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Chapter 26 How to Get and
Keep Credit pp. 418- 433
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 2 of 56
Learning Objectives
After completing this chapter, you’ll be able to:
1. Name the five factors creditors use to consider credit worthiness.
2. Identify the types of credit you can use.
continued
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 3 of 56
Learning Objectives
After completing this chapter, you’ll be able to:
3. Explain some of the costs involved in paying for credit.
4. Describe how to maintain a good credit rating.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 4 of 56
Why It’s Important
Credit can enhance your life if used properly, or it can cause major problems if used improperly.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 5 of 56
Key Words
credit bureau
credit limit
cosigner
down payment
principal
secured loan
unsecured loan continued
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 6 of 56
Key Words
annual percentage rate (APR)
finance charge
variable rate
cash advance
grace period
garnishment of wages
repossess
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 7 of 56
Applying for Credit
To open a credit or charge account,
you’ll have to fill out an application
form.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 8 of 56
Applying for Credit
Some details a credit application will
want to know about you are:
• Address
• Employment
• Income
• Bank information
• Other credit you have
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 9 of 56
Applying for Credit
If a company accepts your application,
you’ll receive a security agreement.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 10 of 56
Figure
26.1 CREDIT CARD SOLICITATION
First Bank of CG
Cary-Grove
High School Student
Dear Student:
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 11 of 56
Figure
26.1 CREDIT APPLICATION
The information you put on a
credit application gives the
creditor information about
where you live and work. It
allows the creditor to access
financial information about
you from a credit bureau.
How old must you be to apply
for this credit card? How do
your choices influence your
economic situation?
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 12 of 56
Sign the back of your
credit card
Ask For ID
•A step in trying to
reduce unauthorized
uses
•Not 100% effective
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 13 of 56
Figure
26.1 SECURITY AGREEMENT
The information on the
backside of the credit card
application is very important.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 14 of 56
Annual Percentage Rate
The annual percentage rate (APR)
determines the cost of your credit on a
yearly basis.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 15 of 56
Changes in Interest Rates In many cases, a credit card might offer a low introductory
rate. This is known as the teaser rate.
After a few months, the rate goes higher (after you’ve
accumulated debt.)
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 16 of 56
Figure
26.1 SECURITY AGREEMENT
0% for 6 months.
16.99% Variable (That means it
changes periodically. Could
go up or down.)
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 18 of 56
Other APRs
Cash Advances – You go to the bank
and charge cash.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 19 of 56
Fees
With a cash advance you borrow
money on a credit card rather than use
it to make a purchase.
There is often a
separate fee for a cash
advance.
It cost me
$25.00 extra
to get this
money.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 20 of 56
Figure
26.1 SECURITY AGREEMENT
Cash Advance – 5% for each
cash advance, with a
minimum of $10 and NO
MAXIMUM.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 21 of 56
Figure
26.1 SECURITY AGREEMENT
Cash Advance Transaction Fee:
5% for each cash advance.
$1000x.05 = $50
Harris Bank bills Credit Card
Company $1050
You pay $100 next month.
Your new Principal is $950
I = P x R x T
How much interest do you owe?
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 22 of 56
Figure
26.1 SECURITY AGREEMENT
Cash Advance: 23.99%
Default Rate: (YOU’RE LATE
ON A PAYMENT) Up to 21.99%
variable for purchases; up to
28.99% variable for cash
advances.*
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 23 of 56
Other APRs
Default Rates: You did not pay the
minimum payment on time.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 24 of 56
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 25 of 56
Changes in Interest Rates
With a variable rate, the rate changes
as interest rates in the banking system
change.
With a fixed rate, the interest rate
always remains the same.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 26 of 56
Figure
26.1 SECURITY AGREEMENT
Purchases - Prime Rate + 13.74%
- it may always be over 13.74%
Purchases Default – Prime Rate +
18.74% - it may always be over
18.74%
Cash Advances – Prime Rate +
20.74% - it may always be over
20.74%
Cash Advances Default – prime
Rate + up to 25.74% - it may
always be over 25.74%
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 27 of 56
Grace Period
The grace period is amount of time
you get to pay off a debt without
having to pay interest charges.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 28 of 56
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 29 of 56
Figure
26.1 SECURITY AGREEMENT
25 days after the close of each
billing period. NO FINANCE
CHARGE if you pay IN FULL
by the due date on your
current billing statement.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 30 of 56
Method of Computing the Balance for Purchases
The Interest will be calculated based
on your average credit card balance.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 31 of 56
Figure
26.1 SECURITY AGREEMENT
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 32 of 56
Fees
In some cases, you have to pay an
annual fee just to have the credit card.
This fee is paid every year and is just
part of the privilege to have the card.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 33 of 56
Figure
26.1 SECURITY AGREEMENT
No Annual Fee
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 34 of 56
Minimum Finance Charges
A minimum finance charge
could be added to your
credit card if you carry a
balance. This is similar to a
processing fee for
calculating your statement,
mailing it to you, etc.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 35 of 56
Figure
26.1 SECURITY AGREEMENT
The information on the
backside of the credit card
application is very important.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 36 of 56
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 37 of 56
Fees
A late or missed
payment fee is
charged when you
miss a payment or
don’t make a
payment on time.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 38 of 56
Figure
26.1 SECURITY AGREEMENT
Late Fee: $19 on balances up
to $250 and $39 on balances
over $250
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 39 of 56
Rewards
In some cases, you earn rewards
based on how much you “CHARGE”
on your card.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 40 of 56
Figure
26.1 SECURITY AGREEMENT
Full terms and conditions will
be sent with your card.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 41 of 56
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 42 of 56
Fast Review
1. Why should you beware of low
introductory interest rates?
2. What are some types of fees credit
cards charge?
Chapter 26 Credit Card Statement
pp. 418- 433
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 44 of 56
Your Credit Limit
The maximum
amount you can
spend or charge on a
credit account is your
credit limit.
Figure
26.2 CREDIT CARD STATEMENT
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 46 of 56
Your Credit Limit
Your credit limit can
change (go up or
down).
Video
Credit Card Interest
The credit card
interest rate can
change, up or down,
as long as the credit
card company gives
you 45 days notice.
Video
Security
Agreement
Credit Card Bill
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 48 of 56
Making the Minimum Payment
Each credit card statement always
includes a minimum payment you
have to make on a bill.
Figure
26.2 CREDIT CARD STATEMENT
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 50 of 56
Keeping Credit
If you always make your
payments on time, you’ll
probably have an
excellent credit rating.
If not, your credit rating
will be poor.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 51 of 56
Making the Minimum Payment
To pay off a credit card debt of $2,500
at 18.9 percent, it would take over 30
years if you only make the minimum
required payment.
The total interest would be
more than $7,800.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 52 of 56
Calculating the Amount of Interest
Interest = Principal x Rate x Time
Principal is the amount of money you still owe
on which the interest is based.
Rate is the APR
Time is how long it will take you to pay off the
loan, including interest.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 53 of 56
Calculating the Amount of Interest
Interest = Principal x Rate x Time
Principal Rate Time
$1,000 12% 1 year
$1,000 11% 2 years
$1,000 12.5% 6 months
Which of the loans offered above would you take?
Why?
Harris Bank
Cary Bank
Home State
Bank
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 54 of 56
Your Credit Burden
Experts in personal finance say that you
shouldn’t use more than 20 percent of
your income for credit payments.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 56 of 56
Overextending Your Credit
The more credit cards you have, the more you
might be tempted to make impulse purchases.
You can quickly reach the credit limit on several
cards.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 57 of 56
Overextending Your Credit
When you overextend your credit, it
becomes a struggle just to make the
minimum payments on them each
month.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 58 of 56
Credit Problems
Some credit contracts allow the
creditor to take all or part of your
paycheck if you miss a payment.
This is called garnishment of wages.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 59 of 56
Fast Review
1. What is the highest percentage of
your income that personal finance
experts say you should spend on
credit payments?
continued
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 60 of 56
Fast Review
2. What is garnishment of wages?
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 61 of 56
Credit Problems
If you put up something valuable as
collateral on a loan, a creditor has the
legal right to repossess it, or take
back the collateral.
Justin Timberlake Video
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 62 of 56
Graphic Organizer Keys to Keeping Good Credit
Graphic Organizer
On-Time
Payments
GOOD
CREDIT
Payoff
Debt
ASAP
Low
Credit
Burden + + =
Chapter 26 Credit Worthiness
pp. 418- 433
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 66 of 56
Your Credit Worthiness: The Five Cs
There are several factors
creditors consider before
giving you credit, which
are usually referred to as
the “five Cs of credit.”
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 67 of 56
Your Credit Worthiness: The Five Cs
The five Cs of credit are:
1. Capacity
2. Character
3. Credit history
4. Capital
5. Collateral
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 68 of 56
Capacity
One of the first things creditors
consider is your capacity to pay.
Creditors will check to see
whether you have a job, how
much you make, and how long
you’ve been employed.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 69 of 56
Character
Creditors might ask for credit
references from businesses or people
you’ve borrowed from in the past who
can testify to your reliability.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 70 of 56
Credit History
The creditor then checks with
a credit bureau, an agency
that collects information about
you and other consumers of
credit. The credit bureau
report tells whether you pay
bills on time and how much
you owe.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 71 of 56
Capital
Your capital is how much
you have beyond what
you owe.
Creditors want to know if you
have enough capital so that if
you lose your job, you can
still pay them back.
Capital Own
Retirement $30,000
Savings $4,000
Stocks $10,000
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 72 of 56
Collateral
Collateral consists of
property, or valuables. It’s
used as security for a loan.
If you fail to pay back a loan, the
creditor can take whatever you
put up as security, such as a car
or house.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 73 of 56
Secured and Unsecured Loans
If a loan is backed by collateral, it’s
called a secured loan.
If a loan is not backed by collateral, it’s
called an unsecured loan.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 74 of 56
Fast Review
1. A credit card purchase for personal
items, such as food, clothing, etc. is
secured or unsecured?
continued
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 75 of 56
Fast Review
2. What is the difference between a
secured loan and an unsecured
loan?
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 76 of 56
Cosigners
If you don’t qualify for a loan on your
own, you can have someone cosign
one for you.
A cosigner is responsible
for a loan if you don’t make the payments.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 77 of 56
Fast Review
1. What kinds of things can be used
as collateral for a loan?
2. What is a credit limit?
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 78 of 56
Fast Review
3. What is the responsibility of a
cosigner?
4. List the five Cs of credit.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 79 of 56
Installment Loans
If you buy a car or large appliance in installments,
you might have to make a down payment.
The down payment is a portion of the total cost
that you pay when you purchase a product.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 80 of 56
Fast Review
1. If you make a $500 down payment
on furniture that costs $2,000, what
is the $1,500 that you still owe
called?
continued
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 81 of 56
Using Credit
Loans from banks usually cost less in
interest than credit cards or other
sources of credit.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 82 of 56
Who’s A Good Credit Risk?
Group Activity
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 83 of 56
Equal Credit Opportunity Act
The Equal Credit Opportunity Act (ECOA)
ensures that all consumers are given an equal
chance to obtain credit. This doesn’t
mean all consumers who apply for
credit get it: Factors such as income,
expenses, debt, and credit history are
considerations for creditworthiness.
Chapter 26
Introduction to Business, How to Get and Keep Credit Slide 84 of 56
Equal Credit Opportunity Act
Consumers cannot be denied credit because
of:
• Sex, marital status (widowed, separated,
divorced, single, married), age, race, national
origin, because you receive public assistance
income (welfare), or because you do or do not
have children.
End of Chapter How to Get and Keep Credit
26
