Credit: Helpful or Hurtful

Fact or Fiction

Q. Using credit can lead to serious problems.

A. True

Fact or Fiction

Q. When you charge a purchase with a credit card, you can withhold payment if the product is defective.

A. True

Fact or Fiction

Q. A credit card company cannot raise your interest rate as long as you pay all your bills on time for that account.

A. False – Under universal default provisions, a company can charge a higher interest rate if your credit score goes down for any reason.

Fact or Fiction

Q. Credit reports usually cost $10 to $20.

A. False – Credit reports can be obtained free of charge.

Fact or Fiction

Q. If a thief charges items to your credit card, you will be responsible for all payments.

A. False – If you report the theft promptly, you will not be charged more than $50.

Fact or Fiction

Q. Debit cards work the same way as credit cards.

A. False – They look like credit cards, but they do not allow you to buy on credit.

Fact or Fiction

Q. If a loan is unsecured, you do not have to repay it.

A. False – You are still responsible for repaying the loan.

Advantages of Credit

Improved standard of living

Convenience Help in

emergencies Help in record

keeping Forced savings

Disadvantages of Credit

Costs more if unpaid balance is not paid monthly.

Interest charges and fees.

Increased impulse buying.

Financial problems Ties up future

income.

Short-Term Consumer Credit

Service Credit Installment CreditCredit Cards

Plastic moneyCredit card rates

Annual percentage rateRevolving account

Charge cards

The most widely used service credit is for utilities such as electricity, gas, telephone, cable TV, water, and garbage collection. The service is provided before you pay for it.

Short-Term Consumer Credit

Service Credit Installment CreditCredit Cards

Plastic moneyCredit card rates

Annual percentage rateRevolving account

Charge cards

Installment credit is a loan repaid with interest in equal amounts over a set period of time.

Usually a down payment is required. A finance charge (interest) is added to the amount owed, and the total divided by the number of weeks or months that payments are made.

Loans

Secured LoansPersonal LoansAuto LoansStudent LoansHome LoansHome Equity LoansConsolidation Loans

Sources of loans

Banks

Obtaining a bank loan is not simple.Complete application formCredit history check

Often have lower interest rates.Most banks require collateral.You might need a co-signer.Banks give preference to their own

customers.

Credit Unions

To borrow from a credit union you must be a member.

A non-profit financial institutionOwned and operated by the membersMight be one company or

organization.Costs are lower

Savings and Loans

The original purpose was to provide money for home loans.

Regulations are different from state to state.

Now provide loans for education and other personal reasons.

Borrow the amount equal to your deposits.

Consumer Finance Companies

Used to be called small loan companies.

Amount able to loan varies from state to state.

Often loan to people who have poor credit history, therefore, the interest rates are higher than other lending institutions. (18% - 40%)

Loans to Avoid

Tempting because there is no application and prequalifying.

Cash advances have high costs.Higher interest rates, no grace period,

interest charges.Payments to credit card go to

purchases first, not to cash advance. Interest still builds until all paid off.

Credit Card Cash Advances

Payday Loans

Small, short-term, high interest loansCash advance, check advance, post-

dated check loans, or deferred deposit.

Average payday loan of $300 for eight days, 15% interest comes to an annual percentage rate of 459%.

Cash advance loan is even cheaper.

Refund Anticipation Loans

“INSTANT TAX REFUNDS!”Borrowing an amount equal to your

refund.A large part of your refund goes to

paying off the loan.They don’t really save you time.

Pawnshops

The cost of borrowing at a pawnshop can be greater than almost any other source.

The loan will likely be 1/3 the value of the item.

No application, no questions, immediate money.

Often more than 100% interest.

Loan Sharks

Dangerous business, illegal Loan sharks do not have licenses.Paying back is difficult; they usually

stop at nothing to get their money.Never borrow money from a Loan

Shark.

Checking for the Main Ideas

How can using credit improve your standard of living?

What does it mean to “secure” a purchase with a credit card?

How can a grace period help you save money on credit card payments?

What is the difference between a secured loan and an unsecured loan?

Consumer Credit Guidelines

Don’t think you will save money by borrowing more.

Consumer Credit Guidelines

Don’t impulse buy.

Consumer Credit Guidelines

Pay off high-interest credit card balances.

Consumer Credit Guidelines

Start an emergency fund savings plan

Consumer Credit Guidelines

Avoid joint obligations with people who have questionable spending habits.

Consumer Credit Guidelines

Charge only those items you can reasonably afford with your basic income.

Consumer Credit Guidelines

Create a realistic budget.

Consumer Credit Guidelines

Find alternatives to spending money.

Consumer Credit Guidelines

Realize that the over-spending culprit is YOU!

Consumer Credit Guidelines

Calculate the cost of using credit before you decide to buy.

Consumer Credit Guidelines

Ask yourself: “Can I pay for this credit purchase if I lose my job?”

Consumer Credit Guidelines

Ask: “What will happen if I don’t make my credit payment work?”

Consumer Credit Guidelines

Ask in each case: “All things considered, do the expected benefits from a credit purchase outweigh the cost?”