Credit• Receiving something now and

promising payment at a later time.• Principle: Actual cost of the good or

service.• Interest: Amount paid for the use of

money.

Charge Accounts

• Buying goods or services with money you promise to have later – NOT with money you have right now

• Credit limit: Maximum amount a person can buy with the promise of payment at a later time.

• Three types of charge accounts are installment, regular, and revolving.

1. Installment Account

• Repaid with equal payments over a long period of time.– Mortgage: Payment owed on property.

• Part of payment goes to interest and part goes to principle.

2. Regular Account• Usually billed on a monthly schedule• Billing amount may change depending on amount of

use• The entire bill must be paid, therefore no interest is

charged– The account can not be used again until the balance is paid

off.

3. Revolving Account

• Billing amount varies based on amount of use• Interest is charged on the portion not paid.• The account can still be used until the credit

limit is reached.

Credit vs. Debit Cards

• Credit cards: Make purchases without cash.– Used to purchase items with money you promise to have in the

future– Charge very high interest rates if you do not pay on time.– Top companies are VISA, MasterCard, Discover, and American

Express

• Debit Cards: Transfer funds electronically.– Paying with money you have right now– Popularly used in Automated Teller Machines (ATM’s)– Safer than carrying around lots of cash– Same as paying with a check, but faster/easier

Cost of using Credit

• Finance Charges: Total cost of credit expressed in dollars.– All of what you owe (principle + interest = finance

charges)

• Annual Percentage Rate (APR): the rate of interest accruing on your finance charges– Shown as a %

Video

• http://www.pbs.org/wgbh/pages/frontline/shows/credit/view/

• Listen for this vocab term “Universal Default”

Applying for Credit• Fill out an application.

• Credit Bureau will do a credit check.• This check gives your income, debt, and ability to pay debts in the past.

• Creditor may require a co-signer if you have no credit score

Credit Rating• 4 levels = Excellent, good, average, or poor.• Lower credit score may be required to provide

collateral, something the borrower is willing to give up if the loan is not paid back.

Bankruptcy

• When debts are so large, that they can not be repaid.

• Most of what debtors own is given to creditors.

• Stays on your credit record for 10 years.– It is very hard to re-establish credit.

Look out for the … FEES!!• Annual Fee: Amount charged once a year for the

benefit of being able to use the card (membership fee)

• Origination Fee: Amount charged when opening a credit account (start-up or activation fee)

• Late Fee: Amount charged if a payment is past the due date

• Over-the-Limit Fee: Amount charged if you spend more than your credit limit

• **NEW** Checkout Fee: Percentage of your purchase price charged to offset “swipe fees”– Charged by the business, not the credit card company

1. Principle 2. Interest3. Credit limit4. Installment account5. Regular account6. Revolving account7. Mortgage8. ATM9. APR10. Finance Charges

11. Annual fee12. Origination fee13. Over-the-limit fee14. Late fee15. Debit card16. Collateral 17. Universal default18. Credit rating19. Credit Bureau20. Bankruptcy