Credit and Its Use

Credit is an arrangement to receive cash,

goods, or services now and pay for them later Financial institutions and merchants issue

credit – called a creditor Having the ability to borrow funds that we

normally could not pay for with cash Homes, cars, education, appliances, electronics

Using credit wisely keeps people out of trouble

What is credit and why is it so important to have good credit?

Do you have the cash you need for the down

payment Do you want to use your savings instead of

credit? Can you afford the item? Could you use the credit in some better way? Could you put off buying the item for a while? What are the costs of using credit?

Factors to Consider Before Using Credit

2 basic types Closed-end credit

One-time loan that you will pay back over a specified period of time in payments of equal amounts

Is used for specific purpose and involves a definite amount of money

Open-end credit Is a loan with a certain limit on the amount of

money you can borrow – line of credit

Types of Credit

Loans

Inexpensive loans with low interest – parents, family members, friends

Medium-Priced Loans with moderate interest – banks, credit unions

Expensive loans with high interest – finance companies, retail stores

Credit Cards Use money over time and pay it back Grace period – a time period with no finance charge Finance charge – total $$ amount you pay to use credit

Sources of Consumer Credit

Annual Percentage Rate (APR) is the cost of

credit on a yearly basis, expressed as a percentage

Variable Interest Rate – changes throughout the term of the credit issued

Fixed Interest Rate – stays the same throughout the term of the credit used

Simple Interest – is the interest computed only of the principal (which is the amount you borrowed)

The Cost of Credit

1. Character: Will you repay the loan?2. Capacity: Can you repay the loan?3. Capital: What are our assets and net worth?4. Collateral: What if you do not repay the loan?5. Credit History: what is your history with using

credit? Credit Rating – is a measure of a person’s ability

and willingness to make credit payments on time. Credit Bureaus – an agency that collects information

on how businesses and people pay their bills. Experian, Trans Union, Equifax

Applying for Credit“The 5 C’s of Credit”

Making only the minimum payment each month Having trouble making the minimum payment Miss loan payments or pay late Use your savings for necessities such as food

and utilities You borrow money to pay off old debts You exceed credit limits on your credit cards Been denied credit because of a bad credit

report

Managing DebtThe Warning Signs

Consumer Credit Counseling Service Counseling Services through banks, military,

credit unions Counseling through state and federal housing

authorities Bankruptcy

What are your options?

A legal process in which some or all of the

assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts

It may also include a plan for the debtor to repay creditors

LAST RESORT!!!

Bankruptcy

Chapter 7

A.k.a. “straight bankruptcy” Most of the debtors assets are sold of to pay the

debt owed Certain assets are protected – Social Security,

unemployment, net value of home or car, tools used for employment

Chapter 13 A debtor with regular income can work with the

court to devise a payment plan Not all assets are lost

Types of Bankruptcy

Credit can be very difficult to obtain You are forced to pay very high interest rates

on loans May not be able to get a credit card Bad credit can keep you from

Getting a job Renting or buying a residence Buying a car

Effects of Bankruptcy