Journal Entry

1. Journal Entry Read the article, “Credit and Debit Cards: What you need to know” Answer the following questions: Why can a credit card be more beneficial than a debit card? How can a credit card hurt your financial future? Does having credit mean you have more money?

2. Chapter 6 Consumer Credit

3. Chapter 6 Objectives/Essential Questions • Why is consumer credit important for me to understand? • How do the 5 C’s of credit effect my ability to get a loan? • What is the importance of building “good credit”? • How can I protect myself from identity theft and fraud? • Is bankruptcy the best way out of debt?

4. What is consumer credit? • Credit: arrangement to receive cash, goods, or services now and pay for them in the future • Consumer Credit is your use of credit to meet personal needs • Credit cards can be issued by: • Financial Institution (Visa) • Retailer/Merchant (Best Buy) • Bank (issue loans for mortgages, cars, school) • The entity that lends you money is the creditor

5. Credit Compared Advantages of Credit Disadvantages of Credit Credit costs money; you pay the money back with interest if you don’t pay in full Temptation to buy more than you can afford Failing to repay the loan can result in “bad credit” Having credit doesn’t mean you have more money • Lets you enjoy goods and services now • Credit Cards allow you to combine several purchases and make one monthly payment • Shopping online or through the phone usually requires a credit card (hotel reservations, renting a car) • Gives record of expenses • Don’t have to carry cash • If you use credit wisely, other lenders view you as a responsible person (GOOD CREDIT)

6. Types of Credit • Close ended credit: one time loan you repay back over a specified period of time in payments of equal amounts (e.g. car loan, mortgage, furniture, large appliance)

7. Types of Credit (cont) 2. Open-end credit: credit as a loan with certain limit on the amount 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 • Grace Period: time period in which no finance charges will be added to your account • Finance Charge: total dollar amount you pay to use credit

8. Activity Instructions • Save your notes (Chapter 6 notes) • Get out NEFE Book • Read pages 41-48 • Complete Activities: • 4B and Assignment 4-1 on page 45 (separate sheet) • 4C on page 46 • Applying for a Loan on page 48 • Get a Chapter 6 Packet • Homework: Read Chapter 6 if you have not already done so

9. Chapter 6 Notes (day 2) Chapter 6 Quiz TODAY

10. The Cost of Credit If you are thinking of taking out a loan or applying for a credit card, your first step should be to figure out: • How much the loan will cost you • Whether you can afford it Two key factors in your decision will be: • The finance charge • The annual percentage rate (APR)

11. How do you obtain credit? • Apply for a loan • If it is a credit card, you need to know your Debt-payments-to-income ratio • Debt should be no more than 20% of net income • If monthly Income=($1,000), debt should be no more than $200 • Need to know APR • Cost of credit on a yearly basis, expressed as a percentage • Example: 18% APR means you pay $18 of every $100 you owe • This is your COST of credit net income the income you receive (take-home pay, allowance, gifts, and interest)

12. Calculating the Cost of Credit • The most common method of calculating interest is the simple interest formula • Simple interest is based on three factors: • The principal (amount borrowed) • The interest rate (rate at which you borrow) • The amount of time the principal is borrowed (length of time till you pay off) • Principal x Interest Rate x Amount of Time = Simple Interest • $1,000 x 5% (.05) x 1 year = $50 in interest

13. The Costs and Methods of Obtaining Credit minimum monthly payment the smallest amount you can pay and remain a borrower in good standing The Minimum Monthly Payment Trap Lenders often encourage you to make the minimum monthly payment because it will then take you longer to pay off the loan If you pay only the minimum amount on your monthly statement, you need to: • Plan your budget more carefully • Understand that the longer it takes for you to pay off a bill, the more interest you pay

14. The Costs and Methods of Obtaining Credit credit rating a measure of a person’s ability and willingness to make credit payments on time The Five C’s of Credit When a lender extends credit to consumers, it expects that some people will be unable or unwilling to pay their debts.Most lenders use the “five C’s of credit” to determine who will receive credit. These C’s are: • Character-will you repay the loan? • Capacity-can you repay the loan? • Capital –what are your assets and net worth? • Collateral-what if you do not repay the loan…what assets can you secure (home, car) • Credit history-what is your credit history? • Pay bills on time? • Have you ever filed for bankruptcy?

15. Credit Reports & Bureaus • Credit reports contain detailed credit information such as name, age, SSN, employer, credit history, homeowner/renter status • Most information in your credit file/report may be reported for 7 years (except bankruptcies) • Equal Credit Opportunity Act: all credit applicants have same rights • Fair Credit Reporting Act: limits who can obtain your report

16. Now… • Save notes—we have 1 more day of Chapter 6 notes, so save these! • Get “Paying Interest on Credit Cards” handout • When finished work on Chapter 6 packets • Movie, “Charge It”--

17. Article: “Credit Reports, Not Just for Lenders Anymore!” Read and answer: Is it ethical for potential employers to access your credit history? Do you think that it is okay for employers to not hire you based on a poor credit score?

18. Building and Protecting Your Credit To build and protect good credit: • Pay your bills and loans promptly • Manage your personal finances carefully • Correct mistakes related to your credit bills and credit reports • Dispute billing errors in writing and pay amounts that are not in question

19. Building and protecting your credit If your credit or identity is stolen: • Contact all your credit card companies • Close and open new bank accounts • Change all PINs • Notify law enforcement agencies and credit bureaus

20. Consumer Credit Protection Laws • Truth in Lending Law: protects a consumer from a creditor not giving credit info or giving inaccurate credit info • Equal Credit Opportunity Act: Fair practices for all • Fair Credit Opportunity Act: protects consumers when a creditor fails to correct billing errors • Fair Credit Reporting Act • Consumer Credit Reporting Act Reform

21. Managing Your Debts • Credit Counseling Service • Aiding families with serious debt problems • Helping people prevent indebtedness • Teaching them the importance of budget planning and other credit education • Declaring Personal Bankruptcy • As a last resort, an individual can declare bankruptcy • Declaring bankruptcy is a last resort because • It severely damages your credit rating.

22. Bankruptcy The U.S. Bankruptcy Act of 1978 You have two choices in declaring personal bankruptcy: • Chapter 7 (a straight bankruptcy) • Chapter 13 (a wage-earner plan bankruptcy) Both choices are undesirable, and neither should be considered an easy way to get out of debt.

23. Activities • Print Notes---3 days and 2 journals! • NEFE read pages 49-57 • Complete 4G on page 56 and 4H on page 57 • Finish Chapter 6 Packets—due today • Start Movie “Maxed Out”