Credit What YOU need to know!. What is Credit? Credit is borrowing money now to make an immediate...
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Transcript of Credit What YOU need to know!. What is Credit? Credit is borrowing money now to make an immediate...
Credit
What YOU need to know!
What is Credit?
• Credit is borrowing money now to make an immediate purchase and promising to repay it later.
Credit Terms
• Lender: one who lends the money
• Borrower: one who receives the loaned money
• Credit Rating: an evaluation of the likelihood the borrower will default on the loan.
• Default: not being able to pay for the loan.
Credit Terms
• Credit Rating is based on:
-past credit experiences
-current financial situation
-job history
***once you ruin your credit rating it is VERY difficult to fix it****
Credit Terms
• Collateral: property or another valuable item that a borrower pledges as security for a loan.
• If a borrower defaults on the loan, the lender can seize (take) the collateral.
• If you don’t make your car payment they take your car!
Sources of Credit
• Banks
• Credit Unions
• Financial Corporations
• Most Common Source: Credit Cards
When you get a credit card…
• You will be given a credit limit (a maximum amount of money you can charge)
• You need to know the APR (Annual Percentage Rate). This is the interest rate the credit card charges.
• Current Average APR: 15.11%
When you get a credit card…
• To avoid interest charges, you MUST pay the ENTIRE balance EACH month!
• NEVER just pay the MINIMUM balance!
Example
• You charge a new computer and TV at Best Buy for $2000.
• Your Best Buy credit card’s APR is 27.99%.– Store credit cards ALWAYS have a MUCH higher interest rate!!
• If you only pay the minimum payment: $80 (4% of $2000), it will take you 11 ½ YEARS to pay it off and you will have paid $2,469.29 in interest
• Your original $2000 purchase really cost you $4469.29!
Credit…Pros and Cons
• Pros:
• You can purchase something immediately
• Using a credit card wisely can teach you discipline, responsibility and other life skills
• It can be used in an EMERGENCY!
Credit…Pros and Cons
• Cons:
• VERY easy to fall into debt!
• Debt can lead to bankruptcy
• If you file for bankruptcy, it stays on your credit rating for 7-10 years.
• During that time, it is extremely difficult to get a loan.
How to build a good credit history…
• Apply for 1 credit card with a low APR (if possible)
• Charge SMALL items that you NEED each month
• Pay off the ENTIRE balance EACH month
• NEVER pay just the MINIMUM balance