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USING CREDIT

USING CREDIT. Unit 7. Terms: 1. Creditor – an entity (bank, finance co., credit union, business or individual) to which money is owed 2. Consumer Credit – the use of credit for personal needs, dates back to colonial times. The Importance of Consumer Credit .

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USING CREDIT

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  1. USING CREDIT

    Unit 7
  2. Terms: 1. Creditor – an entity (bank, finance co., credit union, business or individual) to which money is owed 2. Consumer Credit – the use of credit for personal needs, dates back to colonial times. The Importance of Consumer Credit
  3. FACTORS TO CONSIDER BEFORE USING CREDIT 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? Uses & Misuses of Credit
  4. ADVANTAGE: Lets you enjoy goods and services NOW Credit may be the only acceptable method of payment If used wisely, other lenders will view you a responsible person. DISADVANTAGES: It COSTS money! Does not increase your total purchasing power. Advantages & Disadvantages of Credit
  5. Closed-End Credit You receive a one-time loan that you will pay back over a specified period of time and in payments of equal amounts. Used for specific purpose and involves a definite amount of money Open-End Credit You borrow money for a variety of goods and services. Company issues a credit card with a certain limit on the amount of money you can borrow. Line of Credit – the maximum amount of money the creditor makes available to borrow. Types of Credit
  6. LOANS: Inexpensive loans – parents or family members Medium-priced loans – commercial banks, credit unions Expensive loans – finance co., retail stores Home equity loans – loan based on the equity in your home (the difference between the current market value of your home and the amount you still owe on the mortgage. Sources of Consumer Credit
  7. CREDIT CARDS Terms: Grace period – a time period during which no finance charge will be added to your account. Finance charge – total dollar amount you pay to use credit. Debit Cards – DON’T confuse with credit card!!! Electronically subtracts money from your checking account Smart Cards - a new kind of credit card. Equipped with a computer chip that can store 500 times as much data as a credit card. CC balances, drivers license, health care id., medical history,etc. Travel & Entertainment Cards – not really credit cards. Balance is due at the end of every month!
  8. Debt Payments-to-Income Ratio % of debit you have in relation to your net income (take home pay) Suggested no more than 20% of net income on debt Can You Afford a Loan?
  9. The Finance Charge and the Annual Percentage Rate (APR) APR – how much credit costs you on a yearly basis in % Calculating the Cost of Credit Simple Interest – interest added to the principal Cost of Open-End Credit Truth In Lending Act requires creditors to inform consumers how finance charge and APR affect costs. Cost of Credit and Expected Inflation – inflation reduces purchasing power Avoid Minimum Monthly Payment Trap Smallest amount you can pay to stay in good standing The Cost of Credit
  10. Applying for Credit
  11. 1. Character 2. Capacity 3. Capital 4. Collateral 5. Credit History The 5 Cs of Credit
  12. Will you repay the loan??? What kind of person are you? Stable? Trustworthy? Have you used credit before? How long have you lived at your present address? How long have you held your current job? Character
  13. Can you repay the loan? Your income and current debt. What is your job, and how much is your salary? Do you have other sources of income? What are your current debts? Capacity
  14. What are your assets and net worth? The amount of your assets (what you have) that exceed your liabilities (what you owe) What are your assets? What are your liabilities? Capital
  15. What if you don’t repay the loan? Property or savings you already have. If fail to repay loan…the take property/savings. What assets do you have to secure the loan (such as a car, your home, or furniture)? Do you have any other valuable assets (such as bonds or savings)? Collateral
  16. What is your credit history? Used credit responsibly in the past? Do you pay your bills on time? Have you ever filed for bankruptcy? Credit rating – a measure of a person’s ability and willingness to make credit payments on time Credit History
  17. Age (although must be at least 18 or 21) Public Assistance (social security or state assistance) Housing Loans (neighborhood where you live or want to live) What CAN NOT be considered….
  18. If Denied?
  19. They report your credit report. 3 Major Credit Bureaus: Experian Information Solutions Trans Union Credit Information Company Equifax Services, Inc. Credit Bureaus
  20. Your employer, position, and income Your previous address Your previous employer Your spouse’s name, social security number, employer and income Whether you rent or own your house Checks returned for insufficient funds What’s on your credit file?
  21. Protecting your credit
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