can afford to repay •  Read and understand all aspects of the credit

contract •  Pay all debt PROMPTLY

–  You will avoid interest charges ONLY if you pay the balance IN FULL before the grace period is over

•  Notify the creditor if you CANNOT meet payments

•  Never give your card number over the phone unless YOU initiated the call or are certain of the caller’s identity

How much can you afford?

•  Monthly credit payments (student loans, car loans, credit cards) should not exceed 10% of your monthly income—RENT and MORTGAGE are not counted as part of the 10%. – Monthly net income (after taxes) $1300

• $1300 x .10 = $130 – Your monthly credit payments should not exceed $130

a month

EXAMPLE

Lacy has a monthly net income of $1500. Her rent payment each month is $450 and she is paying off a student loan of $115 a month. Lacy would like to buy a new phone, what is the largest monthly payment can Lacy afford and keep within the safe debt load of 10%?

EXAMPLE Lacy’s Net Income: $1500 Lacy’s Rent: $450 Lacy’s Student Loan: $115 $1500 x .10 = $150 ß Lacy’s Safe Debt Load $150 - $115 = $35 ß Lacy can afford $35 dollars more a month in a loan/credit payments to stay within her 10% credit allowance

Can she afford to buy a new phone?

Your Credit Rights •  Truth in Lending Act

–  Ensures consumers are fully informed about cost and conditions of the loan

•  Fair Credit Reporting Act –  Protects the privacy and accuracy of information

on a credit check •  Equal Opportunity Act

–  Prohibits discrimination in giving credit on the basis of sex, race, color, religion, national origin, marital status, age or receipt of public assistance

Your Credit Rights

•  Fair Credit Billing Act – Sets up a procedure for the quick correction

of mistakes that appear on consumer credit reports

•  Fair Debt Collection Practice Act – Prevents abuse by professional debt

collectors, and applies to everyone employed to collect debts owed to others.

Secured Credit vs.��� Unsecured Credit

SECURED CREDIT •  A secured credit uses money

you place in a bank account as collateral. Your credit line is based on your income, ability to pay and the amount of your cash collateral deposit. –  Customers with poor or no

credit history –  Auto Loan –  Mortgage

UNSECURED CREDIT •  Unsecured credit is most

often found in the form of credit cards. They are not secured by collateral—not tied to money in a savings account. –  If not paid, lender has the

right to seize the property or items purchased

Types of Credit

•  Single Payment Credit – Items and services are paid for in a single

payment, within a given period of time, after the purchase. Interest is generally NOT charged. • Phone Bill • Electric Bill • Cable Bill • Sewer Bill • Water Bill

Types of Credit

•  Installment or Closed-Ended Credit – Merchandise and services are paid for in two

or more regularly scheduled payments of a set amount. Interest is included! • Car Loan • Mortgage

Types of Credit •  Revolving or Open-Ended Credit

– Many items can be bought using revolving credit as long as the amount does NOT exceed the credit limit. Repayment is made at regular time intervals for any amount at or above the MINIMUM required payment. Interest is charged on the remaining balance. •  Credit Cards

–  VISA –  Discover –  Master Card

Types of Credit •  Student Loans

–  A student loan is designed to help students pay for university tuition, books, and living expenses. It may differ from other types of loans in that the interest rate may be substantially lower and the repayment schedule may be deferred while the student is still in school. •  Lower interest rates •  Rates are fixed—will not change over the course of the loan •  Payments can be deferred (not paid) while attending school •  Payment schedule is based off of income

Predatory Lending •  Predatory lending is any lending practice

that imposes unfair or abusive loan terms on a borrower. It is also any practice that convinces a borrower to accept unfair terms through deceptive, coercive, exploitative or unscrupulous actions for a loan that a borrower doesn't need, doesn't want or can't afford. – Undisclosed interest rates – Undisclosed fees

Examples of Predatory Lending •  Pay Day Loans

–  A relatively small amount of money lent at a high rate of interest on the agreement that it will be repaid when the borrower receives their next paycheck.

•  Check City •  Check Into Cash •  Speedy Cash

•  Title Loans –  A quick and convenient way for people who own their car or

motorcycle to get cash. Getting a title loan is simple, as long as you own your car or motorcycle and have its lien-free title, you can use it as collateral to get the cash you need

•  Title Max •  Loan Mart