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Chapter 8 .1

Chapter 8 .1. What is Credit?. Using Consumer Credit Wisely. Credit is an arrangement to receive cash, goods, or services now and pay for them in the future. Borrowing money or using a credit card is ‘using’ credit . Consumer credit is the use of credit for personal needs.

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Chapter 8 .1

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  1. Chapter 8.1 What is Credit?

  2. Using Consumer Credit Wisely • Credit is an arrangement to receive cash, goods, or services now and pay for them in the future. • Borrowing money or using a credit card is ‘using’ credit. • Consumer credit is the use of credit for personal needs. • Most common form = credit card account • Consumer spending and demand indicator

  3. Using Consumer Credit Wisely • An entity that lends you your money is a creditor. • Examples: financial institution, merchant, or individual • Good credit is valuable!!

  4. Brainstorm • What are some reasons for using credit? • When might it be inappropriate to use credit? • Record answers in your notes

  5. Factors to Consider Before Using Credit • Giving or receiving money is the act of finance. • Before using credit, consider: • Do you want to use your savings instead of credit? • Can you afford the item? • Could you put off buying the item for a while? • What are the costs of using credit?

  6. Factors to Consider Before Using Credit • You are also agreeing to pay the fee that the creditor adds on to your purchase. • Example: If you do not pay your credit card bill in full every month, you are charged interest on the amount you have not paid.

  7. Advantages • Enjoy goods and services now and pay for them later • Combine several purchases, making one monthly payment • Record of expenses and safe than carrying cash • If used wisely, other creditors view you as responsible

  8. Disadvantages • Temptation to buy more than you can afford • Risk of losing your good credit reputation. • Risk of losing income and property to repay your debts • If your income doesn’t increase, may have difficulty paying bills

  9. Two Basic Types of Credit • Closed-end credit • Open-end credit

  10. Closed-End Credit • One-time loan, paid back over a specified period of time in payments of equal amounts. • Involves an agreement, or contract. • Examples: Vehicle loans (title), large appliances, furniture

  11. Closed-End Credit • Three most common types: • Installment sales credit – high priced merchandise (large appliances, furniture, etc), usually a down payment is required • Installment cash credit – direct loan for personal money (home improvements, vacation, etc.), no down payment • Single lump-sum credit – must be repaid in full on a specified day, usually 30 to 90 days.

  12. Open-End Credit • Credit as a loan with a limit on the amount of money you can borrow for a variety of goods and services • Line of credit = maximum amount of money allowed • Examples: Visa, MasterCard, Department Stores • Billed for at least a partial payment of the total amount you owe • May have to pay interest or other finance charges

  13. STOP

  14. Sources of Consumer Credit Chapter 8.1

  15. Loans • Borrowed money with an agreement to repay it with interest within a certain amount of time. • Inexpensive Loans: • Low interest • Family or parents • Medium-Priced Loans: • Moderate interest • Savings and Loan Associations, Commercial Banks, Credit Unions

  16. Loans (continued) • Expensive Loans: • High interest • Finance companies, retail stores • Home Equity Loans: • Based on your home equity • Difference between the current market value of your home and amount your still owe on the mortgage • Interest is tax-deductible • Missing payments = possible loss of home

  17. Credit Cards • Average cardholder has more than nine credit cards. • Grace period – time period during which no finance charges will be added • A finance charge is the dollar amount you pay to use credit. • Pay in full and on time = no finance charge • Includes late payment fees, interest, and annual fee.

  18. Do not confuse the following with basic credit cards: • Debit Cards: • Electronically subtracts money from your savings or checking account to pay for goods/services. • Some can be used as credit and delays automatically subtracting from your account • Cobranding: • Linking a credit card with a business trade name offering “points” or “premiums” • Increasingly popular • Offers cash rebates on specified products/services

  19. Smart Cards: • Contains a computer chip and stores 500 times as much data as a normal credit card. • Example: Purchase a plane ticket, store it digitally, and track frequent flyer miles

  20. Textbook Page 231 • Figure 2 • Summarizes the major sources of consumer credit. • Which credit source would you use for the following loans and why: • Mortgage • Vehicle Loan • Your first credit card • Record answers in your notes

  21. Review Key Concepts • Page 233 • #1-4, 6 (one or two sentences) • Turn in when complete • Mini-QUIZ TOMORROW on Ch.8.1 • Homework: Research two colleges of interest to you and locate the tuition for the Fall 2013 Semester. Include on a piece of paper your name, each college, and the tuition. • DUE FRIDAY

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