Chapter 9

Report
Chapter 9
Obtaining and Protecting
Your Credit
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All rights reserved
Learning Objectives
• Explain the concept of consumer credit,
including major types and its benefits and
drawbacks
• Describe the keys to building and
maintaining healthy credit
• Identify ways to protect your identity
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The Basics of Credit for Consumers
• You will almost certainly need or want to
use credit at some point in your life
• Used properly, credit can make it possible to
purchase things that might be difficult to
save the entire amount for
• Used unwisely, credit can wreak havoc in
your financial life
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Types of Credit
• It is essential to know
about:
– the major types of
credit
– the advantages and
disadvantages of each
– the laws that protect
your right to get credit
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• Credit for consumers
fall into one of three
categories:
– Noninstallment
– Installment
– Revolving open-end
credit
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Types of Credit
• noninstallment is
credit that is
extended for a short
term, such as 30
days or less
• The consumer borrows the money at
the time of purchase
• Then the consumer pays off the entire
amount within a short time
• Noninstallment credit is typically
issued by:
– department stores
– furniture stores
– other businesses selling items that cost
several hundred dollars
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Types of Credit
• Noninstallment credit encourages immediate
purchases of specific items
• This type of credit may be useful to a person
who is expecting to receive money soon enough
to repay the amount borrowed
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Types of Credit
• Installment credit is
also used for specific
purchases but allows the
borrower more time to
repay the money
• Principal is the total
amount of money
outstanding on the loan
• Installment loans typically
require the borrower to make
monthly payments
• Part of each payment goes to
reduce the principal
• Monthly payments also include
interest charges
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Types of Credit
• Installment loans may span a few years
• These type of loans are generally used for
purchases such as furniture, boats, and other large
items
• Note that using installment credit does make the
purchase of these items more costly
• Take a look at Figure 9.1 to see how much interest
you might pay over the life of a typical loan
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Figure 9.1
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Types of Credit
• Revolving open-end
credit allows
consumers to borrow
up to some preset
maximum amount,
such as $1,000 or
$10,000
• Credit limit the
preset maximum
amount you can
borrow
• Consumers can use revolving credit
to make one purchase or many
• They can repay the entire amount
borrowed at the end of the month
• They can also spread payments
over a longer time
• They can continue to use the credit
as long as they do not exceed their
credit limit
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Math for Personal Finance
• Barbara borrowed $2,300 to buy some
furniture and is paying 15 percent interest a
year for the loan. The terms of the loan do
not require her to pay off any of the loan
balance during the first year. She only has to
make interest payments.
• How much interest will she pay the first year
if she does no reduce the principal of the
loan?
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Math for Personal Finance
• Solution: Barbara will pay $2300 x .15 =
$345 in interest the first year
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Advantages of Using Credit
• Credit history is the
record of how one
has used credit in the
past
• Credit helps you make large
purchases sooner
• Using credit simplifies your
finances by eliminating the need to
carry cash or checks
• Using credit wisely can help you
establish a good credit history
• A good credit history can make it
less expensive for you to use credit
in the future
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Math for Personal Finance
• Harlan used his credit card—a form of shortterm credit—to charge three tanks of gas this
month.
• If his charges were $43.12, $51.87, and
$38.35, how much should he pay at he end of
the month?
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Math for Personal Finance
• Harlan should pay the bill in full: $43.12 +
$51.87 + $38.35 = $133.34
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Disadvantages of Using Credit
• It is often easier to get credit than it is to pay it
back
• If you borrow too much money, you may have
difficulty making the payments
• A bad history can make borrowing more
costly—or impossible
• Failure to pay off loans can lead to bankruptcy
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Disadvantages of Using Credit
• Credit cards can tempt us to purchase things
today when it would be wiser to save and pay
for in full
• Credit card interest rates are usually very high
• It is wise to use credit cards for purchases you
plan to pay off when the bill comes in
• Check out www.chase.com for a payment
calculator where you can plug in different
balances and interest rates
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Math for Personal Finance
• Sabrina charges $800 at the local sporting
goods store to buy some exercise equipment.
The store offers no interest for 90 days if the
balance is paid in full, or 24 percent annually
if the balance is not paid in full prior to 90
days.
• How much interest will she need to pay if
she lets the account go for 91 days before
paying the bill?
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Math for Personal Finance
• Solution: She will pay 2 percent--.02 a
month, since the annual rate is 24 percent. At
91 days, she will owe for three months-3 x
.02. Therefore, her interest will be $800 x .06
= $48
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Credit Rights and Consumer Credit
Laws
• Equal Credit
Opportunity Act
prohibits creditors—
people who provide
credit—from denying
credit based on
gender, age, race,
national origin,
religion, and martial
status
• Federal law helps protect your
access to credit
• This legislation requires creditors
to notify applicants within 30
days if they will receive credit
• They explain the reason for
denial if credit is denied
• Refer to figure 9.2 for other
consumer credit laws
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Figure 9.2
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Check Your Financial IQ
• What are the risks and benefits of consumer
credit?
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Check Your Financial IQ
• Credit is convenient and can make certain
purchases possible. But credit is costly and
can lead to financial problems if used
unwisely
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Building Good Credit
• We all want to establish good credit
• Having no credit history at all may result in paying
more for credit
• Lenders often charge higher interest rates for
people with less-than-good credit
• Know the process by which you build good credit
and how that information is collected and reported
to creditors
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Your Credit History
• Each person’s credit history is collected in an
individual credit report
• How many times have you borrowed
money? Did you pay it back on time?
• Lenders use this information every time you
apply for credit
• Every time you make a credit purchase, it
will further establish your credit history,
good or bad.
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Your Credit History
• Paying for utilities, such as electricity and
phone, also shows up on your credit history
• Failing to pay your utility bills will
negatively affect your credit history
• It can also affect your ability to get credit in
the future
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Credit Bureaus and Credit Scoring
• Credit bureaus collect
credit information on
individual consumers
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• There are three main credit
bureaus:
– Equifax
– Experian
– TransUnion
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Credit Bureaus and Credit Scoring
• Credit report shows
every time you have
applied for credit,
whether or not you have
paid your bills on time,
if you have paid your
credit cards in full every
month or carried a
balance, and if you have
paid late fees
• Credit bureaus provide credit
reports to potential lenders,
employers, and others upon
request
• Everyone can access his or her
credit report once every 12
months free of charge
• You will see the types of
records being maintained by
these credit bureaus regarding
your personal credit history
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Credit Reports
• Fair Credit
Reporting Act
limits the sharing of
your financial
information only to
firms that have a
legal purpose to
evaluate this
information
• When you apply for credit, the
potential creditor will study your
report and make decisions about
extending additional credit
• Review your credit report now and
make sure it contains accurate
information
• Companies can make mistakes that
can hurt your financial life
• Look at 9.3 for a sample credit
report
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Figure 9.3
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Credit Score
• Credit score a
number based on your
credit history that
assesses your
creditworthiness
• Credit bureaus use your credit
history to create a credit score
• Individuals with higher credit
scores get better interest rates on
loans
• They are determined to have a
lower risk of defaulting
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Credit Score
• Credit scores are
calculated based on a
model created by Fair
Isaac Corporation
(FICO)
• Credit scores are often called
FICO scores
• FICO scores will be between
300 and 850
• A higher score indicates
better credit
• Look at figure 9.4 to see
where most people’s credit
scores fall
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Figure 9.4
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Credit Score
• FICO scores are broken down the following
way:
– 35 percent based on your credit history
– 30 percent based on how much of your available
credit you are using
– The rest based on other information contained in
your credit report (See figure 9.5)
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Figure 9.5
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Check Your Financial IQ
• What are the elements of “good credit”?
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Check Your Financial IQ
• Good credit means having a credit history
that is generally free of credit problems, such
as unpaid or late bills
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Threats to Your Credit: Identity Theft
• Identity theft
occurs when
someone uses your
personal
information
without your
permission for
personal gain
• Identity theft can occur without you
even knowing it
• Someone may use your personal
information to open a credit account
and make a large purchase
• This account will be reported to the
credit bureau under your name
• When they don’t pay the bill your
credit score will suffer
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Threats to Your Credit: Identity Theft
• Some criminals use your personal
information to establish totally new identities
and engage in criminal activity
• People who have had their credit destroyed
can no longer borrow money for anything
• Identity theft is illegal but is difficult to
detect
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Identity Theft Tactics
• Shoulder surfing
occurs when someone
in a public place
skims personal
information to use
against you by
overhearing your
conversation or
viewing your personal
information
• Identity thieves use a variety of
tactics
• Be cautious when someone
seems to be standing too close
to you when you’re using a
computer, using a credit card,
etc
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Identity Theft Tactics
• Identity thieves have been known to go
through a person’s trash to gather
information
• Credit card receipts, banking information, or
unsolicited offers for credit cards can enable
someone to profit from your identity
• Shred documents such as these prior to
disposing of them
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Identity Theft Tactics
• Other tactics include:
– Skimming involves copying your credit card or debit
card numbers from your cards
– Pretexting occurs when someone improperly accesses
your personal information by posing as someone who
needs data for one reason or another
– Phishing is when pretexting occurs online and can
include emailing you and asking you to verify account
information
– Pharming uses email viruses to redirect you from a
legitimate website to an official looking website
designed to obtain your personal information
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Protecting against and Reacting to
Identity Theft
• Preventing the theft of your identity is well
worth the simple investment
• The purchase of identity theft insurance may
also be worth considering
• Refer to figure 9.6 for some methods you
should employ to prevent identity theft.
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Figure 9.6
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Protecting against and Reacting to
Identity Theft
• Act quickly if you detect a sign of identity
theft
• Monitor your credit report and protect
yourself from identity theft
• It is critical to your long-term financial
health
• Figure 9.7 provides helpful resources that
you can use to prevent and respond to
identity theft
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Figure 9.7
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Monitor Your Credit Report
• Check your credit report periodically
• Report inaccurate information to the three
main credit reporting bureaus
• File a dispute related to the inaccurate
information
• The credit bureaus will contact the creditor
to verify the accuracy of information and
change it if inaccurate
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Check Your Financial IQ
• What is identity theft?
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Check Your Financial IQ
• It is the improper use of personal information
for gain
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Summary
• Credit is the ability to borrow funds that will
be repaid in the future
• It comes in a number of different forms such
as:
– Noninstallment
– Installment
– Revolving open-end credit
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Summary
• Credit has advantages and disadvantages
• An advantage to credit is that it helps make
large purchases easier
• A disadvantage is that credit can be costly
• Building good credit history is important to
your financial future
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Summary
• Credit bureaus maintain a complete history
of your credit transactions
• They determine your credit score and report
this information to interested parties
• You can obtain a free credit report from any
one of the three credit bureaus to ensure that
the report is accurate
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Summary
• Identity theft is one of the fastest growing
crimes in our country
• It is important to protect yourself against
identity theft
• Act quickly if you suspect identity theft
• Keep copies of all correspondence and credit
transactions
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Key Terms and Vocabulary
•
•
•
•
•
•
•
•
•
•
•
Credit
Credit bureau
Credit history
Credit limit
Credit report
Credit score
Creditor
Equal Credit Opportunity Act
Fair Credit Reporting Act
Fair Isaac Corporation
Identity theft
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•
•
•
•
•
•
•
•
•
•
Installment credit
Interest
Noninstallment credit
Pharming
Phishing
Pretexting
Principal
Revolving open-end credit
Shoulder surfing
Skimming
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Websites
• www.chase.com
• www.myfico.com
• www.myfico.com/CreditEducation/Improve
YourScore.aspx
• www.annualcreditreport.com
• www.ftc.gov
• www.privacyrights.org
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