HW on WEBSITE Credit Use and Credit Cards

What is Credit? __________ is the amount of money or something of value that is loaned on trust with the expectation it will be repaid to lenders later. NOTE: If you go over your credit limit or make your payment late, you will likely be charged a 6 -2

Sources of Credit • Banks • Credit unions • Department stores • Automobile dealers • Oil companies (for gas stations) • Federal government (for student loans)

What Creditors Look For • Character - do you pay bills on time? • Capacity - can you repay the loan? • Capital - what are your assets and net worth? • Collateral - what if you don’t repay? • Conditions - what economic conditions would affect your repayment of the loan?

What are Credit Cards? • Credit cards are issued ____________ and allow the cardholder to make purchases “_______” up to a maximum amount called your _________. • In addition, the cardholder can receive a cash advance with a credit card. A cash advance is similar to a loan (pay interest) • The cardholder can pay the entire amount in full or make a partial payment. If a partial payment is made, the cardholder is charged interest on the remaining balance.

CC ? s What does APR stand for? A: Annual purchase rate B: Annual percentage rate C: Approximate payment rotation D: Authorization processing rate If you go over your credit limit or make your payment late, you will likely be charged a(n) a. annual fee. c. maintenance fee. b. penalty fee. d. transaction fee.

CC 16 (15 for AMEX) CVV (Card Verification Value) - 3 or 4 #s

Credit Card Convenience • Interest charged on credit cards outstrips returns that could be earned on investments!!! • Think of your credit card as an extension of your checking account…Use your credit card only to access those funds. Common. Sense Economics. com • Paying with a credit card is NOT spending your own money, but borrowing someone else’s.

Review How many digits are in a standard credit card number? A: 16 B: 17 C: 18 D: 19 E: Can be 16 to 19 digits long. How many numbers are in a CVV code? A: 1 B: 2 C: 3 D: 4 E: 3 or 4

Advantages of Credit • • Current use of goods and services Demonstrates financial stability Use for financial emergencies Convenience when shopping • Easiest to use for booking __________ • Safer than cash

Disadvantages of Consumer Credit • • Purchases are more expensive Temptation to overspend Possible financial difficulties Possible loss of merchandise due to late or non-payment • Ties up future income • When you have insufficient income and assets to pay your debts, you are said to be ___________

CC questions Which of the following transactions would likely be difficult to make without a credit card? a. purchasing a car b. reserving a hotel room c. buying a house d. buying groceries When you have insufficient income and assets to pay your debts, you are said to be a. liquidated. c. unsecured. b. indigent. d. insolvent.

Minimum Payments Equals Permanent Debt • Credit card issuers often require a minimum monthly repayment as low as 1/36 or 1/48 of the outstanding balance. Such a payment is mathematically guaranteed to keep the user in “perma-debt. ” When creditors apply the finance charge only to the amount owed after you’ve paid your bill each month, they are using the __________________.

REVIEW All of the following are danger signs that you are overextending your credit except a. your credit cards are all near the limit. b. your credit rating is rising. c. you skip some payments in order to make other payments. d. you often pay one credit card by using another credit card.

Credit Card Statement

How Long Will Paying Take? ? ? You owe $3, 000. APR = 18% Monhtly Payment: 4% of current balance Finance charge: $1, 715. 69 Total cost of original $3, 000 loan = $4, 715. 69 Paying it off will take nearly 11 YEARS After you’ve made the last payment, will what you purchased still be around? ? ?

The Devil’s in the Detail • • • Minimum Payment • Credit card companies require a minimum payment each month. BAD IDEA! Grace Period and Late Fees • The grace period is the number of days you have to pay the balance or the minimum amount due. If your payment is late, the credit card company will charge you a late fee + Interest. In addition, the credit card company can also increase your APR. Other Fees • Credit cards also include annual fees for using the card, fees for cash advances, and fees for exceeding the credit limit. • Bottom Line- use CCs carefully- better yet - PAY CASH OR DON’T BUT IT!

What Is Consumer Debt? w _____________________________________ w Examples n Credit Card Debt n Student Loans n Mortgages n Car loans

Borrowing rule… • Never borrow more than ________ of your annual net income • Your annual net income (money after taxes) is $10, 000 • Calculate 20% of your annual net income to find your safe debt load. $10, 000 x 20% = $2, 000 • Housing debt (i. e. , mortgage payments) should not be counted as part of the 20%.

Good vs Bad Debt? Good. • Borrowing for a home or college usually makes good sense. Just make sure you don't borrow more than you can afford to pay back, and shop around for the best rates. Bad. • Don't use a credit card to pay for things you consume quickly, such as meals and vacations. If you can't afford to pay off your monthly bill in full don’t buy it! There's no faster way to fall into debt.

Good Credit = Easy to Trust Bad Credit = Hard to Trust

Credit Score (FICO) • A ______________is a number that helps lenders determine how likely you are to make your payments on time. • The most widely used credit score is the FICO score, which was developed by the Fair Issac Corporation. • FICO scores range from ________ • > _______ = excellent, ______= good, ______= fair and < ____ = poor • The national average credit score is 661. (New York average score of 675) • A credit score affects whether you can obtain _____________________________on credit cards, auto loans, mortgages, and other loans and credit. • The higher your credit score, the more likely you are to be approved for credit and pay a lower interest rate. • Credit scores can even affect whether you will be able to rent an apartment—without a good credit score, a landlord may turn down your application.

What Your FICO Score Looks At Payment History (35%) Do you pay your bills on time. Amount Owed (30%) Debt ratio Length of Credit History (15%) How long have your accounts been established? Types of Credit (10%) Credit cards, retail accounts, installment loans, mortgage loans, etc. New Credit (10%) It’s OK to request and check your own credit report.

What is the purpose of a credit score? a. To show lenders the risk of default according to the debtor’s credit history b. To show lenders the risk of the creditor defaulting on payments c. To get zero-interest loans d. It is necessary for people to purchase consumer goods (i. e. grocery shopping)

When do you need to show your credit score? A: When you apply for a loan B: When you apply for a credit card C: When you apply for a house D: All of the above

Credit Score Breakdown Credit Score 499 and Below 500 -549 550 -599 600 -649 650 -699 700 -749 750 -799 800+ Percentage who have it 2% 5% 8% 12% 15% 18% 27% 13%

All of the following are danger signs that you are overextending your credit except a. your credit cards are all near the limit. b. your credit rating is rising. c. you skip some payments in order to make other payments. d. you often pay one credit card by using another credit card.

What is the FICO Score impact on interest rates? • • The ________ your score, the _________ your interest rate. Generally, as your score increases, the interest rate you receive gets lower. Some finance companies even offer zero percent financing, which means you pay no interest at all for the loan; however, only consumers with a high score will qualify for such deals.