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CREDIT
WHAT IS IT?
CREDIT
A loan of money given to a borrower
Specific amount to repay
Specific time to repay
Generally has a cost to it
TYPES OF CREDIT Installment Credit – fixed monthly payments over a
specific time period. (ie: car loan; personal loan at a bank)
Service Credit – credit for services you use then pay for the service after you use it (ie: electricity, water, cable TV)
Revolving Credit – credit cards that you charge, pay-on, charge again, pay-on again, charge again, pay-on again, etc. etc. etc.
Charge Credit – credit you pay in full each month; usually to local businesses you have business dealings with. (ie: building contractors; corner grocery stores)
CREDIT HAS A RISK
Credit Risk
The risk that a borrower may not repay a loan on time
THE THREE C’S OF CREDIT
CHARACTERWILL YOU REPAY THE DEBT? From your credit history, does it look like
you possess the honesty and reliability to pay credit debts
Have you used credit before? Do you pay our bills on time? Do you have a good credit report? Can you provide character reference? How long have you lived at your present
address? How long have you been at your present job?
Past performance dictates future results
CAPACITY—CAN YOU REPAY THE DEBT? Have you been working regularly in an
occupation that is likely to provide enough income to support your credit use?
Do you have a steady job? What is your salary?
How many other loan payments do you have?
What are your current living expenses? What are your current debts?
How many dependents do you have?
CAPITAL (COLLATERAL)WHAT IF YOU DON’T REPAY THE DEBT
Do you have any valuable assets? Could these assets be used to repay credit debts if income is unavailable?
What property do you own that can secure the loan?
Do you have a savings account?
Do you have investments to use as collateral?
INTEREST RATE
The cost of using the loan or the credit card money
Usually expressed as a percentage over a period of time
What are typical credit card interest rates?
APR Abbreviation for Annual Percentage Rate
The APR is basically the cost of credit, or how much you must pay to get a loan, on a yearly basis
The APR is expressed as a percentage
It reflects the interest rate as well as other fees and charges
APRs vary widely from one type of credit to another
CREDIT LIMIT
The maximum amount of money the person borrowing the money is allowed to use
CREDIT CARD
A plastic card with an assigned account number
Allows the holder to purchase goods or services on credit or receive cash on credit
“GREEN CHIC”
Fashion designer Anna Cohen of Portland, Oregon needs to keep her start-up company -- and her dream of ecologically friendly fashion -- afloat financially
WHAT HAPPENS WHEN YOU BUY SOMETHING USING A CREDIT CARD?
a) You are taking money from your savings account to pay for the item.
b) You are getting the item and freeing yourself from full repayment.
c) You are taking a temporary loan from a bank, which must ultimately be repaid.
d) You are investing in a financial organization, from which you may get profits.
c
WHAT IS INTEREST?
A) A penalty for making late credit card payments.
B) A charge for borrowing money, generally calculated as a percentage of the amount borrowed.
C) A reward for making credit card payments on time.
D) A written agreement describing the terms of use for a credit card.
B
WHAT COULD LEAD YOU TO END UP WITH UNMANAGEABLE CREDIT CARD DEBT?
a) Buying things you cannot afford.
b) Carrying a large balance for a long period of time.
c) Losing track of purchases and payments.
d) All of the above.
d
HOW CAN CREDIT CARDS BE HELPFUL?
A) They are convenient, they free you from carrying around large amounts of cash, and using them wisely can help you establish a strong financial track record.
B) They can be used to purchase items you cannot afford, give you extra spending money, and enable you to borrow money you don't have to repay.
C) They weigh less than cash, are a status symbol, and give you five years to repay any purchases you make with them.
D) They are tied into your checking account, can be used for necessities, and if you lose them, you don't have to pay back any money you owe on them.
A
WHAT IS A CREDIT HISTORYa) A form the bank asks you to complete when
you open a savings account.
b) The record of purchases and payments to a credit card during a one-month period.
c) A statement sent to you each year by the Internal Revenue Service.
d) A profile or report of a person's debt and repayment habits, which is built up over the course of several years.
d
WHY IS IT IMPORTANT TO ESTABLISH A GOOD CREDIT RATING?
a) A good credit rating enables you to buy things online.
b) A good credit rating can earn you college scholarships and tuition waivers.
c) A good credit rating can impact your ability to secure future loans, obtain housing, or get a job.
d) A good credit rating will give you more money for your retirement income.c
CREDIT CARDS AND THE APR A typical APR is about 18.9%. If you
charge $100 on a card with that APR, over the course of one year, you would be charged an additional $18.90 of interest. Your total debt would be $118.90.
DIFFERENT CREDIT CARDS HAVE DIFFERENT APRS
This means it can cost more or less to use each card. It's usually better to have a low APR, but here are some things to keep in mind:
A "fixed" APR means that the rate shouldn't change. Many cards have a "variable" APR, which changes over time.
Be careful of cards that offer a very low, or even 0%, introductory APR. Introductory APRs usually only last for a short period of time, so pay attention to what the APR will become after that time is up.
Some cards offer other rewards, or "points," that can be used for airline miles, gift certificates, or "cash back." These rewards can be tempting, but make sure to evaluate all the aspects of the card, especially the APR.
TAKE A MOMENT TO EXAMINE CREDIT CARD OFFERS:
Bank of America’s card offers
READ THE DETAILS IN A CREDIT CARD SOLICITATION
Especially the “Disclosure Box”
UNDERSTAND THE DETAILS IN A CREDIT CARD SOLICITATION
WHICH OF THESE APRS OFFERS THE BEST LONG-TERM DEAL?
a) 15% fixed APR
b) 2% introductory APR, which goes up to 23% after 6 months
c) 10% APR, which goes up 1% every month for 10 months
d) 19% fixed APR, with 1 airline mile earned for every dollar you spend
a
CREDIT CARD BALANCES The "balance" on your monthly credit card
statement is the total amount you owe to the bank. The only way to avoid interest piling up is to pay off the ENTIRE balance each month, and not to carry any debt over to the next month. In other words, if you borrow $1000, and pay back $999 by the end of the month, you will still be charged interest the next month!
WHICH BALANCE WOULD MEAN YOU OWE THE LEAST AMOUNT OF MONEY?
A) $10.00
B) $1000.00
C) $0.00
D) $563.25
c
CREDIT CARD “GRACE PERIOD”When you first charge something to a credit card, you often have a period of time before the bank starts charging you interest. This is called the grace period, and it usually ranges from 10 to 55 days, depending on the credit card.
Which of the following is the best strategy for paying your credit card bill?
GRACE PERIODa) Pay off your entire balance the day
after the grace period ends.
b) Pay half of your balance during the grace period and half after.
c) Pay your entire balance during the grace period.
d) Don't charge anything during the grace period.c
MINIMUM PAYMENT ON YOURCREDIT CARDOn the statement each month, there is a "minimum payment" that must be paid, which is usually just a small percentage of the total balance. If you don't pay at least the minimum payment by the due date, the bank will charge a "late fee."
Keep in mind that paying just the minimum payment each month will generally not make much of a dent in your total balance owed. You can avoid late fees by paying the minimum payment, but you will still accumulate interest on all of your unpaid debt.
WHAT IS THE BEST STRATEGY FOR DEALING WITH MINIMUM PAYMENTS?
a) Pay exactly the minimum payment.
b) Pay at least the minimum payment and more whenever possible.
c) Pay less than the minimum payment whenever possible.
d) Never pay the minimum payment.
b
CREDIT LIMIT
When you are issued a credit card, there is a "credit limit" attached to it. This is the maximum amount of money you can charge to the card (the maximum amount you can borrow from the bank). Credit cards with small limits are often safer, because your amount of potential debt is limited.
WHICH OF THESE CREDIT LIMITS IS REASONABLE FOR A STUDENT OR A FIRST-TIME CREDIT CARD USER?a) $100
b) $1,000
c) $10,000
d) $50,000
b
WHAT DO YOU THINK . . . .
Why do banks lend out so much money?
So... are credit cards a bad thing?
