Post on 16-Dec-2015
Chapter 6
Assessing, Managing, and Securing Your
Credit
Copyright © 2012 Pearson Canada Inc.Edited by Laura Lamb, Thompson Rivers
University6-1
Chapter Objectives
• Provide a background on credit
• Describe the role of credit bureaus
• Explain the key characteristics of credit cards
• Explain how to manage debt
• Provide a background on identity theft
• Describe identity theft tactics, explain how to avoid it, and how to deal with it.
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Background on Credit
What is Credit?
funds provided by a creditor to a borrower that the borrower will repay with interest or fees in the future
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Background on Credit
• Types of Credit
• Instalment Loan: a loan provided for specific purchases, with interest charged on the amount borrowed
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Background on Credit (cont’d)
• Revolving Open-End Credit: credit provided up to a specified maximum amount based on income, debt level, and credit history; interest is charged each month on the outstanding balance
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Background on Credit (cont’d)
What are the advantages of using Credit?
What are the disadvantages of using Credit?
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Background on Credit (cont’d)
• Credit History
• Represents your history with credit instruments such as credit cards, retail credit cards, lines of credit, and personal loans and leases
• A favourable credit history is established by paying bills in a timely manner
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Background on Credit (cont’d)
• What is Credit Insurance?
• Why might you want it?
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Credit Bureaus
• Credit Bureaus: reports provided by credit bureaus that document a person’s credit payment history
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Credit Bureaus (cont’d)
• What information is on a credit report?
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Credit Bureaus (cont’d)• What is a credit score?• A rating that indicates a person’s creditworthiness
• Creditors rely on this score to help determine whether or not to extend a loan
• Can affect the interest rate quoted on the loan you request
What factors affect your credit score?
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Credit Bureaus (cont’d)
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Credit Bureaus (cont’d)
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Credit Bureaus (cont’d)• Interpreting Credit Scores
• Range from 300 to 900, with 600 or higher being considered a good score
• Each financial institution sets its own criteria to determine whether to extend credit
• Acceptable credit score may vary with the type of credit
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Credit Bureaus (cont’d)
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Credit Bureaus (cont’d)
• Why might you want to review your credit report?
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Credit Cards
The easiest way to establish credit is to get a credit card.
Why?
1.Establish a good credit history
2.Create credit capacity
3.Eliminate the need for carrying cash
4.Provide a method for payment when cash is not an option
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Credit Cards (cont’d)
5. Earn additional benefits
6. Receive free financing until the due date on your credit card statement
7. Keep track of your spending by providing you with a consolidated list of the purchases you made
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Credit Cards (cont’d)
• Types of Credit Cards• MasterCard, Visa, and American Express are the
most popular
• Credit card company receives a percentage of the payments made to merchants
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Credit Cards (cont’d)
• Prestige Credit Cards• Prestige Cards: credit cards, such as gold cards
or platinum cards, issued by a financial institution to individuals who have an exceptional credit standing
• Provide extra benefits• Travel insurance, insurance on rental cars, special
warranties on purchases
• Usually charge an annual fee
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Credit Cards (cont’d)
• Specialized Credit Cards• Retail (or proprietary) Credit Card: a credit card
that is honored only by a specific retail establishment
• Interest rate charged is normally higher than that charged on standard or prestige cards
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Credit Cards (cont’d)
Characteristics of credit cards:
• Credit Limit• Specifies the maximum amount of credit
allowed
• Overdraft Protection option
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Credit Cards (cont’d)
• Annual Fee• Incentives to Use the Card (e.g., points)• Grace Period• period between time of purchase and when
payment is due (usually about 20 days)
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Credit Cards (cont’d)
• Cash Advances/Convenience Cheques• Usually charge high interest plus a transaction
fee at the time of the transaction (i.e. no grace period)
• Extremely costly source of financing and should be used only as a last resort
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Credit Cards (cont’d)
• Financing
• Paying only a portion of the credit card bill monthly
• 20 and 30% interest
• Finance Charge: the interest and fees you must pay as a result of using credit
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Credit Cards (cont’d)
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Credit Cards (cont’d)
• Comparing Credit Cards• Factors to consider:
• Acceptance by Merchants
• Annual Fee
• Interest Rate
• Watch for “teaser rates”
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Credit Cards (cont’d)
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Debt Management (cont’d)
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Debt Management (cont’d)
• Review personal financial statements• Personal balance sheet
• Personal cash flow statement
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Debt Management(cont’d)
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• Consumer Proposal• Consumer proposal: an offer made by a
debtor to his or her creditors to modify his or her payments
• Creditors have up to 45 days to object
• Proposal can be made in cases where individual debt is less than $250 000, not including your home mortgage
• Removed from your credit bureau report once the consumer proposal terms have been met
Debt Management(cont’d)
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• Bankruptcy• Individuals can file for bankruptcy when they
become insolvent• Insolvent: a person who owes at least $1000 and is
unable to pay his or her debts as they come due
• Property is given to a trustee in bankruptcy• Trustee in bankruptcy: a person licensed to
administer consumer proposals and bankruptcies and manage assets held in trust
Debt Management(cont’d)
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• Unsecured creditors will not be able to take legal steps to recover their debts from you
• Trustee in bankruptcy will sell your assets and distribute the money obtained to your creditors on a pro rata basis
• Certain assets are exempt from bankruptcy
• Spouse or common-law partner is not affected by your personal bankruptcy
• Bankruptcy is a last option
Debt Management(cont’d)
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• Avoid Credit Repair Services• You can often fix any credit mistakes yourself,
without paying for the services of a credit repair agency
Identity Theft:A Threat to Your Credit
• Identity theft: occurs when an individual uses personal, identifying information unique to you (e.g., your Social Insurance Number) without your permission for their personal gain
• Goal may be to acquire money or goods or to establish a new identity for criminal purposes
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Identity Theft:A Threat to Your Credit (cont’d)
• The Scope of Identity Theft• Go to
www.phonebusters.com/english/statistics.html
What is the Cost of Identity Theft?
• Difficult to measure
• Average individual loss due to identity theft is $1868
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Identity Theft Tactics
• Shoulder surfing
• Dumpster diving
• Skimming
• Pretexting, Phishing, and Pharming
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Protecting Against Identity Theft• Only give personal information over the phone,
through email, or over the internet if you have initiated contact
• Keep the amount of identification that you carry with you to a minimum
• Invest in a paper shredder
• Do not give out your SIN and do not carry it with you
• Change your passwords regularlyCopyright © 2012 Pearson Canada Inc. 6-38
Protecting Against Identity Theft (cont’d)
• Look for a closed-lock or unbroken-key icon in your web browser before entering sensitive data
• Clear the cache of you browser after visiting secure sites
• Be familiar with the encryption level of your web browser
• Install and maintain a firewall
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Protecting Against Identity Theft (cont’d)
• Be suspicious of e-mails that request personal information
• Be cautious about downloading files and installing programs from the internet
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Responses to Identity Theft• Take immediate action
• Take steps to undo the damage
• Document the steps you take to re-establish credit
• Cancel and obtain new credit cards
• Have the identity theft noted on your credit report
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Responses to Identity Theft (cont’d)
• Obtain new ABM cards
• Advise the passport office if your passport has been stolen
• Advise Canada Post if you feel that your mail may be being diverted
• Advise you telephone, cable, and utility providers about the identity theft
• Obtain a new driver’s license
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Responses to Identity Theft (cont’d)
• Request that a fraud alert be placed in your file• Will enable the credit bureau to contact you if
there is any attempt to establish credit in your name
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