Phase+3


 * PHASE 3: LIMIT CREDIT**

In our everyday life, we make purchases, whether it is big or small. We can pay them by either paying cash or by credit. What is Credit? **Credit** is an arrangement to receive cash, goods, or services now and to pay for them in the future. A **Creditor** is a person or firm to whom money is owed. An individual agrees to repay the creditor over a specific period of time. The use of credit for personal needs is called **Consumer Credit**. Using credit is necessary and sometime an advantage, but using credit for paying an item involves responsibility and risk. If you pay your bills on, there are advantages, but if you do not pay your bills on time, there are disadvantages.
 * Advantage: Buy now & pay later, Combination of several purchases in one payment, Record of your expenses, Show responisiblity
 * Disadvantage: Increases the amount of money you can spend now, Overspending, Bad credit reputation

There are two basic types of consumer credits: Closed-end credit and Open-end credit.
 * 1) **Closed-end credit.** You receive a one-time loan that you will pay back over a specific period of time and in payments of equal amounts. It is used for a specific purpose and involves a definite amount of money. Examples are mortgage, automobile loans, and installment loans. These loans usually have lower interest rates than open-end credit.
 * 2) **Open-end credit.** You borrow money for a variety of goods and services. **Line of credit** is the maximum amount of money you can borrow the creditor. Examples are credit cards (department store, Visa, MasterCard). You are billed periodically for atleast partial payment of the total amount you owe.

Many sources of consumer credit are available, including commercial banks and credit unions.
 * **Loans.** You borrow money with an agreement to repay it, along with interest, within a certain amount of time
 * Inexpensive Loans. No or low interest rates. Parents or other family members are sources, but this can complicate family relationships.
 * Medium-Priced Loans. Moderate interest rate. Sources are commercial banks, savings & loan associations, and credit unions.
 * Expensive Loans. High interest rate, but easiest to obtain. Finance companies are sources.
 * Home Equity Loans. Based on your home equity (current value of home - amount you still owe = home equity). Interest paid is tax-deductible, but missing one payment can cause you to lose your home. Only use it for major items, such as education and home improvement.
 * **Credit Cards.** Extends credit and delays payments. You do not pay **finance charge**, the total dollar amount you pay to use credit, if you pay your entire balance before the due date, **grace period**. Those who carry balance beyond the grace period have to pay finance charges. Interest or the finance charges must be paid and some cards have annual fees.
 * Debit Cards. Electronically subtracts money from your savings or checking account to pay for a good or service. Most commonly used at ATMs.
 * Travel & Entertainment Cards. Balance is due in full each month.

Cost of credit & can you afford it? Before obtaining any type of credit (loans & credit cards) check how much it will cost and if you will be able to afford it. If you can not pay off your credit cards and loans, you will be in debt. So, before obtaining any credit, make sure you can afford it. To calculate the cost of credit, you will calculate the simple interset.
 * Principal (amount you borrow) X Interest Rate X Amount of Time (in years) = Simple Interest
 * Avoid minimum monthly payment**. Minimum monthly payment** is the smallest amount you can pay and remain a borrower in good standing. The longer it take to pay off a bill, the more interest you pay.

A way to figure out whether you are going to be able to afford it or not, is by using the Debt Payments-to-Income Ratio. **Debt payment-to-income ratio** is the percentage of debt you have in relation to your net income (take-home pay)
 * Monthly Debt Payments / Monthly Net Income = Debt Payments-to-Income Ratio
 * Spend no more than 20% of your net income on debt payments (loans, credit cards)

When applying for credit, lenders will examine the five C's of credit Based on the five C's of credit, your credit application will be either accepted or rejected.
 * 1) **Character: Will you repay the loan?** Creditors want to know that you are trustworthy and stable. To know what kind of person you are they may ask questions, such as Have you used credit before? How long have you held your current job?
 * 2) **Capacity: Can you repay the loan?** Having large amounts of debt compare to your income, will probably reject your application.
 * 3) **Capital: What are your assets and net worth?** Your **capital** is the amount of your assets that exceed your liabilities (debts) you owe.
 * 4) **Collateral: What if you don't repay the loan?** Creditors look at what kinds of property or savings you already have because these can be offered as collateral (security that creditor will be repaid) to secure the loan.
 * 5) **Credit History: What is your credit history?** Lenders will review your credit history to see if you have used credit responsibly in the past. Credit rating is established based on your credit history and your application. **Credit rating** is a measure of a person's ability and willingness to make credit payments on time.

If a friend or relative asks you to co-sign a loan, think twice before signing it. **Co-signing** means that you agree to be responsible for the loan payments if the other party fails to make them. If you and the borrower do not pay the debt, you may have to pay the full amount of the debt as well as any late fees or collection costs. For being the co-signer, the creditor can collect the debt from you without first trying to collect it from the borrower. If the debt is not repaid, it will appear on your credit report.

Credit is good at times, but over using of credit and not paying it can cause you to be in debt. Being deeply in debt is called **indebtedness**. If the debtor suffers from great financial woes, they can declare bankruptcy**. Bankruptcy** is a legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his/her debts. Bankruptcy should be the last resort because it can sevearly damage your credit report. To avoid bankruptcy, use limited credit.

Using limited credit and responsibly will let you enjoy more. It will keep you out of major financial problems you could be in. So, do NOT borrow or use credit that is beyond your affordability.