Consumer CreditWhat is a Consumer Credit?

Name_________________________________

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Using Consumer Credit WiselyWhy 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 WiselyWhy 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

•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 laterALWAYS 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 ScoreWhat is a Credit Score?

Name_________________________________

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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 = 200200*$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 Term Mo. Pymt Interest Total

Cost14% 3 yrs $205.07 $1,382.52

$7,382.5214% 4 yrs $163.96 $1,870.08

$7,870.08

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Applying for Credit

•The 5 “C’s” of Credit1. 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?

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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?

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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?

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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

▫ 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