USING CREDIT Cash vs Credit Buying with CASH

USING CREDIT

Cash vs. Credit Buying with CASH You physically give money in exchange for goods or services. You Now Own your purchases. Buying with CREDIT Instead of giving money you PROMISE to pay LATER. You DO NOT own the purchase but can use it while you pay for it.

CREDIT Allows you to buy goods and services NOW and PAY for them later. What types of purchases might you make on credit? ? Expensive Items 1. Car 2. House 3. College Tuition

Advantages Advantages: Allows you to BUY things NOW and PAY for them LATER Convenience (no need have the cash saved) Help in Emergencies Allows you to purchase things without having the cash

Disadvantages Disadvantages: Credit usually costs more than buying with cash. Interest Rates and Other Charges Overspending (Easy to buy more than you have) Credit ties up future income.

Types of Credit (Accounts) Credit Card Accounts Banks/Credit Charge Accounts Specific Agencies/Department Stores Business – (Electric or Gas Company) Installment Accounts Set payments for expensive items (Furniture/Jewelry)

Types of Credit (Loans) Cash Loan - Credit transaction where a person borrows money to buy items. (Car/House/Tuition) 2 Requirements: Collateral Something of VALUE, held by the creditor, as a PROMISE to pay back the loan. Cosigner A responsible person who signs the loan agreement with the borrower.

Types of Credit (Loans) Home Equity Loans – A loan that provides a sum of money separate from the amount borrowed for the house. Mainly used for Repairs and Improvements Based on the homeowner’s Equity… Equity – What the house is WORTH MINUS Amount OWED on the house.

Other Types of Credit Vehicle Leasing - Credit transaction by which a person rents a car according to certain restrictions or guidelines. What are some restriction? ? ? Usually last 3 years You DO NOT OWN the vehicle Limit on Miles Pay fees for excess miles or wear and tear

Establishing Credit Establishing credit begins with : “Trust between Creditor and Credit User” Creditor – a business or an individual that make credit available to consumers by loaning them money or goods and services.

Establishing Creditors look for a “Good Credit Risk” People who are most likely able to repay the debt. What are some factors that they may look for? ? ? Have a Job with a steady income Regular, on-time payments on: Credit purchases, loans, rent, etc. Owning a car, home, stocks Living in the same community for a period of time

Three C’s of Credit The Three C’s all represent people who are Creditworthy having the assets, income and tendency to repay debts. Character Reputation for honesty and financial history. Paying bills on time Capacity Ability to earn money and pay debts. Employment history and earning income. Capital Financial Worth(what you own or possess) Land, Homes, Cars, Savings

Establishing Credit Before Credit is Granted…. . Creditors need evidence that you can and will pay back your debt Must fill out a Credit Application Helps creditors evaluate your credit rating http: //www. cavodm. com/Credit_Application_Form. pdf

Determining Creditworthiness Credit Report – record of a person’s credit history and financial behavior. Credit Rating – Creditor’s evaluation of a person’s willingness and ability to pay debts. Credit Score – numerical measure of a person’s creditworthiness at a certain point in time. Also called FICO score – Fair Isaac Corporation

Credit Score FICO scores are calculated based on 5 categories. Payment History Amounts Owed Credit History New Credit Types of Credit Used

Credit Score

Building Your Credit Rating You don’t establish a credit rating until you buy something on credit Once established, you can build your Credit Rating in many ways: 1. Get a Job and Stay Employed You must prove you can hold a job and earn a regular income 2. Open a Checking Account Shows that you can handle money responsibly 3. Open a Savings Account Helps establish a good banking record. (credit reference)

Building Your Credit Rating 4. Buy an item on a Layaway Plan The store will probably be willing to grant you a charge account 5. Gasoline or Store Credit Card Only if you have a Steady Job with Steady Income Make small purchases Pay for them on-time and in full each month

Cost of Credit All types of credit have a certain amount of Finance Charges – the total amount a borrower must pay for the use of credit.

Cost of Credit 3 factors to determine the amount of Finance Charges: 1. Amount of Credit Used 2. Interest Rate 3. Length of the Repayment Period

Amount of Credit Used The More you Charge or Borrow = the More Interest you will Pay. Example: Over Charge $300 Computer/12 Months /18% Interest = $30. 00 Total = $330. 00 Over Charge $600 Computer/12 Months /18% Interest=$60. 00 Total = $660. 00

Interest Rate The HIGHER the Interest Rates = MORE Finance Charges Interest – the price paid for the use of money over a period of time. Known as Annual Percentage Rate (APR) APR – the actual rate of interest charged on a yearly basis (annual = yearly)

Interest Rate HIGHER Interest Rates = MORE Finance Charges Example: (25 -7 on page 479) Annual Percentage Rate (APR) 18% 21% 24% Amount Financed $300 Number of Monthly Payments 12 12 12 Finance Charge $30. 00 $35. 16 $40. 44 Monthly Payment Amount $27. 50 $27. 93 $28. 37 Total Paid $330. 00 $335. 16 $340. 44

Repayment Period MORE Time to PAY BACK = MORE Interest Paid Example: (25 -8 on page 479) # of Monthly Payments 12 18 24 Amount Financed $300 Annual Percentage Rate (APR) 18% 21% 24% Finance Charge $30. 00 $44. 66 $59. 46 Monthly Payment Amount $27. 50 $19. 15 $14. 98 Total Paid $330. 00 $344. 66 $359. 46

Closer Look http: //www. calculatorweb. com/calculators/credit cardcalc. shtml