Chapter 6.1

Credit

Objectives

● Explain the advantages and disadvantages of using credit

● Identify the different types of consumer credit

● Describe secured and unsecured loans

● Describe how to establish a sound credit rating

● Describe situations in which it is smart to use credit and others in which it is not

● Explain what makes up the cost of credit

Question of the Day….

What percent of 18-29 year olds have a credit card?

Question of the Day….ANSWER

Article - Click Here

Article Questions1. How did your estimate compare with the actual answer?

2. Why do you think that only ⅓ of 18-29 year olds have a credit card?

3. Do you currently have a credit card? If not, do you think you will get one in the next few years? Why or why not?

4. In looking at the graph, what is the relationship between age and card ownership?

5. What do you think are the pros and cons of having a credit card?

Consumer Credit● Credit = a medium of exchange that allows individuals to buy goods or

services now and pay for them later

2 Parties Involved in Credit

Creditor Debtor / Borrower

Supplies to the other party:1. Money

2. Goods

3. Services

Agrees to make future payment by:1. Particular Date

2. According to an agreed-upon schedule

Types of CreditClosed-End

Definition - a loan for a specific amount that must be repaid with finance charges by a specified date

What’s included?

● Finance Charge - the total amount paid by a borrower to a lender for the use of credit

● Contract - a legally binding agreement between the borrower and the creditor

○ States the terms of the loan

● Principal - the amount of money borrowed

Open-EndDefinition - an agreement that allows the borrower to use a specific amount of money for an indefinite period of time

What’s included?

● Line of Credit - a preapproved amount of money that an individual can borrow

Guidelines?

● Makes payments ON TIME● Pays any finance charges/fees● Stays within borrowing limit

Types of LoansSecured

Definition - a loan that requires collateral (property that a borrower promises to give up in case of default)

Examples?

● Closed-End Credit○ Smaller risk for creditor○ Can take back property for debt

repayment● Installment Loans

○ A loan for a specific amount of money that is repaid with interest in regular installments

UnsecuredDefinition - a loan made on the strength of a signature alone

Examples?

● Open-End Credit○ Credit Cards○ Strong Credit Rating is needed

■ Co-signer - a responsible person who signs the loan with the person to whom the loan is granted. This person promises to repay to loan if the borrower fails to pay

Establishing Credit

Steps to take:

1. Start with a job - prove you can earn money

2. Open a savings account - shows financial responsibility & can be used as collateral

3. Open a checking account - shows you have experience in handling money

4. Get a Credit Card - gives a record of steady payments

Three C’s of Credit

1. Character

Based on your reputation & financial

history

2. Capacity

Your earning power and employment history

3. Capital

Financial worth

Creditworthy - having the assets, income and tendency to repay debt

Credit ReportsDefinition - a record of a person’s credit history and financial behavior

What’s included?

● Every credit account ever opened● Outstanding balances on current credit

accounts● Lists negative information

○ Delinquent or late payments○ Overdue taxes

Who keeps track?

● National Credit reporting agencies○ Equifax, Experian, TransUnion

Credit ScoresDefinition - a numerical measure of a loan applicant’s creditworthiness at a particular point in time

Also known as ….. FICO Score

● Fair Isaac Corporation - developed the rating system

● Calculated on 5 categories

Using Credit

Advantages:

1. Use of goods & services as you

pay for them

2. Opportunity to buy costly items

3. Source of cash for emergency or

unexpected expenses

4. Convenience and safety

5. Taking advantage of sales

6. Long-range Goals

Using Credit Disadvantages:

1. Reduction of future spendable

income

2. Expense

3. Temptation

4. Risk of serious consequences

Cost of Credit

1. Interest Rate Charged

2. Amount of Credit Used

3. Length of the repayment

period

Annual Percentage Rate (APR) the annual cost of credit a lender charges

3 Factors that determine the amount you pay for the use of credit:

Checkpoint 6.1

1. What are some items that consumers use credit to buy?

2. What are 4 common types of open-end credit?

3. List 1 advantage and 1 disadvantage of using credit.

4. List the 5 primary factors your credit score is based on.

5. What 3 factors determine the amount you pay in finance charges?

In your class folder & a new Google Doc, complete the

following with the Doc labeled as “Today’s Date Checkpoint 6.1”