Hello learners. I am Fenrir. Today we are talking about borrowing money. We call this credit. Let us be very clear. Credit is borrowing money from your future self. When you take out a loan or use a credit card you are making a binding commitment. You are promising that your future income will be used to pay for what you buy today. Before you ask for credit you must understand the implications on your future disposable income. Disposable income is the money you have left over after taxes and bills. If you add a loan repayment to your monthly costs you will have significantly less money for savings or fun next year. You must assess your ability to repay before you borrow. Do not just look at your salary today. Ask yourself is my job secure? Will I still be earning this amount in three years? You must also understand the impact of compound interest on credit. Just like compound interest helps savings grow it makes debt grow terrifyingly fast. If you do not pay off your debt quickly the interest earns interest and the debt grows huge. Understand the importance of knowing how long the repayment period will be and whether it is fixed. A longer period means smaller monthly payments but a much higher total cost. Can you differentiate between the use of credit to generate future income and the use of credit for consumption? Using credit to buy a home or pay for education is often considered good debt because it can increase your value or your assets over time. This generates wealth. Using credit to buy clothes a holiday or a meal is consumption. You are paying interest on something that is gone instantly. This is bad debt. Avoid it. Takes into account the cost of credit as well as the cost of the item. If you buy a television on credit it might end up costing double the price. Be motivated to consider the consequences of accessing credit before making a decision. Motivated to seek alternatives to borrowing such as saving leasing joint ownership or seeking social support. Only use credit when absolutely necessary.If you have assessed the risk and decided to proceed you need to understand security. Lenders often require security to protect themselves. This brings us to collateral and guarantors. Aware that asking for credit may require collateral to secure repayment. Collateral is an asset usually your house or your car that you pledge to the lender. If you do not pay back the loan the lender has the right to take your asset and sell it. This is called foreclosure. Aware of the risk of foreclosure in case the mortgage is not paid off. You could lose your home. Loans with collateral are called secured loans and usually have lower interest rates because the bank takes less risk. Knows whether or not a loan is secured against an asset and can assess the benefits and disadvantages. If you do not have collateral the bank might ask for a Guarantor. Aware that some credit providers may require a guarantor to cover credit payments in the event of default. This is usually a person often a parent or a close relative who promises to pay your debt if you fail to do so. This is a massive responsibility. Understands the social and financial implications of asking someone to become a guarantor. If you default you are forcing them to pay your debt. This can destroy trust and ruin relationships within families. Takes into account the social and financial implications of asking someone to be a guarantor. If someone asks you to be a guarantor think twice. Confident to guarantee another person or to ask another person to be a guarantor only if you accept the absolute worst case scenario. Do not sign just to be nice. Sign only if you accept the financial reality. Guarantors are legally bound to pay. It is not just a character reference it is a financial contract.Once you understand the security you need to look at the marketplace. In the European Union we have specific regulations to help you. Knows or can easily research the different types of credit available including credit cards mortgage products rotating credit facilities or short term credit. You must know their intended use and the main advantages and disadvantages of each. Credit cards are for short term convenience but have high interest rates. Rotating credit facilities like overdrafts are flexible but dangerous if used repeatedly. Aware of the risks of repeat use of rotating credit facilities. It creates a cycle of debt you cannot escape. When you choose a product you must assess the Total Cost of Credit. Understands that the total cost credit may be higher than what is implied only by the interest rate. This includes the interest rate plus administration fees plus insurance. In the EU you must look for the SECCI. This stands for Standard European Consumer Credit Information. It is a standardized form that allows you to compare offers easily. On this form look for the APRC. This stands for Annual Percentage Rate of Charge. This is the magic number. It combines the interest rate and all mandatory fees into one percentage. Uses comparison tools to evaluate the cost and other characteristics of credit products. Always compare the APRC. Confident to choose a suitable credit provider and product when necessary. You also need to choose the right type of interest rate. Knows why it is important to be aware of the current interest rate on credit and whether that rate is fixed or variable as well as the rate of inflation. A fixed rate means your monthly payment stays exactly the same. This is safe. A variable rate changes based on the market often linked to the Euribor rate. If inflation rises a variable rate might rise too making your payments much more expensive. Can you afford that increase? Be aware that different types of mortgages exist including green mortgages. These offer better terms if you buy an energy efficient home supporting the EU Green Deal. Also be aware of the specific issues of taking credit in a foreign currency. If you earn in Euros but take a loan in Swiss Francs because the rate looks lower you take a huge currency risk. If the exchange rate changes your debt could double. Understands the risks and benefits of using different kinds of credit providers both formal and informal. Aware that credit can also be accessible online through peer to peer lending platforms and is able to distinguish the different features and risks. Confident to ask additional information about different types of credit.Behind every loan decision is a system that evaluates you. In Europe this varies by country but the principles are the same. Aware of the existence and main characteristics of credit scoring system if available in a country. Lenders use big data and data analytics to predict if you are a good borrower. Aware of the methods used to create credit scores. They look at your history. Did you pay your electricity bill on time? Did you miss a payment on a catalog order? All of this information is collected by credit reference agencies or national credit registers. Aware that a positive credit history can increase the likelihood of accessing credit and reduce the cost of credit. People with good histories get the lowest interest rates. People with poor histories pay more. Knows what factors are taken into account in a credit score including the use of personal data. If you apply for too many credit cards in a short time it can damage your reputation. Takes into account the ways in which certain actions and behaviours will impact on a credit score. Also be aware that income such as bonuses windfalls or gifts may not be taken into account when calculating disposable income for credit purposes. Lenders look at your steady reliable income. Aware that credit providers may seek information about a borrowers ability to repay and that this may include accessing a credit score collected by a third party. You have specific rights here under the GDPR or General Data Protection Regulation. Knows how to access information on personal credit score and who to speak to in case of discrepancies. You have the right to see what data they hold on you. You should check your file regularly. Sometimes there are mistakes. Maybe a bill you paid is marked as unpaid. If you find a discrepancy you must speak to the agency to fix it immediately. Takes steps to improve credit score if necessary. This involves paying bills on time and reducing your debt levels. Asks which information is being used to assess ability to repay credit. In the modern world your digital footprint and your financial data are your reputation. Protect them.That is a lot of information but it is necessary. You must take steps to make informed decisions.Remember the weight of a guarantee. Do not drag your family into debt unless you are sure.And always calculate the total cost. Look for the SECCI form and compare the APRC.Check your data rights under GDPR. Build your score. And use credit as a bridge to a better future not a trap.We believe in your ability to master this. Good luck and see you next time.
