Notes

Unit 4 Lesson 1
•The four different types of credit.
•How to get credit for the first time.
•How to determine creditworthiness by learning about the three C’s of credit.

Collateral - Savings accounts, insurance policies, bonds or other property that are promised to pay off a loan if payments are not made according to the contract. Also called security.
•Credit- A person or institution that provides credit by giving a person permission to borrow money.
•Credit Line or Credit Limit - The maximum amount of credit you are allowed to use.
•Open-End Credit - Credit you may use over and over again, such as credit cards.
•Closed-End Credit - Credit you use once, such as an installment loan to buy a car.
•Incidental Credit - Credit arrangements that involve no extra cost and no specific payment plans. Examples include doctors' and dentists' bills.

Types Of Credit

Public utilities credit
Electricity, water, gas and telephone companies usually allow consumers to pay for their services after they have used them. By allowing consumers to pay later, utility companies are granting credit even though there is no formal credit contract signed. Consumers may have to pay a deposit and may also be charged a penalty or late fee if the bill is not paid on time.

Incidental credit (Non-Installment Credit)
All of us have had a doctor or dentist send us a bill after we have already received treatment. Some small, local businesses may also have arrangements like this, such as a florist who gives you the bouquet of flowers and sends a bill to your home later. If credit arrangements involve no extra cost and no specific payment plans, it is called incidental credit.

Closed-end credit (Installment)
Mortgages, car loans, home equity loans, and installment loans for big purchases like appliances or furniture are examples of closed-end credit. Closed-end credit is used for a specific purpose and a specific amount of money is borrowed. Consumers sign a contract which lists the repayment terms including the total number of payments, amount of each payment, and how much the credit costs. The cost of credit varies with state and local laws, interest rates, availability and demand of credit, and the consumer's creditworthiness.

Open-end credit (Revolving)
Department store credit cards, bank credit cards (like Visa and MasterCard), charging a meal in a restaurant and using overdraft protection on your checking account are all examples of open-end credit. You do not apply for open-end credit for a single purchase. Instead, creditors give you a credit limit you may charge up to. You may have to pay interest if you do not pay the bill in full each month, and there may be other finance charges. Some creditors will give you 30 days to pay the bill in full and not receive any finance charges. This type of credit is called convenience credit.

1.Establish a steady work record. Staying at one job shows creditors that you will have a continual source of income with which to pay your loans.
2.Pay your bills on time.
3.Open a checking account and don't bounce any checks. This shows creditors you can manage your money.
4.Open a savings account and make regular deposits.
5.Apply for a local department store credit card or gasoline company credit card. They are usually easy to get. When you use it, pay the bill on time to prove you can manage money. Remember, it is your responsibility to know the terms of the credit. For example, the dates the payments are due and the amount of interest being charged to your account.
6.Apply for a small loan and use your savings account as collateral. Pay the loan back as agreed and you will be establishing a good credit history. Make sure the monthly payments for the loan are affordable in your budget.
7.Get a cosigner on a loan and pay back the loan as agreed. Ask your parents or relatives to cosign for your first loan to help you get started establishing a credit history. You will be using your parents' income and good repayment history to qualify for a loan. However, if you do NOT repay the loan, the cosigners are responsible for the debt.

THE THREE C'S
-Character
If I lend you money, will you repay it and pay it to me on time?"
Creditors look at:
•Have you ever had a loan before?
•Do you have any credit cards in your name?
•Does your credit report show that you pay your bills promptly?
•How long have you lived at your present address?
•How long have you been at your present job?

-Capital
If I lend you money, do you have any assets you can use as collateral so that if you don't repay the loan, I can get my money back?"
Creditors look at:
•Do you own your home?
•Do you have a checking and savings account?
•Do you have any other assets you can use as collateral?

-Capacity
Do you have a regular job that provides enough income to repay this loan I am about to give you?"
Creditors look at:
•How long have you been at your job?
•How much money do you make?
•Do you have any other sources of income?
•Do you have any other loan payments?
•Do you have any credit card debt?
•What other debts do you have?
•How many dependents do you support?
•Do you pay alimony or child support?
•Can you afford this loan?