Consumer Credit What is a Consumer Credit Name

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Consumer Credit What is a Consumer Credit? Name_________________

Consumer Credit What is a Consumer Credit? Name_________________

2 Using Consumer Credit Wisely Why is having good credit important? • When you

2 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

3 Using Consumer Credit Wisely Why is having good credit important? (cont) • Buy

3 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

4 Factors to Consider Before Using Credit • Before you decide to finance a

4 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?

5 Factors to Consider Before Using Credit • Agree to pay the fee that

5 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

6 Advantages of Credit • Let’s you enjoy goods and services now • Credit

6 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

7 Disadvantages of Credit • • Credit costs money Temptation to buy more than

7 Disadvantages of Credit • • 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

8 Types of Credit • Closed-End Credit – credit as a one time loan

8 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

9 Types of Credit • Open-Ended Credit – a loan with a certain limit

9 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 �Master. Card • Make as many purchases as you want, can’t exceed line of credit • Billed monthly for partial payment of total owed

10 Loans • Borrowed money w/agreement to repay it with interest within a certain

10 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

11 Credit Cards • Average card holder has 9 credit cards ▫ Grace period

11 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_________________

Credit Score What is a Credit Score? Name_________________

13 The Cost of Credit • The key factors will be the finance charge

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*$18 = $3, 600/yr in Interest

14 Tackling the Trade-Offs • Term vs. Interest Costs – many people choose longer-term

14 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% 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

15 Applying for Credit • The 5 “C’s” of Credit 1. Character: Will you

15 Applying for Credit • The 5 “C’s” of Credit 1. Character: Will you repay the Loan? � Trustworthy and stable � 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?

16 The 5 “C’s” 2. Capacity: Can you repay the loan? � Your Income

16 The 5 “C’s” 2. Capacity: Can you repay the loan? � Your Income and Debt � 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 � What are your assets? � What are your liabilities?

17 The 5 “C’s” 4. Collateral: What if you do not repay the loan?

17 The 5 “C’s” 4. 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 � � 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? • Credit History: What is your credit history? ▫ Credit Report � � Do you pay your bills on time? Have you ever filed for bankruptcy?

18 The 5”C’s” • Credit Rating – measure for a person’s ability and willingness

18 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!

19 Credit Score ▫ ▫ ▫ The FICO scoring system goes from 350 to

19 Credit Score ▫ ▫ ▫ The FICO scoring system goes from 350 to 850 660 to 724 to be a good credit score Vantage. Score (a new score now used by all 3 credit bureaus) is 501 -990. ▫ Trans. Union, 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