Credit

Bell Ringer

1. Is a credit card good or bad?

2. What would be considered good credit?

3. On average how many credit cards does the average household have?

4. How do credit cards make money?

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 fees

Chapter 4 - Credit

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.

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?

Consumer Installment Debt in U.S.

• http://glencoe.com/sites/common_assets/socialstudies/in_motion_08/ett/Figure4-1.swf

Consumer Installment Debt in U.S

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 Card

Mortgages

• Mortgage - installment debt on real property such as houses, buildings or land. Largest form of

installment debt in the country

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 $1,144.80

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 fraud

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

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?

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

Credit Scores

• Credit cards may influence each component of how an individual’s credit score is calculated

10%10%

15%

30%

35%Credit Mix

Pursuit of New Credit

Credit History & Length

Outstanding Debt

Payment History

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 $643,320650 7.2% $2,047 $736,920590 9.3% $2,500 $900,000

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