What would be considered good credit On average how many credit cards does the average household have How do credit cards make money Video Who are credit card companies best and worst customers ID: 722362
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Slide1
CreditSlide2
Bell Ringer
Is a credit card good or bad?
What would be considered good credit?
On average how many credit cards does the average household have?
How do credit cards make money?Slide3
Video
Who are credit card companies best and worst customers?
Should people use credit cards as an emergency fund? Why or why not.
0% interest
Late feesSlide4
Chapter 4 - CreditSlide5
Credit and Installment Debt Terms
Credit
- is receiving funds either directly or indirectly to buy goods and services today with the promise to pay for them in the future
Principal
- The amount that was originally borrowed
Interest
- the amount that the borrower must pay for the use of someone else’s funds
.Slide6
Credit and Installment Debt Terms
Installment Debt
- One of the most common types of debt, this loan requires equal payments over time
Period - the term used for the length of time of the loan
Durable Goods
- goods that last longer than 3 years and are often purchased using credit
What are some examples of durable goods?Slide7
Consumer Installment Debt in U.S.
http://glencoe.com/sites/common_assets/socialstudies/in_motion_08/ett/Figure4-1.swfSlide8
Consumer Installment Debt in U.SSlide9
Types of Credit
Characteristics
Close-end Credit
Open-end credit (revolving credit)
Definition
A one-time loan
Credit is extended in advance
Purpose of the loan
Specified in application
May be used for a variety of purposes
Payments
Specified number of equal payments
Vary depending upon amount charged
Loan amount
Agreed upon during the application process
May be increased for responsible consumers
Examples
Mortgage, Automobile Loan
Credit CardSlide10
Mortgages
Mortgage
- installment debt on real property such as houses, buildings or land.
Largest form of installment debt in the countrySlide11
Pay Now or Pay Later!
$1,000 Installment Loan at 9% Interest
Term of Loan
24 Month
36 Months
Monthly Payments
$45.69
$31.80
Total Interest
$96.56
$144.80
Total Payments
$1096.56
$1,144.80Slide12
Why People Use Credit - Advantages
“Buy now, pay later”
Using credit allows the borrower to enjoy consumption now rather than later
Items that are too expensive would often take too long to save for
Builds/establishes your credit history & credit score
Convenient
Useful for emergencies
Often required to hold a reservation
Easy form of debt consolidation
Protection against rip-offs and fraudSlide13
Credit - Disadvantages
Missed payments hurt your score
Opening too many cards hurts your score
Late Fees, Finance charges
Going over credit limit
Interest is costly
Tempting to overspend
Privacy is an increasing concern
Personally responsible for lost/stolen cards
Identity theft easier
Can lose financial freedom from overspending Slide14
Checklist for Buying on Credit
The following questions should help you in determining whether to use credit or not.
Do I really
require
this item? Can I
postpone
purchasing this item until later?
If I pay cash, what
will I be giving up
that I could buy with these funds?
If I borrow or use credit, will the
satisfaction
I get from the item I buy be greater than the interest I must pay?
Have I done
comparison
shopping for credit?
Can I
afford
to use credit now?Slide15
Credit scores
A FICO (Fair Isaac Company) score is an evaluation of a person’s ability to repay debt
It is a number between 300 and 850
A higher number is a better credit score
Indicator of a person’s ability to pay back a loan
A lower score may increase the interest rates a consumer pays or they may not receive credit
The creditor has a greater risk that the individual may not pay back the money they loaned Slide16
Credit Scores
Credit cards may influence each component of how an individual’s credit score is calculatedSlide17
Credit scores
Low credit scores will cost individuals more money long-term.
This table is based upon a thirty-year fixed mortgage rate on a $300,000 loan.
FICO Score
Interest Rate
Monthly Payment
30 Year Amount
760
5.9%
$1,787
$643,320
650
7.2%
$2,047
$736,920
590
9.3%
$2,500
$900,000Slide18
Credit Scores, cont.
Check your credit score & credit report once a year – but not more than once in 12 months!
If your credit is checked more than once every 12 mos, each inquiry after that starts to hurt your score
3 credit reporting agencies are:
Equifax, Experian, and TransUnion