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Understanding Credit: Types, Uses, and Risks

In this chapter, we explore the concept of credit, detailing its definition, principal, and interest rates. Discover the various types of credit, including installment loans for significant purchases, credit cards offering flexibility but often high costs, student loans with favorable rates for education, and mortgages for home purchases. We'll also discuss the pivotal decision-making factors for using credit, weighing benefits like convenience and credit-building against potential risks such as overspending and identity theft. Equip yourself with essential knowledge for navigating the world of credit.

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Understanding Credit: Types, Uses, and Risks

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Presentation Transcript

  1. Chapter 4: Going into Debt Section 1: Use of Credit

  2. Use of Credit • Credit: Receiving money with the promise to pay in the future • Principal: The Original amount of the loan • Interest: Amount charged for use of someone else’s money

  3. Types of Credit 1. Installment Credit • Monthly payment amounts are often set for the life of the loan. • Most common type of Debt • Typically used for large purchases such as a car.

  4. Types of Credit • Credit Cards > No payoff deadline > Some types of cards can be used just about anywhere. > Monthly minimum payments vary > Usually the most expensive type of credit.

  5. Types of Credit • Student Loans - Used for tuition and other college expenses - Loan term is usually up to 10 years - Monthly payment amounts are usually set annually, when interest rates are adjusted. - Usually has a lower interest rate than an installment loan. - May provide an income tax break

  6. Types of Credit • Mortgage - Used specifically for a loan to purchase a house. - Usually repaid over 15-30 years. - Usually has a lower interest rate than an installment loan. - May provide income tax break.

  7. Deciding When to Use Credit • The cost of using Credit is the INTEREST • Will your satisfaction be greater than the interest cost • Always shop around for the best interest rate • Make sure you can afford to borrow now • Ex. I lost my job, Should I buy a new TV

  8. Why Use Credit • Convenience • Protection • Emergencies • Opportunity to build credit rating • Quicker Gratification • Special offers • Bonuses

  9. Risks in Using Credit • Interest • Overspending • Debt • Identity Theft

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