Giving Credit Module Overview

Giving Credit

Introduction

Our credit identity represents our financial character. John D. Rockefeller once said: "The most important thing for a young man is to establish a credit... a reputation, character." Our credit identity represents our financial character. It affects our ability to buy a home or a car, our ability to get insurance, and even our ability to get some jobs. Because our credit identity is so important, we need to understand how it is created, how to maintain it, and how it can change. In this module, we will learn how to create our credit identity successfully. Also, we will learn how our credit report and our credit score provide a picture of our financial character to those who wish to see it. Finally, we will discover steps we need to take as our credit starts moving in the wrong direction.

Essential Questions

  • Who should receive credit?
  • Which credit product does a consumer need?
  • What is a good credit score and why is it important?
  • What laws must banks follow in issuing credit and how do they protect the consumer?
  • What happens when credit doesn't get repaid?

 

Key Terms

collateral: A legal hold or claim on a property as security for a debt

consumer reporting agency: an organization that creates and tracks consumer credit reports and calculates and reports credit scores. Three national agencies are TransUnion, Equifax, and Experian

Equal Credit Opportunity Act: This is a law established by the Federal Government that requires lenders to equally offer credit to all borrowers only based on their income and credit eligibility, regardless of race, religion, gender, or marital status.

Fair Credit Reporting Act: Gives consumers the right to see their credit records and correct any mistakes

Fair Debt Collection Act: Regulates the conduct of debt collectors - any person who regularly collects debts owed to others

FICO score: A numerical rating developed and maintained by Fair Issac and Company that is an indicator of a borrower\'s creditworthiness based on a number of criteria, and is the basis upon which many lenders will decide to loan money.

grace period: the length of time before interest is charged on the purchases. Most companies offer 20-25 day grace periods. People who carry a balance on their credit cards have no grace period.

installment loan: a loan repaid with interest in equal periodic payments

open-ended loan: a line of credit that allows you to borrow money when you need it and leaves you with available funds when you don't

secured loan: A loan containing a provision that, upon default, certain pledged property may be claimed by the lender as payment of a debt

subprime rate: Subprime interest rates are the rate at which a subprime lender charges for a loan. Subprime loans are usually targeted toward people who could not get credit otherwise.

Truth-in-Lending Act: A federal act assuring that every individual who has a need for consumer credit is given full disclosure of the terms and cost of the credit

underwriting: The name used to describe the process of analyzing and structuring a proposed loan. Good underwriting is the most important aspect of secured lending

unsecured loan: A loan made without requiring collateral to back it.

Beacon Score: A credit score that is computed from an Equifax credit report, based on scoring models developed by Equifax and Fair, Isaac and Company, Inc.

mortgage: A lien against the property, which is registered on title, that is granted to secure an obligation such as a debt

adjustable-rate mortgage: A type of home mortgage with interest rates that vary- increasing or decreasing over time in accordance to changes in market interest rates

fixed-rate mortgage: A mortgage with an interest rate that stays the same (fixed) over the life of the mortgage. Monthly payments for a fixed-rate mortgage are very stable and will not change.

equity: the difference between the market value of a property and the claims held against it

foreclosure: the proceeding, by a creditor, to regain property or other collateral following a default on mortgage payments

loan-to-value: Your loan amount as a percentage of the value of the property you are financing.

points: Points, sometimes also called a "discount point", are a form of pre-paid interest. One point equals one percent of the loan amount. By charging a borrower points, a lender effectively increases the yield on the loan above the amount of the stated interest rate.

spread: the difference in borrowing and lending rates of financial institutions (such as banks) in nominal terms

commercial lending: offering loans backed by hard collateral such as real estate

debt ratio: Measure used by lenders to gauge the ability of a borrower to repay a mortgage. The measure takes two forms. The housing debt-to-income ratio reflects how much of a borrower's income goes toward paying the mortgage. The total debt-to-income ratio expresses how much income goes toward making payments on all debts owed by a borrower. Generally, lenders prefer to approve borrowers with a housing-debt ratio of 28 percent or less and a total-debt ratio of 36 percent or less, although the growing use of automated underwriting provides greater latitude in these areas.

factoring: A process whereby one company takes over the responsibility of debt collection from another

simple interest: The basic flat rate interest that is charged on the principal balance of a loan.

compound interest: Compound interest means that each time interest is paid, it is added to or compounded into the principal and thereafter also earns interest.

principal: the original amount of a debt on which interest is calculated

APR: The actual annualized interest charged when all associated costs are included. Associated costs may include interest, origination fees, federal default fees, application fees, repayment fees, and any prepaid finance charges

garnishment: legal action to collect a debt that allows a creditor to attach a debtor's wages and have an amount withheld to settle the debt.

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