Credit: Buy Now, Pay Later Unit 3 Money Management
School Performance Write your answers at the top of your worksheet. 1. Number of times you have missed class this term. 2. Number of times you have been tardy this term. 3. How many times have you turned in late assign. 4. How many times have you turned in incomplete assign. this term. 5. How many times have you NOT turned in an assignment at all this term.
School Performance cont. 6. How many times have you been asked by the teacher to change or improve your behavior in class this term. 7. How many times have you forgotten to bring the required materials (pencil) to class this term. Add up the points. How did you do?
Score!! 4 or less..credit Granted! 5 7 You are going to need a cosigner. 8 or more..credit Denied!!!!!!!!!
Cost of Credit Buying a House ($150,000) a. Each monthly payment is $1200 b. Payments are for 360 months c. Down payment is $15,000 Total Price using credit?? (a x b + c = Total cost) What is the cost of credit? (Total Price - Original cost = Cost of credit)
Costs of Credit cont. *Buying a Car ($20,000) a. Monthly payment is $415 b. Payments are for 60 months c. Down payment is $2,500 Total Price using credit?? Cost of credit??
Credit Credit is derived from the Latin word Credo Which means I believe The lender trusts the borrower to repay the money.
What is a Credit Card? Pre-approved credit Used for purchase of items now Payment of items later
Statistics 92% of college students have a credit card by their sophomore year 1 out of every 5 college students owes between $3,000 and $7,000 in credit card debt Almost half (47%) of all college students carry four or more credit cards (Source: http://www.fcs.iastate.edu/financial)
Credit Facts Nearly 33% of teens owe money to either a person or company, with an average debt of $230. About 26% of teens ages 16-18 already have more than $1,000 in debt. 4-A
Top 10 Questions to Ask Before Signing on the Dotted Line 1. Do I really need this item right now, or can I wait? 2. Can I qualify for credit? 3. What is the interest rate (APR) on this card? 4. Are there additional fees? 5. How much is the monthly payment, and when is it due? 4-B-1 4-B-2 4-B-3
Top 10 Questions to Ask Before Signing on the Dotted Line 6. Can I afford to pay the monthly payments? 7. What will happen if I don t make the payments on time? 8. What will be the extra cost of using credit? 9. What will I have to give up to pay for it? 10. All things considered, is using credit worth it for this purchase? 4-B-1 4-B-2 4-B-3
Types of Credit Installment Credit Fixed payments Set period of time to repay Set or varying interest rates Car loans and home loans are typical examples. Revolving Credit No stated payoff time Limit to credit Minimum monthly payments Interest rates vary or not Finance charges Credit cards most typical example 4-D
Banks Sources of Credit Credit Unions Department Stores Automobile Dealers Oil Companies (for gas stations) Federal Government (for student loans) Others? 4-E
Advantages of Credit Emergencies Convenient Good Record Established a credit rating Safe Increases our standard of living Permits purchases on sale Reservations for car and hotel
Disadvantages of credit High interest rates and fees Risky if spending future income Encourages careless or overbuying Can financially ruin you
Bad Example $1,500 charged would take you 35 years to pay off if you paid the minimum balance of $30. ($24.88 interest, $5.12 principal) You have paid $5,152 in interest alone.
Good Example Buy $1,500 of stuff and put it on your credit card even though you have cash to pay for it. When the statement comes in a month you pay it completely off. You pay NO interest and it is like getting a free loan for a month.
WHEN YOU BUY STUFF You bought STUFF with your credit card. In fact, you bought $500 worth of STUFF with your credit card. Your APR is 18%. You plan to pay $10 a month to pay it off. You will pay $431 in interest Final cost of your purchases = $931.40 And it will take SEVEN YEARS and NINE MONTHS 4-F 1
How Long Will It Take??? You owe $3,000. APR = 18% Minimum Payment of 4% or $120 Finance Charge $1,715.67 Total cost of original $3,000 loan = $4,715.67 And it will take nearly 11 YEARS to pay off! After you ve made the last payment, will what you purchased still be around??? 4-G 1
The Cost of Using Credit $300 for an IPOD APR = 24% Minimum Payment of 4% or $12 Finance Charge $149.99 Your IPOD REALLY cost $449.99 And it will take 3 years and 8 months to pay off! After you ve made the last payment, will your IPOD player still be around??? 4-H 1
The Cost of Using Credit $3,000 Charged to Credit Account APR = 21% Minimum Payment of 4% or $120 Finance Charges $2,220.56 Annual Credit Card Fee: $65 Paying the minimum, it will take you 11 YEARS and 10 MONTHS to pay off your debt. You Owed $3000 but You Paid $5936 4-J 1
Types of Credit Cards Bank Credit Cards Flexible account Accepted anywhere Available from a financial institution (commercial bank, credit union) with a service provider (Visa, MasterCard) Electronic network Retail Credit Cards Purchases allowed at a particular retailer i.e. The Buckle or Old Navy Can work with bank to offer a bank credit card with the retailer s logo
Types of Credit Cards cont. Travel and Entertainment Cards Similar to bank credit cards Can make purchases at a number of businesses Entire balance must be repaid in 30 days Prestige Cards High status accounts Higher credit qualifications Special benefits i.e. Free travelers checks, higher credit limits
Types of Credit Cards cont. Affinity Cards Accounts through financial institutions Logo of sponsoring organization Example: Mothers Against Drunk Driving Financial institution donates percentage of charges to organization
Schumer Box Federal Truth in Lending Act requires Schumer Box Information required by law to inform consumer of all costs associated with use of a credit card Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual Fees Transaction Fees for Cash Advances Late Payment Fees 19.9% Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29
Annual Percentage Rate Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual Fees Transaction Fees for Cash Advances Late Payment Fees 19.9% Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29 Annual Percentage Rate (APR) Interest rate charged for amount borrowed in terms of per dollar per year
Grace Period Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual Fees Transaction Fees for Cash Advances Late Payment Fees 19.9% Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29 Grace Period Amount of time allowed before finance charges are applied
Minimum Finance Charges Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual Fees Transaction Fees for Cash Advances Late Payment Fees 19.9% Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29 Minimum Finance Charge Minimum amount charged for card use
Balance Calculation Method Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual Fees Transaction Fees for Cash Advances Late Payment Fees 19.9% Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29 Balance Calculation Method Method used to determine balance for finance charges
Annual Fees Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual Fees Transaction Fees for Cash Advances Late Payment Fees 19.9% Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29 Annual Fees Yearly charge for credit card ownership
Cash Advances Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual Fees Transaction Fees for Cash Advances Late Payment Fees 19.9% Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29 Cash Advance Transaction Fees Cash withdrawal fees
Late Payment Fees Annual Percentage Rate for Purchases Grace Period for Purchases Minimum Finance Charges Balance Calculation Method for Purchases Annual Fees Transaction Fees for Cash Advances Late Payment Fees 19.9% Not less than 25 days $.50 when a finance charge at a periodic rate is charged Average daily balance method (including new purchases) $20 per year 2% with a minimum fee of $3 $29 Late Payment Fees Penalty fee for payments not made by the due date
Opening a Credit Account 1. Applicant completes a credit application 2. Lender conducts a credit investigation 3. Applicant is given a credit rating 4. Lender accepts or denies the credit request 5. If accepted, applicant evaluates the credit card details 6. Applicant accepts or refuses credit terms
Character 4 C s of Credit Capital Capacity Collateral
Character 4 C s of Credit Lenders want to know if you are trustworthy. One way to measure this is by looking at your credit record. A history of paying bills on time shows them that you are responsible with your finances.
4 C s of Credit Capital Lenders take comfort in knowing that you have personal items of value. In the event you don t pay your bills, lenders will want to know if you have items they can sell to repay the loan. Typical items they look for are an investment account and, in some states, your home.
4 C s of Credit Capacity Lenders chief concern is whether you are able to repay a loan. So key factors of creditworthiness are your income and employment history. A pattern of rising income and steady employment gives lenders more confidence. Of course, if you already have a lot of debt or have an uneven work history, lenders will question whether you are able to make your payments.
Collateral 4 C s of Credit This is an asset of value that lenders can take from you if you don t repay the loan as promised. When you put up collateral for a loan typically for a home mortgage or car loan it may be referred to as a secured loan.