Everyday Finance and Economics with the Siglers
Everyday Finance and Economics with the Siglers
EP 06: Credit Basics
Use Left/Right to seek, Home/End to jump to start or end. Hold shift to jump forward or backward.
Hello! and welcome to Everyday Finance and Economics with the Siglers! The podcast where we discuss what you need to know about personal finance and economics and give you practical advice on how to get started and be smart with your money.
This episode is an introduction to the world of credit! Everyone uses credit. It is everywhere in our daily lives. So it's important to know what it is, how to get it and how to use it! Stay tuned for next week's in depth analysis on consumer credit!
Come engage with us!
Instagram: @efespodcast
Email: efespodcast@gmail.com
Website: http://efespodcast.buzzsprout.com
Intro music:
Coffee & Lullabies R&B mix by J.Lang (c) copyright 2020 Licensed under a Creative Commons Attribution Noncommercial (3.0) license. http://dig.ccmixter.org/files/djlang59/62099 Ft: CrazyLittleAsian aka SHA
Coverart by Karina Ng @karina.ng on instagram
Introduction
Speaker 1Hello, and welcome to everyday at finance and economics with the Sigler is the podcast where we discuss what you need to know about personal finance and economics, and give you practical advice on how to get started and be smart with your money. We're your hosts , Glenn and Christina .
Speaker 2So Christina, what's going on today?
Economic News
Speaker 1What matters this week in the economy is jobs on the first Friday of every month. The Bureau of labor statistics releases the employment situation. Summary also referred to as the jobs report for the month prior. So last week, the jobs report for April was the least , and the results were kind of disappointing. Um, economists had predicted that the U S economy would create around 1 million jobs last month, but the Bureau of labor statistics could only find 266,000 new jobs added in April, which is a huge miss people who had hoped for a speedy recovery of the unemployment rate may have to hold off , uh , as it went up from 6% to 6.1%. So while America is reopening and making an economic recovery, this is evidence that it's not all going to be straight up and linear. It's going to be a little Rocky.
Economic Term of the Episode
Speaker 2That was very disappointing news.
Speaker 1Yeah. Yeah. Our economic term for this week is unemployment, which is when someone who is actively searching for work is unable to find it. That's a very big distinction cause you have to be actively searching for work. That number is typically reported as a percentage of the population. And it's used a lot to determine how healthy and economy is. All right , dad, I think it's time we get into this week's topic. What are we talking about today?
Speaker 2All right. Today, we're talking about credit.
Speaker 1Hm .
What is credit?
Speaker 1All right, dad, what is credit? Let's get into that. Great .
Speaker 2In short it's money, that's been lent to you by a financial institution. It might be in the form of a loan or a line of credit. Examples of loans are mortgages, car loans, student loans , uh , and lines of credit type revolving credit or credit cards or , um, or store cards with , uh, you can charge up some balance each month and that's essentially a mini loan and you try to pay it back at the end of the month. And for that, for the amount that you don't pay back, you pay interest on it and you have to pay it back the next one .
Speaker 1Okay. So money given to you by somebody else. Right? Right, right. Absolutely. What
What are some of the basic terms related to credit?
Speaker 1are some of the basic terms related to credit? Cause I hear, I hear a lot.
Speaker 2All right . W you know, there, there are a lot of terms in this, in this area, and we'll start out with some of the basics, the creditor , financial retailer, or other company lending you money. Um, yeah . Uh, either a loan or line line of credit and a line of credit is a reserve of funds you can draw against. Um, and, and you pay pay interest only when you use the line of credit. So it could be zero. You don't have to pay anything. You start , um, uh , making charges against it . And that's when you start to incur , um, some additional costs in addition to paying back the amount that you borrowed .
Speaker 1Okay. So the line of credit is you can like borrow up to this much money. And then after that, you have to start paying for user .
Speaker 2All right . So, so what you'll get is a credit limit. And it said, okay, you've got to just think of it like a credit card. Oh, you're authorized to spend up to $5,000 on your credit per well, up to
Speaker 1$5,000. All right .
Speaker 2So they're not , they're not, they're not going to just say, Hey, you can have an unlimited amount of money to spend because they may not feel you can pay all that back. Oh, I see. Well , you know , you know , so what they'll do is they'll start you out with a low limit and then work you up to a high limit. So you'll, you'll, you know, if, if you don't use the credit card, you're not paying, you're not paying anything. You're not paying any of the principal back. You're not paying any interest, but say I bought some clothes and I spent a thousand dollars on clothes. And if I pay it all back within the month, I paid a thousand dollars . There's no extra charges, but if I only pay back 500, and then the next month I had to pay back 500 plus interest on the 500 that I did.
Speaker 1And then really quickly let's go back. What is principle ?
Speaker 2Principal is , um, the amount that you have borrowed. Okay.
Speaker 1But that's what, that's what the interest is going on. Right . If you don't pay it back. Oh , that's exactly right . All right. You can continue with
Speaker 2Right . Uh , credit report. This is a report that shows what you've done in all your credit and all your accounts, whether it be mortgages, student loans , uh, all, you know, if you defaulted at all , um, if you've had any late payments, this is report that shows, Hey, how good of a credit risk is Glen ? And, and all the lenders want to see that . And you need to see it too , cause you need to make sure that there's no , no mistakes in it. Okay. This is a critical to this. History is critical to development of your credit score, which we'll discuss later. These reports are done by credit reporting agencies, companies that gather and reports on, on all of us, anybody that uses credit , uh, the there's three main ones and they're experienced TransUnion and Equifax.
Speaker 1Wait. So do you choose who makes your credit report or no , they all. Oh, so they're just tracking, they're all out here and got it
Speaker 2Or not the customer of these things. The , the companies that lends you credit or offering your credit are the people that want to know your credit history, right? They want to know if, Hey, is Glen Sigler a good credit risk? Should I give him, should I loan him money or give him a revolving line of credit? And so they use these reports and something called a credit score that synthesizes the credit score, synthesizes your history into a number. And the number ranges typically typically range from a score of 300 to eight 50. And the higher you are on that, on that range, the better off you are. A score of seven 50 is considered great. And you get the best offers. If you have a credit score over seven 50, if you're over 700, it's good. You start getting below six 60 and 600. Now you've got some challenges. You might not be able to get credit all the time, or when you do get credit, you have to pay higher interest rates because people want to get compensated for
Speaker 1Risk. Okay.
Speaker 2All right . And so phyco and vantage scores are two, two versions of credit scores , um, uh, and credit scores model by , um, by the, the credit reporting agency. And they're going to be different , uh , uses of credit scoring in various or models in various countries. And then there's something called the fair credit reporting act, which mandates that credit card agencies , um, are , are, you know, they have an obligation to report factually correct information,
Speaker 1Credit card agencies or credit report , credit
Speaker 2Reporting agency . Sorry about that. And so , um, if you find that, Oh, you know, they said, Oh, you, you didn't pay this bill, you know, two years ago. And you say, wait a minute, I paid that bill. You show the credit reporting agency that you paid that bill, they have to change it in their reporting. And that will end up being reflected in your credit score, which should improve your credit score. So there is, there are obligations to them ,
Speaker 1Right. Okay. So who
Who provides credit?
Speaker 1provides credit? Where do you, where do you get this from?
Speaker 2In , in most cases , um, the traditionals are banks and credit unions, and now you have a , uh, a whole slew of online lenders and other financial , um, you know, like, so Phi and , and places like that, that aren't traditional , um, consumer lending places, but they, they, they do it now too. And, but the other thing we need to remember is, you know , a lot of people get , uh , loans through friends and family.
Speaker 1Oh, that's true. Yeah. Um, so there's types of credit there's categories. What is, what is that about?
What are the major credit categories?
Speaker 1Ah , I didn't know. That was a thing until right now.
Speaker 2So I'm going to give you four for most of us, we're going to start with, with the , the major categories secured versus unsecured. And , um , secured is a type of, of loan. When the borrower, the person who borrows the money puts up some collateral.
Speaker 1Oh, that's like, when they talk about movies, they're like, Oh, I get put up the house.
Speaker 2Yeah , yep . As collateral. So the lender may be worried about your risk of , of ability to pay. So in order to, to , um, to mollify or , or ease their, their concerns about the risk , you have to put some skin in the game. And if you don't pay, you lose your house, you lose whatever it is that you, you put up at risk. And so secure CA uh , credit is when you put up an asset or, or money that , you know , as an offset to essentially guaranteed that, you know , they get something in return , um, versus unsecured, which is, Hey, I I'm giving you this loan based on your credit history and not any asset. And so, you know, that usually that usually cost more in terms of interest rate secured, because they have that, that guarantee as a backup, usually there's lower interest rates, but unsecured is more flexible. Okay.
Speaker 1Yeah. What are the primary loan
What are the primary loan types?
Speaker 1types?
Speaker 2Okay. Um, there's open-ended and Crow closed ended loan types. So an open-ended loan type is a revolving credit line or credit card. It's all, you know, it can be always open. A closed in is one where the loan is, you know, the loan ends when you make the last payment. So when you pay off a house or you pay off a car, or you pay off your student loans, once that is done, and all the paperwork gets filed, that loan ends and history that goes with that ends . But with a credit card, you can always keep that open and , and, and keep movement in order to , to close it. There has to be, I mean, you have to say, I want to close it, or because of inactivity, the credit card company said, Hey, you haven't used our credit card in three years. We're going to shut you down.
Speaker 1Okay. All right. All right. That's our show. Thank
Outro and contact information
Speaker 1you so much for listening and be sure to join us again next time when we continue our series on credit. And if you have any questions for us, you can email us@efespodcastatgmail.com and follow our Instagram at EFBs podcast . Thank you so much for listening. Take care, everyone.