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Credit. Consumer Economics. What is credit?. The ability to borrow money now with the promise that you will repay it in the future. “Buy now, pay later”. How credit works…. Credit comes in a variety of shapes and sizes. $1 purchase on a credit card (gum) $50 purchase on a credit card (gas)

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credit
Credit

Consumer Economics

what is credit
What is credit?
  • The ability to borrow money now with the promise that you will repay it in the future.
  • “Buy now, pay later”
how credit works
How credit works…
  • Credit comes in a variety of shapes and sizes.
    • $1 purchase on a credit card (gum)
    • $50 purchase on a credit card (gas)
    • $10,000 loan to buy a car
    • 50,000 loan to start a business
    • 80,000 in loans for a college degree
    • $250,000 loan to buy a home
  • A bank lends you the money you need when you need it, but also charges you interest.
    • You borrow $10,000 at 4% to buy a car. It takes you 3 years to pay off the car note. The car ends up costing you $11,200.
pros and cons of credit
Pros and Cons of Credit

Pros (+)

Cons (-)

You are paying money to spend money

Interest rates may be high

Easier to spend recklessly and get in debt

Buy things you don’t need, can’t afford.

  • Can purchase big $$$ items that would take years to save for.
    • Car, home, etc.
  • You get what you want NOW!
  • Useful in emergency situations.
when should i use credit
When should I use credit?
  • Before you borrow, ask yourself….
  • Do I need this item now?
  • Can I afford to make the payments on this item?
  • What do I have to give up in order to borrow for this product?
  • Most people use credit at some point throughout their lives.
  • Buying a home
    • $100,000 and up
  • Buying a car
    • $5,000 and up
  • College tuition
    • $15,000/ year
  • Major medical expenses
    • ???
does everybody get credit
Does everybody get credit?
  • Creditworthiness is a measure of your reliability to repay a loan.
  • Banks will check your credit history to see if you’ve paid past loans/ bills on time.
  • The higher your credit score, the more likely banks will be to lend you $$$
  • You will also get a lower interest rate on loans.
  • Many people are denied mortgages or car loans because their credit is bad.
credit cards
Credit Cards
  • A credit card allows you to use credit for everyday purchases such as gas, groceries, household goods, clothing, etc.
  • You can also make larger purchases such as electronics, vacations, etc.
  • What you can buy depends on your credit limit.
    • As little as $500 for a college student
    • $25,000 or more for an established adult
more on credit cards
More on Credit Cards

Watch out for….

Annual fees

High interest rates

Late fees

Minimum payments

  • Many people try to pay their entire balance each month to avoid going into debt.
  • Whatever you don’t pay carries over to the next month and you are charged interest on that balance.
a word of caution
A Word of Caution…
  • Credit used inappropriately can lead to a lifetime of debt, financial stress, and possibly even bankruptcy.
  • Credit can be used as a tool to help you, but like a sword, it can also cut you.