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Credit. Advantages and Disadvantages of using Credit. Advantages : Able to buy needed items now Don’t have to carry cash Creates a record of purchases More convenient than writing cheques Consolidates bills into one payment Emergencies. Advantages and Disadvantages of using Credit.
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Advantages and Disadvantagesof using Credit Advantages: • Able to buy needed items now • Don’t have to carry cash • Creates a record of purchases • More convenient than writing cheques • Consolidates bills into one payment • Emergencies
Advantages and Disadvantagesof using Credit Disadvantages: • Interest (higher cost of items) • May require additional fees • Financial difficulties may arise if one loses track of how much has been spent each month • Increased impulse buying may occur
The Three C's Character – will you repay the debt? Capital – what if you don’t repay the debt? Capacity – can you repay the debt?
Character – will you repay your debt? From your credit history, does it look like you possess the honesty and reliability to pay credit debts? • Have you used credit before? • Do you pay your bills on time? • Do you have a good credit report? • Can you provide character references? • How long have you lived at your present address? • How long have you been at your present job?
Capital – what if you don't repay the debt? Do you have any valuable assets such as real estate, savings, or investments that could be used to repay debts if income is unavailable? • What property do you own that can secure the loan? • Do you have a savings account? • Do you have investments to use as collateral?
Capacity – can you repay the debt? Have you been working regularly in an occupation that is likely to provide enough income to support your credit use? • Do you have a steady job? What is your salary? • How many other loan payments do you have? • What are your current living expenses? What are your current debts? • How many dependents do you have?
Building a Credit History • Establish a steady work record. • Pay all bills promptly. • Open a chequing account and don’t bounce cheques. • Open a savings account and make regular deposits. • Apply for a local store credit card and make regular monthly payments. • Apply for a small loan using your savings account as collateral. • Get a co-signer on a loan and pay back the loan as agreed.
Types and Sources of Credit Single-payment Credit Items and services are paid for in a single payment, within a given time period, after the purchase. Interest is usually not charged. • Utility companies, medical services • Some retail businesses
Types and Sources of Credit Instalment Credit Merchandise and services are paid for in two or more regularly scheduled payments of a set amount. Interest is included. A repayment plan is drawn up in the form of a conditional sales contract based upon fulfilling a number of conditions of the contract. • Some retail businesses, such as car and appliance dealers
Types and Sources of Credit Consumer Loans Money may also be loaned for a special purpose, with the consumer agreeing to repay the debt in regularly scheduled payments. • Chartered banks • Consumer finance companies • Credit unions • Trust companies
Types and Sources of Credit Revolving Credit Many items can be bought using this plan as long as the total amount does not go over the credit user’s assigned dollar limit. Repayment is made at regular time intervals for any amount at or above the minimum required amount. Interest is charged on the remaining balance. • Retail stores • Financial institutions that issue credit cards
Credit Application • Is a form that a borrower must complete before being granted a loan, charge account, or credit card. • This helps the lender decide whether you should be approved or not. • A credit check is completed.
Video … "Credit Scores"
Bank pays store for credit slips, minus approx. 2% of the total transaction amount BANK Member of Visa or MC Association 3 Store sends credit card slips to bank STORE 2 • Consumer pays bank: • Total amount by due date = no interest • partial payment = 1.5% interest on old balance Bank sends statement to consumer Consumer buys from store using a credit card 4 5 1 CONSUMER
How Credit Cards Work Example • If you buy something for $500 using your Visa card. • The store bills the bank for $ . • The bank deposits the $500 into the store's account, minus a percentage (assume 2%: 2% x $500 = $ ) as a fee to the store for using the credit card service. 500 10
How Credit Cards Work Example • The bank then sends you a statement billing you for the $ . • a) If you pay $500 right away, you are charged $ interest. b) If you pay a portion of what you owe (say, $100) you are charged interest on your next statement based on the previous statement balance of $ . 500 0 500
How Credit Cards Work Results • The average annual interest rate on Visa and MasterCard is 18%; the monthly interest rate is 1.5% (18% / 12 months). • Your interest would be: 1.5% x $500 = $7.50 • Visa makes $10 from the Store and $7.50 from the Consumer for a total of $17.50
Canadian Statistics In 2009, it was estimated that there were: 72 Million Credit Cards in circulation Canadians used credit cards to purchase: $267 Billion on their cards in 2008 Total outstanding credit card debt $78 Billion How much interest would this generate?
