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Ch 4: Consumer Credit

Ch 4: Consumer Credit . 4.1 Introduction to Consumer Credit. A couple fun tips…. There are almost a billion MasterCard and Visa credit cards in use in the US In 2006, Visa cardholders made more than $1,000,000,000,000 in purchases

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Ch 4: Consumer Credit

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  1. Ch 4: Consumer Credit 4.1 Introduction to Consumer Credit

  2. A couple fun tips… • There are almost a billion MasterCard and Visa credit cards in use in the US • In 2006, Visa cardholders made more than $1,000,000,000,000 in purchases • Today’s consumer owes money, on average, to 13 different lending institutions, including credit cards and loans • More than half of the US has at least 2 credit cards

  3. What do you need to know before using credit???? Answer the following questions with your groups! • Why does credit compel people to overspend? • Have you ever seen an advertisement about obtaining your credit score on TV, on radio, or in print media? • How is your credit score like a credit “report card?”

  4. What do you need to know before using credit???? • Using cash or debit = buy now, pay now • Purchasing something but not paying immediately means you are using credit • People who use credit are called debtors • Every time you use electricity, you are using credit. You use the electricity and then pay for it when the monthly bill arrives • Organizations or people that extend credit to consumers are called creditors • For example, Bank of America

  5. Advantages vs. disadvantages YAY!!! • Don’t have to carry lots of cash • Can use something while still paying it off • Don’t have to pay something in full before purchasing But… • Interest! • Tendency to overspend (think you have more money than you do)

  6. With your group… • Create a pros and cons list of having a credit card • You may not use the ones on the previous slide • Must have 5 of each

  7. When getting a credit card… • Creditors have you fill out an application and they will check your financial history. The history includes three basic items… • Assets – everything you own (car, home, bank accounts etc) • Earning Power – your ability to earn money now and in the future. They look to make sure you have enough income to pay back debt • Credit rating – aka your “credit report card”. Creditors report how well you met your financial obligations to a credit reporting agency. You are given a score from 300-850.

  8. When getting a credit card… • A credit reporting agency compiles records on all credit users. • These records are used by creditors before they issue credit to a consumer • How do you start a good credit history? • Open a checking and savings account • Pay all bills on time • Successfully handle all credit transactions • Given score based on those 3 criteria • Most popular score is called FICO score • 300 – 850 • Higher the score the better the credit

  9. What else?? • Some stores offer an installment plan to creditworthy customers. This gives consumer the convenience of paying for merchandise or services over a period of time. • The consumer pays part of the selling price at the time of purchase. This is called a down payment • Payments made on monthly basis • Installment buyers are charged an interest fee or finance charge that is added to the cost

  10. Example 1 • Heather wants to purchase an electric guitar. The price of the guitar with tax is $2,240. If she can save $90 per month, how long will it take her to save up for the guitar?

  11. Check your understanding • If Heather’s guitar costs x dollars and she could save y dollars per month, express algebraically the number of months it would take Heather to save for the guitar.

  12. Example 2 • Heather, from Example 1, speaks to the salesperson at the music store who suggests that she buy the guitar on the installment plan. It requires a 15% down payment. The remainder, plus an additional finance charge, is paid back on a monthly basis for the next two years. The monthly payment is $88.75. What is the finance charge?

  13. Check your understanding • Assume the original price of the guitar was p dollars, and Heather made a 20% down payment for a one-year installment purchase. The monthly payment was w dollars. Express the finance charge algebraically.

  14. Example 3 • Carpet King is trying to increase sales, and it has instituted a new promotion. All purchases can be paid on the installment plan with no interest, as long as the total is paid in full within six months. There is a $20 minimum monthly payment required. If the Schuster family buys carpeting for $2,134 and makes only the minimum payment for five months, how much will they have to pay in the sixth month?

  15. Check your understanding • The Whittendale family purchases a new refrigerator on a no-interest-for-one-year plan. The cost is $1,385. There is no down payment. If they make a monthly payment of x dollars until the last month, express their last month’s payment algebraically.

  16. Example 5 • Mike has a credit rating of 720. Tyler has a credit rating of 560. Mike and Tyler apply for identical loans from Park Bank. Mike is approved for a loan at 5.2% interest, and Tyler is approved for a loan that charged 3 percentage points higher because of his inferior credit rating. What interest rate is Tyler charged?

  17. Chapter 4 Asnmt 1 • Pg. 178 #1 – 7, 11 - 13

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