Presentation Transcript

1. Credit and Its Use

2. What is credit and why is it so important to have good credit? Credit is an arrangement to receive cash, goods, or services now and pay for them later Financial institutionsand merchants issue credit – called a creditor Having the ability to borrow funds that we normally could not pay for with cash Homes, cars, education, appliances, electronics Using credit wisely keeps people out of trouble
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?
4. Types of Credit 2 basic types Closed-end credit One-time loan that you will pay back over a specified period of time in payments of equal amounts Is used for specific purpose and involves a definite amount of money Open-end credit Is a loan with a certain limit on the amount of money you can borrow – line of credit
5. Sources of Consumer Credit Loans Inexpensive loans with low interest – parents, family members, friends Medium-Priced Loans with moderate interest – banks, credit unions Expensive loans with high interest – finance companies, retail stores Credit Cards Use money over time and pay it back Grace period – a time period with no finance charge Finance charge – total $$ amount you pay to use credit
6. The Cost of Credit Annual Percentage Rate (APR) is the cost of credit on a yearly basis, expressed as a percentage Variable Interest Rate – changes throughout the term of the credit issued Fixed Interest Rate – stays the same throughout the term of the credit used Simple Interest – is the interest computed only of the principal (which is the amount you borrowed)
7. Applying for Credit“The 5 C’s of Credit” Character: Will you repay the loan? Capacity: Can you repay the loan? Capital: What are our assets and net worth? Collateral: What if you do not repay the loan? Credit History: what is your history with using credit? Credit Rating – is a measure of a person’s ability and willingness to make credit payments on time. Credit Bureaus – an agency that collects information on how businesses and people pay their bills. Experian, Trans Union, Equifax
8. Managing DebtThe Warning Signs Making only the minimum payment each month Having trouble making the minimum payment Miss loan payments or pay late Use your savings for necessities such as food and utilities You borrow money to pay off old debts You exceed credit limits on your credit cards Been denied credit because of a bad credit report
9. What are your options? Consumer Credit Counseling Service Counseling Services through banks, military, credit unions Counseling through state and federal housing authorities Bankruptcy
10. Bankruptcy A legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts It may also include a plan for the debtor to repay creditors LAST RESORT!!!
11. Types of Bankruptcy Chapter 7 A.k.a. “straight bankruptcy” Most of the debtors assets are sold of to pay the debt owed Certain assets are protected – Social Security, unemployment, net value of home or car, tools used for employment Chapter 13 A debtor with regular income can work with the court to devise a payment plan Not all assets are lost
12. Effects of Bankruptcy Credit can be very difficult to obtain You are forced to pay very high interest rates on loans May not be able to get a credit card Bad credit can keep you from Getting a job Renting or buying a residence Buying a car