Money in Motion 1/9/12 8:44 PM

CHAPTER 4
Credit Can Enhance Your Life

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When used wisely, credit can enhance your life. It can allow you to purchase things like a home, a car, and even finance a
college education. However, when you use credit unwisely, your financial life can become stressful and difficult.

Credit is a financial tool that can help you get what you want. Financial tools themselves are neither good nor bad; they are just
tools. How you use the tools available to you determines whether they will have a positive or negative affect on your life.

Credit comes in many forms: credit cards, charge cards, car loans, mortgage loans, home equity loans, personal loans,
consolidation loans, student loans, and more. When you use credit, it becomes a debt. Anytime you use credit, you are relying on
the fact that you will be able to pay the debt back in the future, regardless of what is happening in your life.

To purchase an item on credit means that to get the item now, you are willing to pay extra for it. This extra amount is
called interest. The amount of interest you pay will be determined by the rate of interest, how the interest is calculated, and
length of time interest is paid. You will also pay additional fees to use some loans and credit cards. The less interest and fewer
fees you pay, the more money you have for things you need and want.

Whenever you use credit, you should calculate the true cost of an item, which will include all fees and interest you pay. It is not
uncommon for people who make purchases using credit to spend two to three times more than if they were paying cash for the
purchase.

The most common types of credit include revolving credit, installment credit, and service credit.

Revolving credit allows you to borrow up to a specific dollar amount. The monthly payment may vary as your balance changes.
As you repay the credit, you will be able to borrow it again. Credit cards are revolving lines of credit.

Installment credit allows you to borrow a specific amount, for a specific period of time. The monthly payment usually remains
the same. When you have repaid the amount, the loan is closed. Car and mortgage loans are considered installment credit.

Service credit allows you to pay for a service at a later date. If you cannot make the payment in the agreed upon time, there is
a penalty. Utility companies offer this kind of credit.

Most types of loans can be categorized as secured or unsecured. Secured loans are backed by property that has value, also called
collateral. An example of a secured loan is a car loan, as the car is security or collateral for the loan. In other words, if you dont
make the loan payments, the lender can take back or repossess the car.

On the other hand, an unsecured loan does not have any property backing the loan. If you, for example, apply for a signature
loan at a bank or credit union, this would be considered an unsecured loan. Many credit cards are unsecured; however, not all
are. Some credit cards are known as secured credit cards. A secured credit card may be secured by your savings account or by
the merchandise you purchase. If you dont make the payment, the lender can and will take the item you pledged as security.
Before you sign any credit card agreement, make sure you read and understand all the fine print.

When you want to borrow money, lenders will look at a number of things before agreeing to grant credit to you. First, lenders
want to know if you have the financial ability to repay the loan. This is known as capacity. Second, lenders look for any property
you have to back the loanagain, this is called collateral. And third, lenders want to know if you will make your payments and
how you have handled other loans in the past. This is called character. Capacity, collateral, and character represent the three
Cs of credit.

To understand the role a lender plays in the credit-granting process, you might think about what you would want to know if
someone wanted to borrow money from you. You certainly would want to know that they have a job and that they have the
ability to pay you back. You would want to know how long they have been at their job and that they would make every effort to
pay you back. Knowing whether the potential borrower had repaid their other loans on time and in full would also be important to
you. Lenders are no different.

Lenders are in business to lend you moneythats their job. They have federal and state government regulations, as well as
company guidelines they have to follow. Some people think that lenders look for any reason not to give a loan, but this simply is
not true. Lenders want to make loans, though they want to make them to people who will repay the loan.

When you want to borrow money from a lender, you need to fill out the application completely and honestly. If you arent sure
how to answer a question on the application, call the lender and ask for help.

When you meet with a loan officer, be helpful and polite. Answer their questions to the best of your ability. Again, put yourself in
the position of the lenderif you were going to lend money to someone, you would expect to be treated politely, honestly, and
with respect.

If you are turned down for the loan, ask why. It doesnt do you any good to get upset with the loan officer. You may be turned

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down for any number of reasons. Ask the loan officer what actions you could take to qualify for the loan in the future. Just
because one lender turns you down for a loan, however, doesnt mean another lender will do the same. If you are turned down at
one financial institution, make an appointment to see a loan officer at another bank or credit union.

The way you handle loans made to you will determine whether you have good credit. What exactly does it mean to have good
credit? You can achieve good credit by making all of your payments, as agreed, in full monthly payments. If you want
good credit, you cannot skip payments or pay less than the full amount due. If you have made financial mistakes in the past, its
still possible to build good credit by committing to paying all of your bills on time and in full.

Credit cards are useful and often necessary for making hotel reservations, buying something online, and getting the best exchange
rate when traveling abroad. They offer the convenience of buying something now and paying for it later, and they give you the
security of being able to get a refund for damaged or defective products.

While useful in many ways, credit cards can be very costly to you if you opt to carry a balance from month to month, as the
chart on the following page demonstrates.

If you have a credit card with an interest rate of 18% and were allowed to make a minimum monthly payment of 2% on a
$2,000 balance, it will take you over 30 years to pay off the card. You will have paid $4,931.15 in interest in addition to the
original $2,000 you charged on the card, assuming that you never charge another dollar on the credit card. Most people dont
believe this could possibly be true, but the chart below details how paying the minimum monthly payment will keep you in debt
for 30 years.

The true cost of paying the minimum payment on a credit card

Month Payment at 2% Interest Paid Principal Paid Remaining Balance

1 $ 40.00 $ 30.00 $ 10.00 $ 1,990.00
2 $ 39.80 $ 29.85 $ 9.95 $ 1,980.05
3 $ 39.60 $ 29.70 $ 9.90 $ 1,970.15
4 $ 39.40 $ 29.55 $ 9.85 $ 1,960.30
5 $ 39.21 $ 29.40 $ 9.80 $ 1,950.50
6 $ 39.01 $ 29.26 $ 9.75 $ 1,940.75
7 $ 38.81 $ 29.11 $ 9.70 $ 1,931.04
8 $ 38.62 $ 28.97 $ 9.66 $ 1,921.39
9 $ 38.43 $ 28.82 $ 9.61 $ 1,911.78
10 $ 37.24 $ 28.68 $ 9.56 $ 1,902.22
11 $ 38.04 $ 28.53 $ 9.51 $ 1,892.71
12 $ 37.85 $ 28.39 $ 9.46 $ 1,883.25
13 $ 37.66 $ 28.25 $ 9.42 $ 1,873.83
14 $ 37.48 $ 28.11 $ 9.37 $ 1,864.46
15 $ 37.29 $ 27.97 $ 9.32 $ 1,855.14
16 $ 37.10 $ 27.83 $ 9.28 $ 1,845.86
17 $ 36.92 $ 27.69 $ 9.23 $ 1,836.63
18 $ 36.73 $ 27.55 $ 9.18 $ 1,827.45
19 $ 36.55 $ 27.41 $ 9.14 $ 1,818.31
20 $ 36.37 $ 27.27 $ 9.09 $ 1,809.22
21-359
360 $ 10.00 $ 1.47 $ 8.53 $ 89.42
361 $ 10.00 $ 1.34 $ 8.66 $ 80.77
362 $ 10.00 $ 1.21 $ 8.79 $ 71.98
363 $ 10.00 $ 1.08 $ 8.92 $ 63.06
364 $ 10.00 $ 0.95 $ 9.05 $ 54.00
365 $ 10.00 $ 0.81 $ 9.19 $ 44.81
366 $ 10.00 $ 0.67 $ 9.33 $ 35.49
367 $ 10.00 $ 0.53 $ 9.47 $ 26.02
368 $ 10.00 $ 0.39 $ 9.61 $ 16.41
369 $ 10.00 $ 0.25 $ 9.75 $ 6.65

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370 $ 6.75 $ 0.10 $ 6.65 $ -

With a balance of $2000, 18% annual interest and a minimum interest of 2%, it will take over 30 years and you will repay
$4931.15 in interest

Whenever possible, pay your bill in full. When that isnt possible, pay more than the minimum monthly payment. If you were to
pay $40 a month, every month, on the same balance of $2,000, (rather than reducing your payment as the balance declines),
you would reduce the number of months you pay on this debt from 370 to 94 months, and you would reduce the amount of
interest you pay from $4,931.15 to $1,724.47.

Various financial institutions issue credit cards. But no matter where you get your card, you should receive a monthly statement
detailing any activity on your credit card. While the format of this information may vary, all statements will show your previous
balance, any charges you have made, any fees assessed, the credit limit of your card, payments you have made, any amount
past due, the minimum monthly payment due, annual percentage rate on your card, your available credit, and the ending
balance.

The fees you pay will vary from card to card, so you should read the disclosures closely before signing any agreements. These
fees can include a combination of the following:

Interest the percentage of interest charged on your credit card each month.

Late fees the fee assessed if your payment arrives at the credit card company after the due date.

Overlimit Fees the monthly fee you will pay if you charge more than your pre-established credit limit. (To be charged
an overlimit fee, you must have agreed to allow the card issuer to complete over-limit transactions, thus charging you
overlimit fees.)

Cash Advance fees fees that apply if you use your credit card for cash advances.

Annual fees a fee you may be charged for the privilege of having the card.

Balance transfer fees fees you may incur by transferring the balance of one card to another card.

Program fees a special fee charged by the credit card company

Additional cardholder fees a fee that may apply if you order a credit card for another person, such as a spouse.

Fees on your credit card are not limited to those listed above, but these represent the most common ones you will encounter.

The fees on credit cards are constantly changing, so it is important that you read the disclosures your credit card company
periodically sends you. Your fees can be changed based on the agreement you have with the financial institution that issues the
credit card.
In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009, or the Credit CARD Act of
2009. This law, whose entire provisions went into effect in February 2010, was designed to protect consumers from deceptive
credit card practices. Under the CARD Act, issuer penalties are significantly higher. Some of the other changes include those
listed below:

Payment allocation and fees payment amounts in excess of the minimum payment must apply to the balance with the highest
rate first and then to the next highest rate. If your payment deadline falls on a day when card issuers are not open, such as
weekends or holidays, they can no longer charge you late fees, provided your payment is received on the next business day. If
the payment is received by 5:00pm on the due date, you can no longer be charged late fees. Only expedited payments could be
subject to payment processing fees.

Statements statements must be sent 21 days prior to the due date, and the due date must be the same day each month. The
statement must clearly state on what day a late fee can be assessed and the fee amount that the cardholder must pay. The
statement must also clearly state how long it will take to pay off the balance and the total interest a cardholder will pay if he or
she opts to make only the minimum monthly payment. Statements will also show options to pay off the balance in 36 months.
And standard contract terms will be posted on the internet.

Regulation of rate increases credit card companies are now required to notify card holders of any rate increases or other
significant change in their terms 45 days prior to those changes taking effect. The cardholder then has the ability to accept or
reject the new terms. If the cardholder rejects the terms, they must cancel the account. The cardholder is allowed to make
payments on the balance of the closed account in accordance with the original terms of the contract.

A ban on universal default clauses In the past, credit card issuers could raise interest rates on one card based on the payment
history of another unrelated account. For example, if you were past due on any of your accounts with any lender, and this was
reflected in your credit report, the credit card company could raise your interest rate. This was the case even if you were current
with that credit card company. This practice is no longer allowed. Rates can be raised in accordance with the contract terms if
your payment is more than sixty days late or you otherwise violate the terms of the contract. Your statement will include clear
notice of your new rate. The original rate can be reinstated after you correct the violation and pay on time for 6 consecutive
months.

There are new restrictions for individuals under 21 years old, making it harder for them to get a credit card. A minor can no
longer raise the limit on a joint credit card account.

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Under the CARD Act, there are also new restrictions on stored value cards and gift cards. There are exceptions for gift certificates,
promotional gift cards, and telephone cards, but in general, the following new rules will apply: Under the CARD Act, there are
also new restrictions on stored value cards and gift cards.

The issuer can no longer charge a fee if the card goes unused for the first twelve months.

After the twelve months have passed, one inactivity fee may be charged each month, provided the fees are clearly detailed on
the card and the purchaser was informed before buying the card.

The issuer can no longer sell a gift card with a specified expiration date.

However, after five years, the card can expire, provided that the terms of the expiration are clearly detailed.

When it comes to credit cards, most people dont intend to charge a lot of items on their credit cards, but life happens, and
before they know it, their balance is higher than they want it to be. They find that they cannot pay off the balance each month.
If you find yourself in this situation, the best thing to do is to calculate how much you owe on all your cards and begin paying
extra on them. Use the form that follows to take an inventory of all your cards and the balance you owe on each of them.

Creditor Inventory Form

Creditor Account Balance Monthly Interest

Name Address Number Owing Payment Rate
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
The average person does not need more than two credit cards, though people often open multiple accounts and fool themselves
by spreading the balances owed onto seven or eight cards. Youll find it is easier to keep track of your debt and get fewer
surprises if you have only a couple of cards.

Perhaps one reason that people end up with so many cards is that they get enticed by special teaser interest rates that many
credit card companies offer. These companies offer 0% interest for the first six months you have the card and offer to transfer

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your existing balance on another card at a low interest rate as well. Some people constantly change credit cards to take
advantage of teaser rates, but you only truly realize savings when you are certain that the new card offers better terms than the
one you are replacing. Some cards charge an additional fee for transferring the balance from one card to another.

If you receive an offer for a lower interest rate with a different credit card company, make a quick call to your existing company
before deciding to make a switch. If youve kept your account in good standing by paying your bills on time and in full, your
credit card company will usually agree to lower your interest rate to keep you as their customer. But if youve missed payments
in the past, dont expect them to adjust to a new, lower rate at your request. If you are in good standing and your company
does not agree to the lower interest rate (and the new card has no additional fees), you always have the option of switching to
the new card.

Whether you pay your creditors on time and in full can affect your ability to get credit in the future and influences your credit
scorea number that potential lenders use to decide whether to grant you credit and at what interest rate. The next chapter
explores how your credit score is determined and explains how this number influences the loan rates you will pay.

Chapter Review

Credit is a tool that helps you get what you want. It is important to manage your credit wisely.

Credit comes in many forms: credit cards, charge cards, car loans, mortgage loans, home equity loans, personal loans,
consolidation loans, student loans, and more. Credit is a loan that lets you buy something now and pay for it later.

The Credit Card Accountability Responsibility and Disclosure Act of 2009 was designed to protect consumers from
deceptive card practices.

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