UNIT FIVE.CREDIT:

BUY NOW,PAY LATER

Coming soon to a mailbox near you:

Credit Card offers

If you haven’t already started receiving credit

card offers,YOU WILL!

“To use credit wisely, you need to know

what is really involved.”

CAN YOU BELIEVE?

Question 1:28% of studentswith a credit card

don’t repaythe entire balance

each month.

Question 2:68% of teenagers

say they have neverdiscussed using credit

cards responsiblywith a family member.

Question 3:56% of teenagers say they

are pretty familiar with credit cards.

Question 4:9% of teenagers have

access to a parent’s credit card.

Question 5:31% of teenagers

aged 18-19 alreadyhave a credit cardin their own name.

OVERVIEW:CREDIT 101

“Knowledge is power.”

CREDIT means someone is willing to loan you money

(called principal) in exchange for your promise to pay it back, usually with

interest.

INTEREST IS THE AMOUNT YOU PAY TO USE

SOMEONE ELSE’S MONEY.(The higher the interest

rate, the greater the costs of using credit.)

All interest rates are quoted as

AN ANNUAL PERCENTAGE RATE (APR).

(The APR is the amount it costs you a year to use credit, expressed as a

percentage rate. It includes the interest, transaction fees, and

service charges.)

Other costs of using credit:

1. ANNUAL FEEyearly charge for the

privilege of using credit

2. FINANCE CHARGEactual dollar cost of

using credit, which is calculated by a lender.

3. ORIGINATION FEE:charge for setting up a

loan

4. LOAN TERM:how long the loan lasts.

CREDIT COSTS.

Loan Length.Figure 5.1 shows 2 loans, both with 8% interest rate

and a $1,000 loan.

It costs an extra $90 for an extra two years of

payments.Think of it as an extra $90

per $1000 borrowed.

Okay for $1,000.

BUT what about $100,000?

See figure 5.2

You paid a total of

$315,926for your house.

2.INTEREST RATE

High interest rates men that borrowed money

costs more to use.

See 5.3

CREDIT BENEFITS:

1. ACCESS TO CASH IN AN EMERGENCY

2. THE ABILITY TO USE IT NOW.

3. SAFETY AND CONVENIENCE

4. EARN BONUS POINTS OR MILES

SOURCES OF CREDIT

1.CREDIT CARDS

(no loan term, pay the balance over a varied and

extended time.If you take a long time to pay the balance, you will pay larger credit costs.)

5 hints on how to use credit cards to your

advantage:

1. ANNUAL PERCENTAGE RATE

Credit cards can carry APR’s as high as 20%.

2. ANNUAL FEESome cards charge an annual fee and others

don’t.

3. MINIMUM PAYMENTMost cards require a minimum monthly

payment of about 2% of your credit card

purchases. Some set a minimum dollar payment of $15 - $20 per month.

4. GRACE PERIOD: number of days during which no

interest or finance charges will apply.

The key is to pay off the entire balance of your card during the grace

period.

5. CREDIT LIMITAll cards come with a limit establishing how much you can charge. Once you reach that

limit, you are “maxed” out and can charge no

more.

HOW LONGCAN IT TAKE?

A $500 credit card, maxed out,

18% APR, minimum paymentof $15 per month.

How long will it take?

ALMOST FOUR YEARS.

Plus you will have paidabout $180

in finance charges.

SAME STORY,2ND VERSE.

$2000 CREDIT CARDmaxed out,

18% interest.Minimum payment

of 2% or $20.

How long will it take?

More than 18 years.

Total finance charge =over $3,500.

Total costs for $2,000 credit =$5,500.

“Paper or Plastic?Consumers with a credit

card will spend up to 33% more than if they shopped

with cash instead.”

Hint:If you need the advantage

of a credit card (ex. Internet, car rental, etc.), try an ATM/VISA instead.

2. INSTALLMENT LOANS

Require you to make payments on a regular basis – usually every

month – until the note is paid off.

Interest rates on installment loans are

generally lower than credit card rates.

Example:$10,000 car loan.

9% interest, 48 months.

Payments are $249/mo.

At the end, you will have paid $11,950.

3. STUDENT LOANS

LOW INTEREST RATES.

DELAY OF PAYMENTS UNTIL YOU FINISH

COLLEGE.

POSSIBLE TAX BREAKS.

3. MORTGAGES

Looks like an installment loan –

but extends over a longer period of time – 15 to 30

years.And the amount borrowed

is larger.

SETTING LIMITS ON CREDIT

1. HOW MUCH IS TOO MUCH?

A maximum of 20%of your net income should

go toward all of your loan payments (excluding a mortgage.)

2. WHAT ABOUT HOME LOANS?

No more than 33%of take-home pay

for a mortgage loan.

COMPARING CREDIT OFFERS:Look at:1. The APR2. The loan term3. The maximum amount of the loan4. The minimum payment amount5. Any annual or up-front fees6. Any prepayment penalties7. Additional fees8. The amount of income you need to qualify for the credit

CREDIT REPORTS:a credit history, a report of

your personal(or family) financial

transactions.Good for 7 to 10 years.

How to keep a good credit history:

1. No bounced checks2. Regular savings

3. Loan repayments on time

CREDIT SCORING:1. Capacity—

ability to repay a loan2. Character—

trustworthiness3. Capital –

things that you own

DEBT:THE AMOUNTS OF MONEY

YOU BORROW.

TEN QUESTIONS TO ASK BEFORE YOU SIGN ON THE

DOTTED LINE:

1. Do I really need this item right now or can I

want?

2. Can I qualify for credit?

3. What is the interest rate (APR)?

4. Are there additional fees?

5. How much is the monthly payment and

when is it due?

6. Can I afford the monthly payments?

7. What will happen if I don’t make the payments

on time?

8. What will the extra costs of using credit?

9. What will I have to give up to pay for it

(opportunity cost)?

10.All things considered, is using credit worth it?

WHAT IF??

You are covered with excessive debt.

1. Spend less than you earn.

Start using the excess to pay down your bills.

2. Contact your lenders.Let them know what is

going on.

3. When one loan is paid off, use the extra

money to start paying off another.

4. Pay off the highest interest loans first.

5. Seek help from a nonprofit agency.

6. The last step –bankruptcy.

(A legal process that allows someone deeply in debt to create a plan

to get out of it.)

Chapter 7 bankruptcy.* Effectively erases most of your debt.* Must be unemployed.* have a very low income.* Financial counseling required.

Chapter 13 bankruptcy:* pay back some of the debts over time.* A court oversees the repayment plan to ensure

accountability.

Costs of bankruptcy:1. Lenders can’t recover and must raise rates on others loans and services.2. Responsible borrowers must pay higher rates to help lenders recover.3. People who have declared bankruptcy will find it harder and more expensive to borrow money.