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Section 10.1- What is Credit?

Section 10.1- What is Credit?. Goals: Identify reasons to borrow and the trade-offs you make when you borrow. Discuss how to plan when and how much to borrow. What is Credit?.

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Section 10.1- What is Credit?

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  1. Section 10.1- What is Credit? Goals: Identify reasons to borrow and the trade-offs you make when you borrow. Discuss how to plan when and how much to borrow.

  2. What is Credit? • Credit: the ability to borrow money in return for a promise of future repayment. Future repayment usually includes interest. • Basically you are giving up the ability to spend in the future in order to spend now

  3. Example: • Suppose you use credit to buy a jacket for $100. If the interest rate is 15% per year, you must repay $115 at the end of the year. • $100 X 0.15 = $15 • $100 + $15 = $115 • You are really giving up $115 worth of future spending for the ability to spend $100 now.

  4. Reasons to Borrow? • Credit helps you buy things you want sooner than you can get them by saving • Some things are too expensive for most people to buy with savings • For your Education • For your Health • For your Home • For your Car

  5. For your Home • Owning a home is a often a lifespan goal. • The average cost of a home is $245,000 and up to $450,000 in some areas. • Few people can pay for a home without borrowing. • By borrowing for a home, you get the benefit of living in it while you are making the loan payments.

  6. Advantages of Home Ownership • An investment: home values can increase over time which give you the opportunity to sell your home for more than you paid for it. • Equity- the difference between the amount you owe on a home and the home’s value. • If you own a home worth $250,000 and your mortgage is $200,000, how much equity to you have in your home? $250,000 (value) -$200,000 (mortgage) = $50,000 (equity) • Tax benefits: property taxes & mortgage interest are deductible on income tax forms.

  7. Plan Your Borrowing • How important is this purchase? • Do I need to use credit? • Can I make the payments? • Will I still be able to buy other things I want if I borrow for this now? • Basic rule of thumb is that your total debt payments should be no more than 20%-25% of your take home pay.

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