BALANCE Credit Matters Counseling Curriculum

Credit Matters
In today’s world, credit does indeed matter. In fact,
obtaining and using different types of credit instruments
is part of almost every American’s financial life. However,
because it is so easy to make expensive mistakes that
can follow you for a long time, it is a good idea to learn
how to borrow wisely from the beginning. This program
will cover the core concepts of credit usage, including:
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What is Credit?
Getting Started
Using Credit to Your Advantage
Delete Your Debt
Consumer Rights and Responsibilities

Chapter 1: What is Credit?
In the broadest sense, credit means having the use of
something before you pay for it. It adds flexibility to
planning and makes it possible to pay for expensive items
over a period of time. Credit comes in many different
forms and it is important to understand how each works
so you can obtain the right type for your needs.
Secured Credit
This is commonly used to purchase a large item such as
a home, car, or appliance. An asset (most often the item
purchased) called collateral secures the loan. If you do
not keep the monthly payment arrangement, the creditor
has the right to reclaim the collateral. There are two types
of secured credit:
• Secured/Closed-end. With a secured/closed-end
credit instrument, you put down an initial deposit, and
the item you purchase is taken as collateral for the
loan. The remaining balance is calculated into equal
installments that you repay over a specific period of
time. An example would be a car or boat loan.
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Secured/Open-end. Secured/open-end credit is
usually a type of revolving credit that is secured by
collateral that you put down to secure the loan. It can
be repaid in a single payment, equal payments, or
unequal payments. A home equity line of credit is an
example of secured, open-end credit.

Unsecured Credit
This is credit extended without collateral (security).
Because of the higher risk to lenders, unsecured credit
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generally carries a higher interest rate than secured credit.
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Unsecured/Closed-End. Sometimes referred to as
signature loans or personal loans, the repayment is
made in equal, monthly installments. An example is a
debt consolidation loan.

• Unsecured/Open-End. The lender sets a credit limit
and the borrower may use up to that amount. The
initial agreement states the terms of repayment and
the credit limit. Bills are issued monthly and the
minimum payment due is based on the balance and
terms. Credit cards are the most common form.
Credit Cards
There are several types of credit cards on the market:
• General-purpose credit cards can be used virtually
anywhere.
–  If you have both an excellent credit history and
a high income, you may be offered a “premium”
card (sometimes called Gold or Platinum), which
comes with a high credit limit and enhanced
customer service.

– Some credit cards offer points, rebates, or cashback rewards where the more you use them, the
more benefits you receive.

• Retail cards may only be used at a particular retail
establishment, such as a department store or gas
station.
• Small business cards offer special perks to business
owners and their employees.
• Student cards generally offer lower credit limits and
special benefits for students.
Charge cards
A charge card is similar to a credit card, but you have to
pay the entire balance in full each month. The credit limit
is often very high or even unlimited. Charge cards usually
come with higher annual fees than credit cards because
no interest is charged. If you cannot make a full payment,
a high rate of interest is assessed and late fees are
charged. Collection action can be swift and severe.
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Debit Cards
It is important to not confuse debit cards and credit
cards. Because the money is deducted from your
checking account right away when you use a debit card,
it is not a type of credit.
Chapter 2: Getting Started
What You Should Look For
Before you apply for credit, make sure you know what the
terms of borrowing are, especially the following:
• Annual percentage rate (APR) – The APR is the
annual rate of interest charged on the outstanding
balance. The lower it is, the lower the cost of
borrowing. The APR can either be fixed, meaning
it never changes, or variable, meaning it fluctuates
according to an index. For credit cards, a variable
rate is common, as is charging a different rate for
different types of transactions. (For example, the APR
for cash advances is usually higher than the APR for
purchases.) For mortgages and other large loans, a
fixed rate is usually preferable because the payment
is set. You may be able to get a lower rate initially
with an adjustable-rate loan, but if the interest rate
rises, the payment does too.
Keep in mind that the rate advertised in the application or
marketing materials is the rate that is given to borrowers
with the strongest credit history. After the creditor
processes your application and checks your credit score,
you may be given a higher rate. If you are not satisfied,
you do not have to take the credit.
• Grace period – For credit cards, a grace period is
the number of days, usually 21 to 30, before interest
is assessed on new purchases. (It is only given if you
paid off your balance in full the previous month. Also,
there is usually no grace period for cash advances.)
If your credit is good, you should have no problem
finding a card with a grace period.
• Annual fee – Unless you want special features, if you
have good credit, you should be able to find a credit
card that does not charge an annual fee. If you have
no or a poor credit history, you may be out of luck.
However, once you build a positive credit history,
request that the fee be reduced or eliminated, or shop
for a card that doesn’t charge one.
• Late fee – Virtually every credit issuer charges a late
fee. You should always make your payments on time,
but it does not hurt to look for an account with a low
late fee just in case.
• Application or activation fee – For secured loans,
you may have to pay an application fee (which should
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be refunded if you are denied). However, if you have
good credit, you should not have to pay one when
applying for a credit card. Neither should you have to
pay a fee to activate the card.
• Miscellaneous fees – Some credit card issuers
charge for a variety of other activities, such as for
not carrying a balance or carrying a balance under a
certain sum. The better your credit history is, the less
you have to accept such expensive terms.
What Creditors Look For
To get a credit card or other type of credit, you must fill
out and submit an application. You may receive a “preapproved” offer in the mail, but it is just a marketing
device – you still have to apply.
While specific approval guidelines vary from lender to
lender, many base them on the “Five C’s of credit”:
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Character – Character refers to how responsible you
are with repaying your debts. Most creditors judge
this by looking at your credit report and/or score. Your
credit report tracks your credit activity: what accounts
you have, how much you owe, your payment history,
etc. Your credit score is a numeric summary of the
information in your credit report and is formulated
to predict the likelihood you will not repay what you
borrowed. The two most important factors in your
credit score are your payment history and level of
debt (the higher the balance, the lower your score,
especially if the balance is close to your credit limit).

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Capacity – Capacity refers to the ability to repay
what you borrow. Few lenders would approve you
for a loan with a $1,700 monthly payment when you
are bringing in $1,800 a month. Creditors also usually
consider what your current debt obligations are. If
a creditor feels you do not have the capacity to pay
back the amount you want to borrow, they may deny
you or approve you for a lesser amount.

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Capital – Capital refers to the assets that you have.
Basically, the creditor wants to know if you have
savings or other assets that you can use to make
your payments if you lose your job or experience
something else unexpected.

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Collateral – When you are applying for secured credit
and the collateral is an item, not cash, the lender
will likely be concerned with what the condition of
the collateral is. For example, most lenders require
an appraisal when you apply for a mortgage. A
crumbling house near a toxic dump that appraises
for $25,000 is not very good collateral for a $200,000
loan.
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Conditions – Conditions are situations that could
affect your ability to make payments. Often these
situations are beyond your control. For example, a
creditor may be less likely to lend to people if the
economy is weak and many companies are shutting
down.

New to Credit
If you are new to credit (or trying to reestablish a positive
credit history), you may find it difficult to get approved
for a regular credit card or loan. However, you still have
options. A secured credit card is usually the easiest type
of credit to get. As mentioned previously, it requires you
to make a cash deposit that the creditor can keep if you
do not make your payments. (You will get the deposit
back otherwise.) The credit limit is often low, and the fees
can be high, but you may be able to convert it to a regular
credit card after a year or two of on-time payments. Make
sure that the creditor reports your account to the credit
bureaus – if they don’t, you won’t be establishing a credit
history. The approval standards are often not that strict
on retail cards either. Another option is to have someone
with a good credit score cosign an account for you. This
requires a great deal of trust on the part of the cosigner –
if you fail to pay, he or she can be held responsible for the
full balance.
Chapter 3: Use Credit to Your Advantage
Credit use is not without its pitfalls. Interest rates and fees
can dramatically increase the cost of a purchase made
on credit, and generous credit lines make overspending
easy. However, when used correctly, credit can be an
excellent tool, and it’s the only way to build a positive
credit history – which will help you get what you want in
the future at the lowest cost.
Wise Use – and Misuse
There are many appropriate uses for credit cards.
Because of the protections provided and fact that
the money is not immediately deducted from your
checking account, it is a good payment option for online purchases, airline tickets, car rentals, hotel rooms,
and other products and services that require advance
payment. Furthermore, it makes it easier to track your
spending since you receive detailed account statements.
With some cards, you can even accumulate points for
such goodies as airline tickets, cash back rewards, and
discounted merchandise. Best of all, if your card has a
grace period and you pay off your balance in full each
month, you get all of these benefits without having to pay
any interest.
Many people get into trouble when they see their credit
line as “extra cash.” It is not a bonus for vacations or
money for emergencies (that is what savings is for). Most
importantly, it is not additional income to get you through
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a shortfall until the next month. Using it that way may
help temporarily, but it will make the next month more
stressful when the same cash flow problems arise – but
with more debt to pay.
It is best to use close-ended credit for something that
will provide a long-term benefit. For example, taking out
a mortgage to buy a home provides your family with a
place to live and can also be an investment because most
homes increase in value over time. However, even if it will
provide a benefit, it is important to make sure that you
can comfortably afford the monthly payment before you
borrow. Don’t just rely on the lender’s approval amount –
take a look at your budget to see how much money you
have available to make payments. Remember, once you
sign the loan papers, you are legally obligated to pay the
loan back under the set terms.
Tips
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 nly charge the amount you can afford to repay when
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the bill comes due.

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 now your due dates, and always pay on time. Late
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payments can be reflected on your credit report and
lower your score.

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If you have debt now, repay it as quickly as possible.

• Avoid expensive, high-penalty loans that that can
work against you.
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 eep your charge receipts in an envelope with a
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running total on the outside. If the total exceeds
an amount you consider appropriate, curtail your
spending.

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 void shopping in stores where you know you will be
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tempted to spend more than you can afford to repay.

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 ave monthly for such periodic and emergency
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expenses as vehicle maintenance, medical bills,
holiday gifts, and vacations. That way, you won’t
need to use credit to cover these expenses, or, if you
do charge them, you can pay the balance in full when
the bill arrives.

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 imit the number of open credit card accounts you
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have. It’s much easier to keep track of your total
outstanding debt with just a couple of accounts.

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If you are having a hard time using credit
responsibility, it may be best to not have any active
accounts until you can make changes, even if it hurts
your credit score.


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Credit To Avoid
Not all credit is created equal. There are some loans on
the market today that are especially costly for consumers
and should be avoided:
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Payday loans – This is a way to borrow from your
future income. You write a check to the lender for the
amount you wish to borrow plus a fee. The check
is typically held until your next payday, at which
time you can either redeem the check by paying the
face amount or allow the check to be cashed. If you
can’t afford to cover the check, you may roll it over
for another term by writing another check, which
will result in another set of fees being added to the
balance. With an average annual interest rate of more
than 400 percent, payday loans are no bargain.

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 ar title loans – Car title loans are promoted as
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small emergency loans but because the interest rate
is often in the triple digits, repayment can be difficult
and expensive. You don’t need good credit or often
even a job to receive a car title loan – just sign over
your title as collateral and hand in an extra set of
keys. The typical repayment period is one month.
Though most loans are for $1000 or less, the finance
charges quickly rack up, and it is possible to lose
your vehicle if you can’t meet the payments.

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 awn shop loans – You take a consumer good,
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such as an electronic device or jewelry, to the pawn
shop and are given a short-term loan in exchange for
leaving the item there as collateral. If you pay back
the loan, including interest, on time, you get the item
back. However, if you fail to repay or renew the loan,
your item can be sold. The APR for pawn shop loans
are typically around 120-300 percent, much higher
than the rate charged on credit cards. Many pawn
shops also charge additional fees for insurance and
storage.

Chapter 4: Delete Your Debt
If you currently owe money on credit cards and/or
personal loans, it is a good idea to develop a plan to
repay them as quickly as possible. Finance charges make
holding onto balances extremely expensive. There are
several methods you may be able to use to delete your
debt efficiently.
Pay Extra
Are you just making the minimum required payments
now? Minimum payments are often set very low, and you
may be able shave years off your debt repayment time
just by paying extra. If you have multiple accounts, it is
better to be systematic and focus your extra payments
on one creditor at a time instead of sending a little extra
to all of your creditors. (Of course, you should continue to
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make minimum payments to everyone.) Many people like
to start with the debt with the lowest balance because
it will be paid off the soonest, providing gratification
that makes it easier to keep going. However, you will
save the most money by starting with the debt with the
highest interest rate. Once the first debt is paid off, put
that money toward the debt with next lowest balance
or highest interest rate and so and so on until all of the
debts are paid off.
If you feel that you currently don’t have any spare cash
lying around, take a close look at your budget. Are there
any expenses that can be cut or reduced, like dining out
or cable? Do you receive periodic sources of income,
such as a tax refund or bonus, that you can direct toward
your debt even if you can’t afford to pay extra on a
regular basis?
Balance Transfer
As the name implies, a balance transfer is the transfer of
the balance from one credit card (or another type of debt)
to another. This could be a good option if you are able
to get a card with a lower APR than what you have now.
The lower your interest rate, the more of your payment
that goes toward principal and the sooner you will be
debt free. However, before you do a balance transfer, be
aware that most creditors charge a balance transfer fee. If
the interest rate on the new card is only slightly lower, the
savings may be negligible.
It is better for your credit score to keep old accounts
open when you do a balance transfer. However, make
sure to use them responsibly. If you charge them up and
cannot pay off the balances in full each month, you could
wind up with more debt than before.
Home Equity
If you are a homeowner and have equity in your home
(owe less on your mortgage(s) than the home’s value),
you may be able to use some of that equity to pay off
your unsecured debt. Not only is the interest rate on a
mortgage usually lower than for unsecured debt, but, in
most cases, the interest paid is tax-deductible as well.
Besides selling, there are two basic ways you can take
the equity out of your house:
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 ash-out refinance – With a cash-out refinance,
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you take out a new mortgage for an amount greater
than the balance on your existing mortgage and get
back the difference in cash. For example, you owe
$240,000 on your mortgage and refinance with a
$260,000 mortgage – you receive $20,000, which you
could use to pay off your debt. Keep in mind that you
typically need to have good credit to refinance, and
there is a limit as to how much equity you can take
out. (Doing a traditional refinance is another option.
You won’t receive any cash to pay off debts, but if
you can lower your mortgage payment, you will have
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more money to send to your other creditors each
month.)
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Second mortgage – A second mortgage is a loan or
line of credit that is taken out against your home in
addition to the first (or primary) mortgage. If you take
out a home equity loan, you receive a lump sum at
closing. If you opt for the home equity line of credit,
you can withdraw from it repeatedly over a set period
of time. Like with refinancing, you usually need to
have good credit to be approved, and there is a limit
as to how much you can borrow.

Think carefully before you decide to refinance or take out
a second mortgage to pay off debt. Both options come
with fees that can cancel out your potential savings.
Furthermore, if you are spending more than you make,
tapping out the equity in your home to pay off consumer
debt is a short-term solution that can put your home in
jeopardy of foreclosure. Many people get into trouble by
using their home equity to pay off unsecured debts, then
running up the credit cards again. That pattern leads to
a very difficult situation: no home equity, high debt, and
the inability to make payments on both secured and
unsecured financial commitments.
Debt Consolidation Loan
Another possibility you may have is consolidating some or
all of your debt into a new loan. Many financial institutions
offer unsecured loans specifically for debt consolidation.
The advantage is that you have one convenient payment,
and if your credit standing is good, you may be able to
get an interest rate that is less than what you currently
have. However, if it isn’t, be prepared to pay more.
Like with a balance transfer, cash-out refinance, or
second mortgage, if your expenses exceed your
income and you need credit to close the gap, a debt
consolidation loan is just a short-term solution that may
not benefit you in the long run.
Debt Management Plan (DMP)
DMPs are administered by credit counseling agencies.
You make one payment to them, and they distribute
the money to your creditors. For people with multiple
accounts, being able to make one payment can be
a relief. Furthermore, many creditors reduce or even
eliminate interest rates and fees for borrowers on a DMP,
so less money goes toward finance charges and more
goes toward the principal. Because you are required
to suspend further use of your credit lines when on the
plan, there is not the risk of getting further into debt like
there is when taking out a loan. In order to participate in
a DMP, you must first complete an hour-long session with
a counselor, who will examine your financial situation and
see if it is an affordable and beneficial option.
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Chapter 5: Consumer Rights and Responsibilities
When you use credit, you enter into a contract – the
financial institution lends you money with specific terms,
and you agree to repay it under those terms. Therefore,
as a borrower, you have both rights and responsibilities.
Federal Law
The Consumer Financial Protection Bureau (CFPB)
enforces these rules. Any violation should be reported to
the CFPB at www.consumerfinance.gov/complaint or by
calling 855-411-2372.
Truth in Lending Act (TILA)
The TILA requires credit issuers to disclose the following:
• The finance costs in dollars, annual interest rate, and
any late or penalty fees that may be imposed.
• Written itemization of the amount borrowed and
the total amount of the loan, including interest and
fees, and the number, amount, and due dates of all
payments necessary to repay the loan.
Fair Credit Billing Act (FCBA)
The FCBA offers the following protections under the law:
• Liability for lost or stolen credit cards is limited to $50
if you notify the card issuer within 30 days.
• If you purchase a defective item or substandard
service by credit card, the payment can be withheld
if the seller refuses to replace, repair or otherwise
correct the problem.
• If there has been an error in a credit card bill the
lender must correct it, or explain why the amount is
believed correct, within 90 days after being notified.
Fair Debt Collections Practices Act
The FDCPA regulates collection agencies’ conduct, and
specifically prohibits such action as:
• Calling before 8am or after 9pm, or at any
inconvenient time.
• Calling you at work if you have informed the
collector that the calls are jeopardizing your job.
• Discussing your debt with a third party other than
your spouse without your permission, except to leave
a message that he is trying to contact you.
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Using profanity.

• Misrepresenting himself. For example, he cannot say
he is an attorney if he is not.
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• Collectors cannot make false threats. If a collector
says he is going to take a specific action against you
to enforce the debt, he has to do it.
Credit Card Accountability Responsibility and
Disclosure (Credit CARD) Act
The Credit CARD Act was designed to protect credit
cardholders and give them certain rights, including:
• Your interest rate cannot be increased during the first
12 months of opening a credit card unless you are
more than 60 days late with a payment.
• An interest rate increase can only apply to new
charges, not the pre-existing balance. (This rule does
not apply if you are past due more than 60 days.)
• If your interest rate was raised due to making a
payment late, the card issuer must reinstate the lower
interest rate if you make on-time payments for six
months.
• You cannot be charged an over-the-limit fee unless
you authorize your credit card company to process
over-the-limit transactions.
• If your due date falls on a weekend or holiday, your
payment is considered on time if it is made on the
next business day.
Debt and lawsuits
A creditor or collector cannot take any wages, money,
or property without first suing you in court, winning,
and then obtaining a judgment. Also, be aware that in
most instances you cannot go to jail for non-payment of
unsecured debt, even if you have lost a lawsuit.
State Law
You may also have additional rights under state law.
Check with your state’s Office of the Attorney General
for more information. To locate your Attorney General,
contact the National Association of Attorneys General at
www.naag.org.

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