Transcript Consumer Credit - Union High School

Consumer Credit
What is a Consumer Credit?
Name_________________________________
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Using Consumer Credit Wisely
Why is having good credit important?
• When you borrow money or charge an item to a
credit card, you are using credit
▫ Credit - an arrangement to receive cash, goods, or
services now and pay for them in the future.
▫ Consumer Credit – use of credit for personal
needs.
▫ Creditor – financial institution, merchant, or
individual – an entity that lends money.
▫ Good credit is very valuable
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Using Consumer Credit Wisely
Why is having good credit important?(cont)
• Buy things we would have to save for years to afford:
homes, cars, education
• Credit is an important financial tool, but it can be
dangerous
▫ Leading people into debt beyond their ability to pay
▫ Involves responsibility and risk!
• Today consumer credit is a major force in the
American economy
▫ Any forecast or evaluation of the economy includes
consumer spending trends/consumer credit
• When misused, credit can result in default,
bankruptcy, and loss of creditworthiness
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Factors to Consider Before Using
Credit
• Before you decide to finance a major purchase
by using credit, consider:
▫ Do you have the cash you need for the down
payment?
▫ Do you want to use your savings instead of credit?
▫ Can you afford the item?
▫ Could you use the credit in some better way?
▫ Could you put off buying the item for a while?
▫ What are the costs of using credit?
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Factors to Consider Before Using
Credit
• Agree to pay the fee that a creditor adds to the
purchase price.
▫ Monthly interest if not paid off at end of month
▫ Periodic or annual fee
▫ Late fees if not paid on time
• Does the benefit outweigh the cost of credit
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Advantages of Credit
• Let’s you enjoy goods and services now
• Credit cards allow you to combine several
purchases, making just one monthly payment
• Making hotel reservations, renting a car,
shopping online, you will need a credit card
• Records your expenses
• Shopping and traveling without a lot of cash is
safer
• Using credit wisely makes lenders view you as
responsible
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Disadvantages of Credit
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Credit costs money
Temptation to buy more than you can afford
Fail to repay – lose your good credit reputation
May lose some of your income or property to
repay your debts
• Doesn’t increase your total purchasing power
▫ Just allows you to buy things now for which you
must pay later
ALWAYS APPROACH CREDIT WITH CAUTION
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Types of Credit
• Closed-End Credit – credit as a one time loan that you will pay
back over a specified period of time in payments of equal amounts
▫ Examples
 Mortgages
 Car loan
 Large Appliances
• Lender will hold title, document showing ownership, until all
payments are made
• Installment sales credit – high priced items, down payment and
monthly payments
• Installment cash credit – you receive cash - direct loan,
personal, home improvements, monthly payments
• Single lump-sum credit – repaid in total within 30/90 days
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Types of Credit
• Open-Ended Credit – a loan with a certain limit
on the amount of money you can borrow for a
variety of goods and services
▫ Line of Credit – maximum amount of money a
creditor will allow a credit user to borrow
• Examples:
 Department Store Credit Card (Macy’s, Target)
 Visa
 MasterCard
• Make as many purchases as you want, can’t exceed
line of credit
• Billed monthly for partial payment of total owed
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Loans
• Borrowed money w/agreement to repay it with
interest within a certain amt of time.
▫ Inexpensive Loans – parents or other family members,
be aware, that loans can complicate family
relationships
▫ Medium-Priced Loans – commercial banks, savings
and loans, credit unions – moderate interest
▫ Expensive Loans – easiest and most expensive,
finance companies and retail stores
▫ Home Equity Loans – based on your home equity
(current market value of home minus what you owe)
tax deductible, but could lose your home if not repaid
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Credit Cards
• Average card holder has 9 credit cards
▫ Grace period – time period during which no
finance charges will be added, usually first 25 days
▫ Finance charge –total dollar amt you pay to use
credit
• Debit Card – Do not confuse credit cards with
debit cards, electronically subtracts your money
from your account
Credit Score
What is a Credit Score?
Name_________________________________
13
The Cost of Credit
• The key factors will be the finance charge and
the annual percentage rate (APR)
▫ APR - Cost of credit on a yearly basis, expressed as
a percentage
18% APR - $18/yr on each $100
$20,000/$100 = 200
200*$18 = $3,600/yr in Interest
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Tackling the Trade-Offs
• Term vs. Interest Costs – many people
choose longer-term financing, they want smaller
payments, longer terms cause more interest
being paid…$6,000 loan
APR
14%
14%
Term
3 yrs
4 yrs
Mo. Pymt Interest
Total Cost
$205.07 $1,382.52 $7,382.52
$163.96
$1,870.08 $7,870.08
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Applying for Credit
• The 5 “C’s” of Credit
1. Character: Will you repay the Loan?
Trustworthy and stable
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Personal and Professional References
Criminal History
Have you used Credit before?
How long have you lived at your present address?
How long have you held your current job?
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The 5 “C’s”
2. Capacity: Can you repay the loan?
Your Income and Debt
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What is your job, and how much is your salary?
Do you have other sources of income?
What are your current debts?
3. Capital: What are your assets and Net Worth?
If you loss your income, you can still repay your
loan from savings or selling assets
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What are your assets?
What are your liabilities?
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The 5 “C’s”
4.
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Collateral: What if you do not repay the loan?
What kind of property or savings do you have
The creditor may take whatever you pledge as collateral
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What assets do you have to secure the loan? (vehicle, home, furniture)
Do you have any other assets (bonds or savings)
5.
Conditions: What if your job is insecure? Economic conditions,
is your job and company secure?
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Credit History: What is your credit history?
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Credit Report
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Do you pay your bills on time?
Have you ever filed for bankruptcy?
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The 5”C’s”
• Credit Rating – measure for a person’s ability
and willingness to make credit payments on time
A Good Credit Rating is a Valuable Asset that You
should PROTECT!
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Credit Score
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The FICO scoring system goes from 350 to 850
660 to 724 to be a good credit score
VantageScore (a new score now used by all 3
credit bureaus) is 501-990.
▫ TransUnion, Equifax, Experian
▫ American Express, requires at the very least a
750 fico score to be eligible for quite a few of
their credit and charge cards
▫ Excellent credit rating can change as the
country's economy fluctuates
 the average credit score, 692 as of January
2011