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Consumer Credit

Consumer Credit. What is a Consumer Credit?. Name_________________________________. Using Consumer Credit Wisely Why is having good credit important?. When you borrow money or charge an item to a credit card, you are using credit

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Consumer Credit

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  1. Consumer Credit What is a Consumer Credit? Name_________________________________

  2. Using Consumer Credit WiselyWhy is having good credit important? • When you borrow money or charge an item to a credit card, you are using credit • Credit - an arrangement to receive cash, goods, or services now and pay for them in the future. • Consumer Credit – use of credit for personal needs. • Creditor – financial institution, merchant, or individual – an entity that lends money. • Good credit is very valuable

  3. Using Consumer Credit WiselyWhy is having good credit important?(cont) • Buy things we would have to save for years to afford: homes, cars, education • Credit is an important financial tool, but it can be dangerous • Leading people into debt beyond their ability to pay • Involves responsibility and risk! • Today consumer credit is a major force in the American economy • Any forecast or evaluation of the economy includes consumer spending trends/consumer credit • When misused, credit can result in default, bankruptcy, and loss of creditworthiness

  4. Factors to Consider Before Using Credit • Before you decide to finance a major purchase by using credit, consider: • Do you have the cash you need for the down payment? • Do you want to use your savings instead of credit? • Can you afford the item? • Could you use the credit in some better way? • Could you put off buying the item for a while? • What are the costs of using credit?

  5. Factors to Consider Before Using Credit • Agree to pay the fee that a creditor adds to the purchase price. • Monthly interest if not paid off at end of month • Periodic or annual fee • Late fees if not paid on time • Does the benefit outweigh the cost of credit

  6. Advantages of Credit • Let’s you enjoy goods and services now • Credit cards allow you to combine several purchases, making just one monthly payment • Making hotel reservations, renting a car, shopping online, you will need a credit card • Records your expenses • Shopping and traveling without a lot of cash is safer • Using credit wisely makes lenders view you as responsible

  7. Disadvantages of Credit • Credit costs money • Temptation to buy more than you can afford • Fail to repay – lose your good credit reputation • May lose some of your income or property to repay your debts • Doesn’t increase your total purchasing power • Just allows you to buy things now for which you must pay later ALWAYS APPROACH CREDIT WITH CAUTION

  8. Types of Credit • Closed-End Credit – credit as a one time loan that you will pay back over a specified period of time in payments of equal amounts • Examples • Mortgages • Car loan • Large Appliances • Lender will hold title, document showing ownership, until all payments are made • Installment sales credit – high priced items, down payment and monthly payments • Installment cash credit – you receive cash - direct loan, personal, home improvements, monthly payments • Single lump-sum credit – repaid in total within 30/90 days

  9. Types of Credit • Open-Ended Credit – a loan with a certain limit on the amount of money 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 • Examples: • Department Store Credit Card (Macy’s, Target) • Visa • MasterCard • Make as many purchases as you want, can’t exceed line of credit • Billed monthly for partial payment of total owed

  10. Loans • Borrowed money w/agreement to repay it with interest within a certain amt of time. • Inexpensive Loans – parents or other family members, be aware, that loans can complicate family relationships • Medium-Priced Loans – commercial banks, savings and loans, credit unions – moderate interest • Expensive Loans – easiest and most expensive, finance companies and retail stores • Home Equity Loans – based on your home equity (current market value of home minus what you owe) tax deductible, but could lose your home if not repaid

  11. Credit Cards • Average card holder has 9 credit cards • Grace period – time period during which no finance charges will be added, usually first 25 days • Finance charge –total dollar amt you pay to use credit • Debit Card – Do not confuse credit cards with debit cards, electronically subtracts your money from your account

  12. Credit Score What is a Credit Score? Name_________________________________

  13. The Cost of Credit • The key factors will be the finance charge and the annual percentage rate (APR) • APR - Cost of credit on a yearly basis, expressed as a percentage 18% APR - $18/yr on each $100 $20,000/$100 = 200 200*$18 = $3,600/yr in Interest

  14. Tackling the Trade-Offs • Term vs. Interest Costs – many people choose longer-term financing, they want smaller payments, longer terms cause more interest being paid…$6,000 loan APRTermMo. PymtInterestTotal Cost 14% 3 yrs $205.07 $1,382.52 $7,382.52 14% 4 yrs $163.96 $1,870.08 $7,870.08

  15. Applying for Credit • The 5 “C’s” of Credit • Character: Will you repay the Loan? • Trustworthy and stable • Personal and Professional References • Criminal History • Have you used Credit before? • How long have you lived at your present address? • How long have you held your current job?

  16. The 5 “C’s” • Capacity: Can you repay the loan? • Your Income and Debt • What is your job, and how much is your salary? • Do you have other sources of income? • What are your current debts? • Capital: What are your assets and Net Worth? • If you loss your income, you can still repay your loan from savings or selling assets • What are your assets? • What are your liabilities?

  17. The 5 “C’s” • Collateral: What if you do not repay the loan? • What kind of property or savings do you have • The creditor may take whatever you pledge as collateral • What assets do you have to secure the loan? (vehicle, home, furniture) • Do you have any other assets (bonds or savings) • Conditions: What if your job is insecure? Economic conditions, is your job and company secure? • Credit History: What is your credit history? • Credit Report • Do you pay your bills on time? • Have you ever filed for bankruptcy?

  18. The 5”C’s” • Credit Rating – measure for a person’s ability and willingness to make credit payments on time A Good Credit Rating is a Valuable Asset that You should PROTECT!

  19. Credit Score • The FICO scoring system goes from 350 to 850 • 660 to 724 to be a good credit score • VantageScore (a new score now used by all 3 credit bureaus) is 501-990. • TransUnion, Equifax, Experian • American Express, requires at the very least a 750 fico score to be eligible for quite a few of their credit and charge cards • Excellent credit rating can change as the country's economy fluctuates • the average credit score, 692 as of January 2011

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