Download Module 15 Credit Review

Discuss the factors on which credit is
granted and the cost of credit.
G42
Process of Obtaining Credit
1.
2.
3.
4.
5.
6.
Credit Application
Documentation
Processing
Underwriting
Closing
Funding
G43
Credit Application
• Form on which you provide information
needed by a lender to make a decision about
granting credit or approving a loan.
• Provide the following information:
– Salary, Employer, Outstanding Credit (Debt),
Assets, Credit References, Checking and Savings
Accounts, Stock Portfolio, etc.
G44
Documentation
• Creditor will collect and verify necessary
documentation for the extension of credit.
– Examples: Bank statements, credit card
statements, past W-2’s, etc.
G45
Processing
• Building of loan file.
• Evaluating credit worthiness.
G46
Credit Worthiness Terms (Processing)
The C’s of Credit Worthiness
• Capacity
– Your ability to pay (income)
•
Character
– Earned by paying bills on time and being a trustworthy,
reliable, stable person.
– References – people you have borrowed from in the past.
•
Collateral
– Security to help guarantee that the creditor will be repaid.
G47
Credit Worthiness Terms (Processing)
continued
•
Credit History
– Indicates the amount of debt you have and your payment
history.
•
Capital
– How much you have beyond what you owe.
•
Credit Limit
– Maximum amount you can borrow.
•
Cosigner
– Responsible for a loan if you, the original debtor, do not
pay.
G48
Underwriting
• Reviewing loan for soundness.
• Consumer Reporting Agencies
– Company that compiles and keeps records on
consumer payment habits.
– Used to evaluate creditworthiness.
• Examples: Equifax, Experian, and TransUnion.
G49
Closing
• Representative explains terms of credit.
• Debtor signs appropriate forms.
G50
Funding
• Creditor will issue credit/funds to the
debtor.
G51
Denial of Credit
• Fair Credit Opportunity Act requires that
credit denial cannot be based on sex,
family, religion, etc.
• Must be based on ability to pay back loan.
G52
Cost of Credit
• Interest Rates
– Percentage that is applied to debt.
• Principal
– Amount of money borrowed.
• Time Factor
– Length of time for which interest will be charged.
• Maturity Date
– Date on which a loan must be repaid.
G53
Cost of Credit continued
• Finance Charge or Fees
– Cost of credit stated in a dollar figure
• Annual Percentage Rate (APR)
– Indicates how much credit costs on a yearly basis.
• Grace Period
– Time period during which no finance charges will be
added to an account.
• Cash Advance
– Borrow money on a credit card.
G54
Simple Interest Formula
I=PRT
I=Interest
P=Principal
R=Rate
T=Time
G55