What do we know about credit??? What is credit? What is a credit limit? What can happen if you make a payment late or go over your credit limit? When can you apply for a credit card? How does a credit card work? Who has a credit card? What is a credit score?
amount of money loaned to you with the expectation that it will be paid back later Credit – • Buy now… Pay later! What’s the catch???
Interest • Amount you pay to use someone else’s money • Buy now, then pay for it over a period of time with interest • Higher interest rate = Higher total amount • When you use credit to buy something you end up paying more
Interest can sneak up on you… • If you pay your full balance off every month there will be no interest added • If you just make the minimum payment every month… • Takes longer to pay off balance • You will end up paying a lot more money • Example: Interest
Why people use credit? • To buy something you couldn’t afford if you had to pay for it all at once Examples: - car - college tuition - vacation • Convenience - They have the money but don’t want to carry cash • Shopping online • Immediate Satisfaction • Regardless if they can afford it or not Not a smart way to use credit!!!
Common Types of Credit • Credit Card • Installment Loan • Student Loan • Mortgage
1. Credit Card Institution: - banks, credit unions, stores, and gas stations Features: - Some can be used just about anywhere, others only at a specific place - No payoff deadline - Monthly minimum payments may vary… based on the balance - Usually have highest interest rate out of these 4 types of credit
2. Installment Loan Institution: - banks, credit unions, auto dealers, and other financial institutions Features: - Used for large purchases *cars and appliances - Loan term can vary from a few months to many years - Monthly payments usually set for life of loan - Usually lower interest rates than credit cards
3. Student Loan Institution: - banks, credit unions, and the federal government Features: - Used for college tuition and other expenses - Some loans let you wait to make payments until after graduation - Loan term usually up to 10 years - Monthly payment amounts are usually set annually - Usually lower interest rate than installment loans *May provide an income tax break on the interest paid
The truth about student loans Student Loan Activity in Moodle!!!
4.Mortgage Institution: - banks and credit unions Features: - Used specifically for a loan to purchase a home - Usually repaid over 15-30 years - Monthly payments may be set for the life of the loan - Usually lower interest rate than installment loans *May provide an income tax break on the interest paid
Cost of Using Credit Using credit comes with a price… • Biggest part of the price is the interest rate Advertisers: “Buy it now for only $19 a month!” • Doesn’t tell you what you really are paying?!?! Read the fine print of credit card or loan application!
Annual Percentage Rate-APR • The cost of the loan per year as a percentage of the amount borrowed • Best credit feature to compare • Law requires exact same APR calculations • Beware of “teaser rates”
REVIEW! What is a Mortgage? Installment loan? What is the biggest part of the cost of using credit? What is the best credit feature to compare? What other factors should you look at when choosing to use credit?
Other factors connected to cost of using credit… What you need to look for… • Annual fee • Credit limit • Finance charge • Origination fee • Loan term • Grace period
Annual Fee • Yearly charge you pay to use credit • Usually charged by credit card companies
Credit Limit • Maximum amount of credit a lender will give to customer • $500 • $1,000 • $10,000 • $25,000 • Can increase over time
Finance Charge • Actual dollar cost of using credit • Extra price you pay for the privilege of borrowing money
Origination Fee • Charge for setting up a loan • Usually associated with home loans
Loan Term • Length of time you have to pay off loan • Applied to installment, student, and mortgage loans • Longer loan term = Lower monthly payment • Cost increases because of interest
Grace Period • Length of time before interest kicks in • If you pay off your balance each month, you will not pay any interest • Look for credit card with a grace period of 25 days or more
Everyone Makes Mistakes… • Payment after due date • Spend more than credit limit What are the consequences????
Consequences • Over-The-Limit Fee • Spending more than your credit limit • Late Fee • Making payment after the due date • Know how much late fee is and when it will be charged May NOT be the only penalty for a late payment!
Universal Default Clause • Hike up your interest rate for one late payment • Even if it’s to a different creditor • Could be for a very low and minor payment
REVIEW • What is a grace period? • What type of loan usually has a origination fee? • What is the Universal Default Clause?
Credit: The Good and Bad • Before you decide whether credit is the best choice for you • Extremely important to know all the rewards and risks
Benefits • Convenience • Protection • Emergencies • Opportunity to Build Credit • Quicker Gratification • Special Offers • Bonuses
Convenience • Safer than carrying around large amounts of cash • Easier for travel expenses • Used to buy items on internet
Protection Credit Card: • Easier to get a refund • Some cards offer buyer protection • Type of insurance for: • Damaged items • Mistaken charges on account
Emergencies • Always have a way to pay for sudden expenses • Examples: • Car breaks down • Injuries
Opportunity to Build Credit • Best way to build credit history • Must be responsible with credit card • Makes it easier to get more credit in the future
Quicker Gratification • Allows you to buy expensive items • Car • House *Only way some people can afford these items
Special Offers • Decrease short-term costs of credit cards • Examples: • Reduced interest rate • No payments until next year *Be careful when these deals expire!!!
BONUSES • Offer bonus points: • Frequent-flyer miles • Cash rebates for every dollar you spend *These perks may come with higher interest rates Rewards
Potential Risks • Interest • Overspending • Debt • Identity Theft
INTEREST • Amount you pay for using credit • Makes item more expensive
OVERSPENDING • Use credit to live beyond their means • Buying items they can’t afford • Time goes on, amount grows, harder to pay off balance
DEBT • Entire amount of money you owe to your lenders • Lenders have legal claims against your future income • Too much debt… can destroy financial plan and future
Identity Theft • Personal info is used without your permission • Frauds/Crimes • Be careful giving out information
Moodle Activity • Identity Theft • Answer questions in the discussion topic in Moodle!
Review… • 4 potential risk we looked at • What is overspending • Identity theft
Are you worthy???? When you apply for a credit card or a loan you will usually need: • Social security number • Driver’s license number • Date of birth • Address and phone number • Name of employer • Monthly income • Other debts • Monthly rent or mortgage
What Lenders Look For… • Once you apply, lender decides if your creditworthy • They decide if and how much to lend you • What all lenders look for is referred to as THE 4 C’s
THE 4 C’s OF CREDIT • Collateral • Capital • Capacity • Character
1. Collateral • An asset of value lenders can take from you if you don’t repay the loan • Typically for home mortgage or car loan • “Secured Loan”