Chapter 6.1 Credit
Objectives Explain the advantages and disadvantages of using credit Identify the different types of consumer credit Describe secured and unsecured loans Describe how to establish a sound credit rating Describe situations in which it is smart to use credit and others in which it is not Explain what makes up the cost of credit
Question of the Day. What percent of 18-29 year olds have a credit card?
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Article Questions 1. How did your estimate compare with the actual answer? 2. Why do you think that only ⅓ of 18-29 year olds have a credit card? 3. Do you currently have a credit card? If not, do you think you will get one in the next few years? Why or why not? 4. In looking at the graph, what is the relationship between age and card ownership? 5. What do you think are the pros and cons of having a credit card?
Consumer Credit Credit = a medium of exchange that allows individuals to buy goods or services now and pay for them later 2 Parties Involved in Credit Creditor Supplies to the other party: 1. Money 2. Goods 3. Services Debtor / Borrower Agrees to make future payment by: 1. Particular Date 2. According to an agreed-upon schedule
Types of Credit Closed-End Open-End Definition - a loan for a specific amount that must be repaid with finance charges by a specified date Definition - an agreement that allows the borrower to use a specific amount of money for an indefinite period of time What s included? What s included? Finance Charge - the total amount paid by a borrower to a lender for the use of credit Contract - a legally binding agreement between the borrower and the creditor States the terms of the loan Principal - the amount of money borrowed Line of Credit - a preapproved amount of money that an individual can borrow Guidelines? Makes payments ON TIME Pays any finance charges/fees Stays within borrowing limit
Types of Loans Secured Definition - a loan that requires collateral (property that a borrower promises to give up in case of default) Examples? Closed-End Credit Smaller risk for creditor Can take back property for debt repayment Installment Loans A loan for a specific amount of money that is repaid with interest in regular installments Unsecured Definition - a loan made on the strength of a signature alone Examples? Open-End Credit Credit Cards Strong Credit Rating is needed Co-signer - a responsible person who signs the loan with the person to whom the loan is granted. This person promises to repay to loan if the borrower fails to pay
Steps to take: Establishing Credit 1. Start with a job - prove you can earn money 2. Open a savings account shows financial responsibility & can be used as collateral 3. Open a checking account shows you have experience in handling money 4. Get a Credit Card - gives a record of steady payments
Three C s of Credit Creditworthy - having the assets, income and tendency to repay debt 1. Character 2. Capacity 3. Capital Based on your reputation & financial history Your earning power and employment history Financial worth
Credit Reports Definition - a record of a person s credit history and financial behavior What s included? Every credit account ever opened Outstanding balances on current credit accounts Lists negative information Delinquent or late payments Overdue taxes Who keeps track? National Credit reporting agencies Equifax, Experian, TransUnion
Credit Scores Definition - a numerical measure of a loan applicant s creditworthiness at a particular point in time Also known as.. FICO Score Fair Isaac Corporation - developed the rating system Calculated on 5 categories
Advantages: Using Credit 1. Use of goods & services as you pay for them 2. Opportunity to buy costly items 3. Source of cash for emergency or unexpected expenses 4. Convenience and safety 5. Taking advantage of sales 6. Long-range Goals
Using Credit Disadvantages: 1. Reduction of future spendable income 2. Expense 3. Temptation 4. Risk of serious consequences
Cost of Credit Annual Percentage Rate (APR) the annual cost of credit a lender charges 3 Factors that determine the amount you pay for the use of credit: 1. Interest Rate Charged 2. Amount of Credit Used 3. Length of the repayment period
Checkpoint 6.1 In your class folder & a new Google Doc, complete the following with the Doc labeled as Today s Date Checkpoint 6.1 1. What are some items that consumers use credit to buy? 2. What are 4 common types of open-end credit? 3. List 1 advantage and 1 disadvantage of using credit. 4. List the 5 primary factors your credit score is based on. 5. What 3 factors determine the amount you pay in finance charges?