fis200_week5_reading1ch7

You will learn about secured and unsecured credit

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stallment credit may be secured or unsecured. You will learn about secured and unsecured credit later in this chapter when I discuss collateral. How Creditors Evaluate You When You Apply for Credit When you apply for credit, creditors will use three basic criteria to help them determine whether or not you are creditworthy and what terms of credit they are willing to give you. Those criteria are: 1. Your character. Creditors will look at your credit his- tory and/or your credit score to determine how you have handled credit in the past. (Chapter 5 discusses credit reports and credit scores.) They will be particu- larly interested in knowing how much credit you al- 140
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Using Credit Responsibly ready have, how often you have been late with your account payments, whether any of your accounts have been sent to collections or written off, and whether you have filed for bankruptcy within the past 10 years. Frequent late payments, defaulting on an account, and filing for bankruptcy will be big strikes against you. Another big strike against you is being delinquent with your court-ordered child sup- port payments. 2. Your capacity. When you apply for credit, creditors want to feel certain that you will be able to repay it. Therefore, they will look at how much credit you al- ready have (credit card debt and loans) relative to your income and how close you are to the credit lim- its on your credit cards. They will also be interested in whether you have applied for a lot of credit re- cently because if you have, you may be taking on more debt than you can afford. Creditors are typically wary of consumers who have been applying for a lot of new credit. 3. Collateral. If you want to borrow a substantial amount of money, the creditor will be interested in knowing what assets you own that you could use as collateral, the value of those assets, and whether they are secur- ing some other debt that you owe. If you don’t have any collateral or you don’t have enough collateral, you probably will not be approved for the credit that you applied for. A collateralized debt is referred to as a secured debt. Your collateral could be cash, a certificate of deposit, your car, your home, or some other asset 141
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Credit Hell of value. When you don’t repay a secured debt ac- cording to the terms of your agreement with a credi- tor, the creditor is legally entitled to take your collateral as payment. For example, if you don’t pay your mortgage, the lender can take back your home through the foreclosure process, and if you fall behind on your car payments, the business that financed it can repossess your car. How Much Credit Is Enough Credit? As we have already made clear, you are asking for trouble if you have a pocket full of credit cards. One or two bankcards, a gasoline card, and maybe a travel and enter- tainment card like American Express is really all you need.
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