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Learning Objectives
After completing this chapter, you’ll be able to:
1. Define Credit.
2. Know the difference between good and bad debt.
Credit
What is Credit?
Your credit goal is to obtain a good credit score!
Why It’s Important
You’ll probably borrow money (use credit) some day. When you do, it will be helpful to know what credit is and the types of credit you can use.
What is Credit?
Credit is an agreement to get
money, goods, or services now
in exchange for a promise to
pay in the future.
Credit: The Promise to Pay
The one who lends money or
provides credit is called the creditor.
The one who
borrows money or uses credit is
called the debtor.
Credit is a Loan (borrowing money)
How much do you know about borrowing
money? Take the car loan quiz.
http://auto.howstuffworks.com/buying-
selling/applying-car-loan-quiz.htm
Credit Costs you Money
Creditors charge a fee for using their
money, which is called interest.
What is Debt?
There are people who are debt free. It does happen.
But, sometimes, it is not possible to be completely
debt free. You may need to borrow money to buy a
house, finance a car, or pay for your college
education. It is important to know what type of debt is
good, and what type of debt is bad. Eventually all
debts will need to be paid back to the creditor with
interest.
What is Debt?
Debt is money that is owed. You could owe money
to your parents, friends, or a credit card company.
There are many businesses and people that you
could borrow money from and need to pay back.
Staying out of debt is a financial goal.
A debt occurs when a creditor loans money to a
debtor and the borrower agrees to pay that
person, business, or company back, usually with
interest (additional money). The lower the
interest rate, the less money you will
need to pay back to your creditor.
How much money will credit cost you?
The amount of interest is based on
three factors:
• Interest Rate
• Time of the loan
• Amount of the loan -
Principle
I = PxRxT
For example, if you took out a loan for $1000 and
the annual (yearly) interest rate was 10%, then you
would owe $1100 at the end of the first year. (1000
x .10 x 1 = $100). $100 is the amount of interest
(additional money) you owe for the loan of $1000.
(You also have to pay back the $1000).
But, if the annual (yearly) interest rate was 5%,
then you would owe $1050 at the end of the first
year. ($1000 x .05 x 1 = $50.)
Credit scores help determine what your interest
rate is, but we’ll get to that later.
How much will credit cost you?
It’s important to shop around for credit
because creditors may charge different
rates. BMO Harris Cary Bank Chase
Auto Loan 3% 3.5% 6%
Home Loan 5.2% 5.5% 4%
Personal
Loan
6% 6% 6.5%
Home Equity 7% 6% 5%
A lower rate means lower cost (interest) to you.
How much will credit cost you? Interest rates change daily.
BMO Harris Cary Bank Chase
Auto Loan 3.7% 3.5% 4.3%
Home Loan 6.2% 5.38% 4.98%
Personal
Loan
8.5% 8.3% 8.4%
Home Equity 9.3% 8.7% 7.65%
The day you finalize your loan you should lock in
your rate IF you applied for a fixed rate loan.
How much will credit cost you?
Variable rate loan changes on a periodic (monthly,
yearly) basis. BMO Harris Cary Bank Chase
Auto Loan 3.3% 3.2% 3.3%
Home Loan 5.8% 5.3% 4.7%
Personal
Loan
9% 9.2% 9.4%
Home Equity 8.68% 8.54% 7.73%
If the rate of your loan goes down, you get the lower rate
until the next change. If the rate of your loan goes up, you
get the higher rate until the next change.
Which type of loan does the interest rate
stay the same?
A. Fixed
B. Variable
Why should you shop around for credit?
To find the
lowest interest
rate so you can
save money.
Learning Objectives
After completing this chapter, you’ll be able to:
1. Distinguish between good debt and bad debt.
2. Know the advantages and disadvantages of credit.
Credit
Debt – The amount of money you owe
Before you can learn how to build, manage, and use credit,
it is important that you know about debt.
Determining the difference between good and
bad debt and learning the right time to finance
something is the key to your financial well-
being.
Protecting your credit, using caution when banking and
preventing identity theft will help prevent money troubles in
the future.
Complete Worksheet
Good Debt Before you begin to think about good debt, it is always
important to remember to never let debt get out of hand. If
you spend within your means and do not finance things you
will never be able to pay back, then some amount of debt is
alright. Incurring good debt can also increase your credit
score, which will help you buy expensive items later on.
Buying a home that you can afford is an example of a good debt.
Good Debt
Good debt includes necessities that you can’t afford to pay
for up front. Buying a car to get to your job or purchasing a
home to live in are examples of taking on good debt. Good
debt is debt that increases your personal wealth in some
way. Good debt can also help your credit score. Because
public transportation in the United States may not get you
everywhere you need to go, personal transportation may
be a necessity in order to manage life. While cars
depreciate (decrease in value with time), they allow their
owners to earn a living and manage other aspects of their
lives. Homes generally increase in value over the long
spans of time and are considered an investment.
Good Debt
What about a college education? On average, according to
the College Board, a private four year university tuition
costs $30,094 annually (yearly) and a public four year in
state resident college tuition costs $8,893 a year.
In addition to tuition, there are
also room and board charges as
well as books and other fees.
Good Debt Not everyone can afford to pay that much money per year
for an education. Student loans are an alternative but it is
always wise to never borrow more than you will be able
to pay back. Remember, investing in college is investing in
your future. The average college graduate will earn over
$1 million more than someone who just has a high
school diploma, during their lifetime. Thus, college loans
are generally considered good debt since they generate
income in the future for those who use them to gain a
degree.
What is an example of Good Debt?
1. House
2. Cary
3. School Loan (only what you need)
Complete Worksheet
Bad Debt
Bad debt is when you finance things that you consume
and do not have the money or a plan to repay the debts
within a reasonable amount of time. A car or home is a
lasting item, and it doesn’t just disappear when you use it.
You can also use these things to increase your overall
wealth. However, when you use your credit card to
pay for your dinner night after night, you will
then need to pay off something you already
consumed and cannot get back.
Bad Debt
Credit cards are generally seen as a bad debt because of
the things that credit cards are usually used to purchase.
Buying a new outfit each week will accumulate debt and a
large balance at the end of the month. Most people cannot
afford to pay off their credit card bill each month—that’s
when it becomes a bad debt. Bad debt will hurt
your overall credit score.
Bad Debt
What if you want to go on vacation? Do
you really want to spend the next 10
years paying off a vacation you took
one summer? No, so it is generally
unwise to go into debt to pay for a
vacation.
Vacation Cost – $2,000
Bad Debt
Once the vacation is over, money
can’t be saved for the next vacation
since the consumer is still paying
for the first vacation.
Secondly, making payments to a
credit card company increases the
cost of the vacation (because of
the added interest payments) and
then makes it more difficult to take a
second vacation.
Save for the Vacation
It is much better to make payments to a
vacation savings account and then go
on vacation, than to take a vacation and
then make payments to a credit card
company.
Turning Bad Debt into Good Debt If you use your credit card to pay for all of your food, clothing, and other
items during the month, it can be a good debt, if you can
pay your balance off in full each month. This can happen with proper budgeting and if you have already the
money set aside for the credit purchases you make. It is good debt if
you already have the money and using credit just makes life easier.
Paying off your credit cards each month actually increases your credit
score.
What is an example of Bad Debt?
1. Consumables (food, drinks)
2. Entertaining friends
3. Purchases you don’t need (clothes)
4. Vacation
Figure
25.1
Advantages vs. Disadvantages
C
R
E
D
I
T
ADVANTAGES DISADVANTAGES
Learning Objectives
Students will be able to:
Credit
1. Explain the advantages and disadvantages of using credit.
Who Uses Credit?
The type of credit used by people for
personal reasons is called consumer
credit.
Who Uses Credit?
Credit used by a business is called
commercial credit.
When businesses borrow
money, they often pass along
the cost of credit to consumers
by charging higher prices on
their products.
Who Uses Credit?
The federal government uses
credit to pay for many of the
services and programs it provides to
its citizens.
National Debt
Who Uses Credit?
State and local governments use credit to pay
for such things as highways,
public housing, stadiums,
and water systems.
Why should I use credit?
There are some things in life that you just can’t have if you
don’t have credit, such as major purchases for big ticket
items or airfare, hotel, car rental.
Advantages of Credit
The main advantage of credit is that it’s
convenient.
Credit is especially useful in an
emergency.
Advantages of Credit
Without credit, there are some things you
can’t buy.
Make a major
purchase.
Advantages of Credit
.
If you don't like to carry large amounts of
cash with you or if a company doesn't
accept cash purchases (for example
most airlines, hotels, and car rental
agencies), putting purchases on a credit
card can make buying things
easier.
Advantages of Credit
Using credit wisely establishes a good
credit rating. A credit rating is a
measure of a person's ability and
willingness to pay debts on time.
It helps establish a credit history.
Advantages of Credit
A good credit rating tells other lenders
that you are a responsible borrower and a
good credit risk.
A good credit rating leads to
guaranteed loan at a low interest rate.
Advantages of Credit
You can take advantage of sales.
Some stores offer special sales for
credit card customers only.
Advantages of Credit
Credit helps you keep track of
your spending.
Advantages of Credit
Credit contributes to the growth of our
economy.
More people are able to spend money
now and pay in the future.
What is an Advantage to Credit?
1. Convenient
2. Make a major purchase
3. Easier to buy things
4. Establish credit history
5. Credit rating
6. Special Sales
7. Keep track of spending
8. GDP goes up – helps economy
Disadvantages of Credit
The more items you charge and the
longer you take to pay off your credit
cards, the more you pay in interest.
Disadvantages of Credit
You may be discouraged from
comparison shopping thus paying
higher prices for items.
Some places even charge more for an
item if you are using credit.
Disadvantages of Credit
Credit contracts
(rules) may
be difficult to
understand.
Disadvantages of Credit
Overuse leads to a poor credit rating.
Disadvantages of Credit
Your future
income is tied
up repaying
previous debts.
Disadvantages of Credit
Late or missed payments lower
your credit rating, which will make it
difficult for you to get credit in the future.
What is disadvantage to Credit?
1. Pay interest if you don’t pay it off on time, in full.
2. Pay higher prices
3. Difficult credit rules
4. Overuse = poor credit rating
5. Future income pays past debts
6. Late or missed payments = lower
credit rating.
End of Questions?
Learning Objectives
Identify the different types of credit.
Let’s learn how to get the most of the
advantages of credit by differentiating
the types of credit.
Types of Credit
Short-term loans last for one year or
less.
Medium-term loans last for one to five
years.
Long-term loans last longer than five
years.
Types of Loans
Vehicle Loan House Loan
Student Loan
Personal Loan
Signature Loan
Credit Card and
Cash Advance
Payday Loan
Vehicle Loan
If you don’t have enough money saved to
buy a vehicle, you might want to finance the
vehicle (get a loan).
Banks and other financial institutions may
offer you a loan. This is a secured loan,
because the vehicle will be used as
collateral. If you don’t make the loan
payments (delinquency), the bank can
come and repossess (take away) your car
and resell it to someone else.
Let’s Buy a Car
You have saved $1,000.
That will be your down
payment for the car.
$6,999 - $1,000 =
$5,999.
The $5,999 is the
principal amount you will
need to borrow (get a
loan).
How much will this loan
cost you?
Only
$6,999
2006
Chevrolet
Impala
Calculating the Finance Charge
Finance Charge = Principal x Interest Rate x
Time
The amount a loan costs is known as the
finance charge. This charge can be calculated
by using the following formula:
Finance Charge = Principal x Interest Rate x Time
The higher the Interest Rate the more money you will owe
in finance charges.
The longer the Time period the more money you will owe in
finance charges.
Principal Interest Rate Time Finance
Charge
Home State
Bank
$5999 X 2.69% X 3 = $484.12
Chase Bank $5999 X 2.69% X 4 = $645.49
Harris Bank $5999 X 2% X 7 = $839.86
Which bank is offering you the lowest finance charge? That
is the bank you should get your loan from to purchase your
car.
How much is the Finance Charge? Finance Charge = Principal x Interest Rate x
Time
Only
$6,999
2006
Chevrolet
Impala
Finance Charge = $5,999 x 2.69% x 3
Finance Charge = $484.12
This is your total
finance charge. How
much it will cost you
to borrow this money
for 3 years at the
2.69% interest rate.
Car Payment Your car loan is known as an Installment
loan because this loan will be repaid in
regular (same amount) payments over a
period of time.
How much will you pay each month?
You have to repay $5,999 plus the $484.12 in total
finance charges.
$5,999 + $484.12 = $6,483.12.
Car Payment
You will make equal monthly
payments, to cover the amount of
the loan and the interest.
$5,999 + $484.12 = $6,483.12.
$6,483.12 / 36 months = $180.09 (rounded up)
Only $180.09
per month
(with $1,000
down)
2006
Chevrolet
Impala
Which type of loan is a 5 year car loan?
A. Short term
B. Medium term
C. Long term
Buying a House
House/Property Vocabulary
Land, houses, & condominiums are forms
of investments.
Buy low and sell high!
Equity – means how much ownership
you have in your home
Down payment – amount you pay in cash
to reduce your monthly loan payments
Interest – amount you pay the bank for a
loan
House/Condo Loan
A home loan is known as a mortgage. This loan is a
secured loan because if you don’t repay the loan on time
every month, the finance company can repossess (take
back) your home and resell it to someone else
(foreclosure).
The interest rate on a home loan is usually the lowest
rate for any secured loan because the value of the
home is higher than any other secured loan, such as a car.
If the creditor repossessed your home because of failure to
pay, they would most likely recover their losses from your
lack of payment.
Fixed Loan vs. A.R.M. Loan
• Mortgage – long term property loan
• Typical length is 15 or 30 years
• (click here) Calculator (see how much interest you
pay on a $200,000 House)
• Fixed Mortgage – your interest rate never
changes and the monthly payment remains the
same
• A.R.M. (Adjustable Rate Mortgage)- your
interest rate can fluctuate based on market
conditions
• See article (click here for article)
Interest on a $160,000 loan 30 year fixed loan mortgage
Which type of loan is a 15 year mortgage?
A. Short term
B. Medium term
C. Long term
Home Equity
• Home Equity – the difference between the
market value of your home (what it could
sell for) and what you owe in loan(s) on
the home.
Equity Example
Cost of House
Down Payment
(paid in cash)
Total Loan
Amount (minus
down payment)
Interest on 30
year mortgage
$200,000 $20,000 $180,000 5%
Since you paid $20,000 in cash you now have $20,000 of equity in the House. If your home is worth $250,000 after 5 years and you owe $175,000 on your mortgage loan, you now have $75,000 of equity in the house. ($250,000 - $175,000 = $75,000)
The principal for your loan is $180,000 so the bank is going to charge you 5% interest for borrowing that money.
Refinance a Loan
Refinance – reduce your monthly payments by obtaining a
lower interest rate
If you initially take a loan out for $180,000 from a bank at
a 5% rate
You can refinance and if your credit score is high, you can get a lower rate.
5%
3.5%
This will save you money because you will pay the bank less money in interest on your loan
Interest rates are LOW right NOW so it is a good
time to refinance
Click here to watch a video.
Refinance
You can refinance your:
• Mortgage loans
• Car loans
• Boat loans
• Student loans
The goal is to get a lower interest rate to
SAVE money!
Interest rates are low now because the government
wants us to SPEND money to help the economy
Student Loan
A student loan is an unsecured loan and is designed to
help students pay for college tuition, books, and living
expenses. It may differ from other types of unsecured
loans because the interest rate is lower. There is less risk
of the student not paying back this loan. All student
loans must be paid back. You cannot declare
bankruptcy on this loan.
Students do not have to start paying on this loan until they
have completed their education.
Government
Student
loan interest
is low.
Personal Loans
Banks or other financial institutions may offer
you a personal loan. You can use this money
for personal reasons.
This is an unsecured loan, so therefore the
interest rate will be higher than for a secured
loan. Unsecured
Loan
Personal Loan
Personal loans are often used to pay down and consolidate
debt on high interest credit cards, cover emergency or
unexpected expenses, medical bills, home
improvements bills, moving costs, weddings, paying
taxes, and more.
This is an unsecured personal loan, with no collateral
being promised in consideration for the loan. The creditor
is usually known by the financial institution lending the
credit. For example, they may have a checking or savings
account at the bank in which they are obtaining credit.
Although the interest rate is higher than it is for a secured
loan, it won’t be as high as a signature loan or cash
advance loan.
High
Interest
Signature Loan
This is an unsecured loan often used for small purchases
such as computers, and vacations.
An unsecured loan means the lender relies on the
borrower's promise to pay it back. Due to the increased
risk involved, interest rates for unsecured loans tend to
be higher than they are for secured loans.
This type of loan is usually obtained by creditors whom are
not known very well. Their credit report will not be
analyzed before they receive the credit. Because of these
risk factors, the interest rate on this loan will be higher
than on a personal loan.
Which of the following loans offers the lowest interest to an excellent
creditor?
A. Personal
B. Government Student Loan
C. Signature
Charge Accounts
One of the most common types of
short-term and medium-term credit is
the charge account.
Charge Accounts
The three main types of charge
accounts are:
• Regular
• Revolving
• Budget
Regular Charge Accounts
If the bill is paid on time, you don’t
have to pay interest.
If you don’t pay the entire bill,
interest is charged on the
amount that hasn’t been paid.
Revolving Charge Accounts
A revolving account allows
you to borrow or charge up to
a certain amount of money
and pay back a part of the
total each month.
Interest is charged on
the unpaid amount.
House payment $1500.00 per
month
Budget Charge Accounts
Budget charge accounts let
you pay for costly items in
equal payments spread out
over a period of time.
Each payment includes
part of the total due on the
item and sometimes
includes interest.
4 payments of
$75.00 each
$300
Which of the following is not a type of
charge account?
A. Budget
B. Convenient
C. Regular
D. Revolving
Which of the following credit accounts always offers no interest?
A. Regular
B. Revolving
C. Budget
Credit Cards
Credit cards are like charge accounts
but some can be used in many
different places.
Credit Cards
The three basic types of credit cards
are:
• Single-purpose
• Multipurpose
• Travel and entertainment
Single Purpose Card = Seller-Provided Credit
Many stores provide credit
for their customers.
One of the reasons they
provide such credit is to
make it easier for
consumers to buy their
products.
Single-Purpose Cards
Single-purpose cards can only be
used to buy goods or services at the
business that issued the card.
NO INTEREST
if paid in full
before the
due date
Multipurpose Cards
Multipurpose cards are also called
bank credit cards because banks
issue them.
Multipurpose cards are designed
to work like a revolving charge
account but you can pay it off in
full each month when it is due and
make it a regular charge account.
NO INTEREST.
NO
INTEREST if
paid in full
before the
due date
3% Rule
Single-Purpose Card Multipurpose Card
3% of transaction remains
with the seller (store).
3% of transaction goes to the multipurpose card company.
You purchase an item for $100.00. You use
a multipurpose credit card. The multipurpose
credit card company ONLY pays the store
$97.00. The store loses $3.00.
Cash Advance on a Credit Card
Cash Advance Loan
A cash advance is a cash loan from a credit card, using an
ATM, a bank withdrawal or "convenience" checks. The
interest rate on cash advances is usually the highest for
any type of loan.
Money obtained for cash advances can be used for anything.
Credit Cards
Some credit cards
have annual fees,
which might range
from $25 to $80.
Credit card companies earn
money from the interest they
charge. Interest rates vary.
VISA
Travel and Entertainment Cards
Travel and
entertainment cards
usually work like regular
charge accounts.
You must pay the full amount
due each month. NO
INTEREST. You will have an
annual fee.
If you are looking for a credit card that can be
used at many different places, you should
apply for which of the following cards?
A. Single Purpose
B. Multi Purpose
C. Travel and Entertainment
D. All of the above
Credit Card Offers How many credit card offers do you think a family
of 4, with excellent credit and has 2 small home
businesses, will receive in one year?
Single Payment Loan
The debtor pays back
this type of loan in one
payment, including
interest (at the end of
the loan period).
Installment Loan
Installment loans are loans repaid in
regular payments over a period of
time.
The debtor makes
equal monthly
payments, which
cover the amount of
the loan and the
interest.
Which of the following types of loans would be
an installment loan?
A. Mortgage
B. Vehicle Loan
C. Revolving Charge Account
D. All of the above
What is the difference between a
single payment loan and an
installment loan?
A. A single payment loan is
paid in 1 payment and
includes interest.
B. An installment loan is
paid in equal payments.
C. Both A&B
End of Questions?
Activity: Types of Loans
Loan
1. Car
2. House
3. Student (Government
Loan)
4. Personal
5. Signature
6. Cash Advance
Expected Interest Rate
A. 19%
B. 17%
C. 2.25%
D. 14%
E. 2.69%
F. 6%
Directions: Match the loan in the first column with the
expected interest rate in the second column.
Hint: secured loans have lower interest rates.
Activity: Types of Loans
Loan
1. Car
E
2. House C
3. Student F
4. Personal D
5. Signature B
6. Cash Advance A
Expected Interest Rate
A. 19%
B. 17%
C. 2.25%
D. 14%
E. 2.69%
F. 6%
Answers
Learning Objectives
After completing this chapter, you’ll be able to:
1. Name the places where you can get credit. 2. Compare and contrast credit places and
choose the lowest interest.
Where do you borrow money from?
1. Banks
2. Savings and Loans
3. Credit Unions
4. Finance Companies
5. Payday Advance
6. Pawnshops
Making the right decision on where to borrow
money from, can save you money (interest
money).
Banks and Other Financial Institutions
Financial institutions, such
as banks, savings and
loans, and credit unions
offer many types of loans.
Lowest interest rates
available IF you have
and excellent credit
report.
Banks and Other Financial Institutions
More demands on the borrower,
but worth it because the interest
rate should be as low as
possible.
Paperwork
1. Application
2. Check stubs
3. References
4. Tax forms
Consumer Finance Companies
Consumer finance
companies specialize
in loans to people who
might not be able to
get credit elsewhere
because of their poor
credit record. Since you are riskier the
interest rate goes up.
Consumer Finance Companies
Read the disclaimer at the end of this commercial.
Payroll Advance Services
If you don’t have
any savings and
an unexpected
expense occurs,
you might look for
a short-term
loan until
payday.
Also known as “Borrow Until Payday” Loan
A payday loan is made without a
credit check but you must have proof
of a checking account and employment.
These places charge higher interest (because you have extremely poor
credit),
Payroll Advance Services
You write a check to
them for $300 that they
can cash on your next
pay day (1 week) and
they give you $270
today. Not secure
because your
check might
bounce.
$30 in interest for a loan for 1 week! That’s 10%
interest a week.
“Borrow Until Payday” Loan
These businesses provide very short-term
loans, usually for 7 to 14 days. The interest on this kind of loan gets higher because of
the additional time.
Pawnshop Loan A pawnshop loan is based on the
value of something you own.
Generally, the interest of this type of loan is very high
depending on how long you leave your
items at the pawn shop.
Pawnshop Loan Although the interest at a Pawnshop is the
highest for any loan, some people
continue to use a Pawnshop over and over again.
Pawnshop Loan – Court Case
If you have good credit and want a low
interest loan you should apply at which of
the following places?
A. Bank
B. Payday advance
C. Pawnshop
D. American General Finance
Why is it important to have a good credit
rating?
It shows that a consumer is a responsible
borrower and a good credit risk.
Activity: Places to Get a Loan
1. Bank
2. Pawn shop
3. American General
Finance
4. Payday Advance
Expected Interest Rate
A. 3%
B. 15%
C. 50%
D. 10%
Directions: You need a $2,000 car loan that you can repay
in full with interest in 6 months.
Match the place to get a $2,000 car loan in the first column
with the expected interest rate in the second column.
Activity: Places to Get a Loan
Loan
1. Bank
2. Pawn shop
3. American General
Finance
4. Payday Advance
Expected Interest Rate
A. 3%
B. 10%
C. 25%
D. 6%
Directions: You need a $2,000 car loan that you can repay
in full with interest in 6 months.
Match the place to get a $2,000 car loan in the first column
with the expected interest rate in the second column.
A
C
D
B
Secured vs. Unsecured Loans
Secured
Borrower pledges some asset (a
car, house, or other property) as
collateral for the loan
If the borrower doesn’t repay the
loan as promised the creditor can
take possession of the asset
used as collateral and may sell it
to regain some or all of the
amount originally lent to the
borrower.
Interest rate for borrowing money
for a secured loan is usually
lower than an unsecured loan.
Examples: car, boat, motorcycle,
house.
Unsecured
The borrower does not pledge an
asset to be used as collateral for
the loan.
If the borrower doesn’t repay the
loan as promised the creditor
cannot take the borrowers
possessions. However, the
creditor can seek legal action
against the borrower to try to
obtain the money.
The interest rate for borrowing
money for an unsecured loan is
usually higher than a secured
loan.
Examples: student loan,
computer, vacation, medical bills.
True Life: I’m in Debt
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Credit Cards
Take Notes
Learning Objectives
After completing this chapter, you’ll be able to:
1. Complete a credit card application.
2. Understand how to use a credit card wisely.
Credit
Credit Card Terms
Credit
Interest
Credit Limit
Annual Percentage Rate
Finance Charge
Annual Fees
Minimum Payment
Due Date
Late Payment Fee
Cash Advance Fee
College Credit Video
1. What does the credit card company offer to college
students which makes its card appealing to the students?
2. How does the college benefit from allowing the credit card
company to solicit on campus?
3. List on criticism that either of the two parents said about
the credit card companies?
4. What explanation did the bank, university, or credit card
solicitor give to justify their action of marketing credit cards
to college students?
Figure
26.1 CREDIT CARD SOLICITATION
First Bank of PR
Prairie Ridge
High School Student
Dear Student:
Applying for Credit
To open a credit or
charge account,
you’ll have to fill out
an application form.
Figure
26.1 CREDIT APPLICATION
When you sign the bottom of the
credit application, 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?
Applying for Credit
Security agreement.
This is the most
important piece
of information
and is required
by law. Most
people don’t read
it.
Annual Percentage Rate
The annual percentage rate (APR)
determines the cost of your credit on a
yearly basis.
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.)
Figure
26.1 SECURITY AGREEMENT
0% for 6 months.
16.99% Variable (That
means it changes
periodically. Could go
up or down.)
Why should you beware of low
introductory interest rates?
They are a teaser to get you to
use the credit card. If you don’t
pay your balance off in full, the
interest rate increases after a
few months.
This will cost you
money!
Other APRs
Default Rates: You did
not pay the minimum
payment on time.
Figure
26.1 SECURITY AGREEMENT
Default Rate: (YOU’RE
LATE ON A PAYMENT)
Up to 21.99% variable
for purchases; up to
28.99% variable for
cash advances.*
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.
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%
Figure
26.1 SECURITY AGREEMENT
Method of Computing the Balance for Purchases
Figure
26.1 SECURITY AGREEMENT
Cash Advance: 23.99%
Interest rate until you
pay this money back.
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.
Figure
26.1 SECURITY AGREEMENT
.50
Other APRs
Cash Advances – You go to the bank
and charge cash.
Figure
26.1 SECURITY AGREEMENT
Cash Advance: 23.99%
Interest rate until you
pay this money back.
Figure
26.1 SECURITY AGREEMENT
Cash Advance – 5%
for each cash
advance, with a
minimum of $10 and
NO MAXIMUM.
Fees
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?
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
$50.00 extra to
get this money.
Figure
26.1 SECURITY AGREEMENT
No Annual Fee
Annual Fee
Annual Fee
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.
Fees
A late or missed
payment fee is
charged when you
miss a payment or
don’t make a
payment on time.
Figure
26.1 SECURITY AGREEMENT
Late Fee: $19 on
balances up to $250
and $39 on
balances over $250.
You pay
interest on
this late fee.
What are some types of fees credit
cards charge?
Late payment
Missed Payment
Cash Advance
Annual Fee
Grace Period
The grace period is amount of time you get
to pay off a debt without having to pay
interest charges.
Use credit to
your
advantage.
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.
Rewards
In some cases, you earn rewards
based on how much you “CHARGE”
on your card.
Use credit to
your
advantage.
Rewards
1 reward point
for each dollar
charged on
credit card.
Rewards
Cash is credited to my credit card
account. Can be used towards
future purchases.
NBC 5 – Credit Card Signatures - Video
Credit Card Offer
2015
Credit Card Review
Credit Card Offer
2015
This is the amount of
interest you will pay
for any purchase
balances not paid in
full by the due date.
2015 Cash Advances is the interest rate
you will pay for using your credit
card at a bank or at an ATM and
borrowing money. The interest rates on
this credit card are
variable (they can
change).
Grace Period – You
have 25 days to pay
your balance in full from
the time the bill is
mailed to you and then
you will not have to pay
interest.
Annual Fee: This is the amount of money
you must pay each year to the credit card
company whether you use the card or not.
If you do not pay your credit card bill in full
by the due date, then the minimum amount
of finance/interest money you will pay is .50
cents, even if the balance multiplied by the
rate of interest is lower.
Credit Card Application
New
Credit
Card
Law
2010
or the APR will be calculated on the balance
(amount you don’t pay) and you will owe more
money.
Note: If you cannot pay the balance in full, pay
as much as you possibly can to keep the interest
charges as low as possible.
Evaluate these Credit Card Offers
Which one
would you
choose?
Credit Worthiness
Learning Targets
After you have completed this unit, you
will be able to:
Explain what creditors look for in
applicants when they apply for credit.
Identify the 5 C’s of Credit.
Explain the Equal Credit Opportunity Act
(ECOA).
Evaluate credit applications and decide
whether to approve or deny credit.
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.”
Your Credit Worthiness: The Five Cs
The five Cs of credit are:
1. Character
2. Capacity
3. Capital
4. Collateral
5. Credit History Credit History
Character
Creditors might ask for credit references from businesses
or people you’ve borrowed from in the past who can testify
to your reliability when you fill out a credit application.
If this section is
left blank, you
may be denied
credit. Complete
as much of it as
you can.
Do you
move
around
a lot?
Capacity
Creditors will also consider your capacity to pay
back the credit before they decide to give you
credit.
Creditors will check to see whether you have a job,
how much money you make, and how long you’ve been
employed when considering your capacity to repay the
loan.
Capital
Your capital is how much
you have beyond what you
owe. It is also known as your
assets.
A creditor will want to know if you
have valuable assets such as
personal property, investments,
or savings with which to repay
the debt if income is unavailable.
Capital Own
Retirement $30,000
Savings $4,000
Stocks $10,000
Collateral
Collateral consists of property,
or valuables. It can be used as
security for a loan.
If you fail to pay back a loan, the
creditor can take whatever you
pledged (agreed to on the loan
document) as collateral, such as
a car, jewelry, or house and resell
it to try to get their money back
that you owe them.
Credit History
The creditor then checks with a credit bureau, which
is 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.
There are 3 authorized credit bureaus:
1. Trans Union
2. Equifax
3. Experian
All 3
credit
reporting
agencies
You have the
right to 1 free
credit report
every year
from each
agency.
40 Million Mistakes: Is your credit report
accurate?
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Your Credit Report
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FREE way to
get your
credit
report.
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.
Equal Credit
Opportunity Act
Factors such as income, expenses, debt, and credit history are considerations for
credit worthiness.
Equal Credit Opportunity Act
Consumers cannot be denied credit because of:
Gender, marital status (widowed, separated, divorced,
single, married), age, race, national origin, because
they receive public assistance income (welfare), or
because they do or do not have children or how many
children they have.
Consumers can be denied credit because of:
1.Low income
2.Large current debts
3.Poor record of payments in the past
End of Questions?
Discussion Activity: Evaluate Credit Applicants
Directions: Each applicant
described on the next two
pages has applied for a $4,000
loan to purchase a more fuel-
efficient car.
Imagine you are a loan officer at the bank, and you must
decide whether to approve or deny loans for each of the
four applicants. You have been given five pieces of
information about each applicant. Using this information,
evaluate each applicant’s ability and willingness to repay
(use the 5 C’s of credit) and make the “best” decision you
can. Approve or Deny each applicant. Consider the ECOA
law in making your decision. Explain your answers in a
discussion.
Credit Applicants
Applicant 1
1. Has 10 open charge
accounts
2. Address has not
changed for 5 years.
3. Has 6 children
4. 62 years old.
5. Owns stock.
Applicant 2
1. Annual income of
$25,000
2. Caucasian
3. Behind on paying
installment loan
4. Owns or is buying a
home
5. Has an overdrawn
checking account.
Credit Applicants
Applicant 3
1. Receives a welfare
check (money from the
government) each month
2. Divorced
3. Pays bills on time
4. Works part time
5. Female
Applicant 4
1. 21 years old
2. Has no credit history
3. Has been at present job
for 10 months
4. Has a savings account
5. Mexican-American
End of Questions?
Learning Targets
After you have completed this unit, you
will be able to:
1. Explain what to do if you are having
credit problems.
Credit Problems
What can you do when you have a credit problem
or when you’ve gone too far in your use of credit?
If you can’t make your credit payments the first
thing you should do is contact the creditor and
explain the situation to them. They may be able to
work out a plan that will make your payments
easier. (They may even stop charging interest).
Credit Counseling
Credit Counselors help consumers with their credit
problems.
They can help you revise your budget, contact
creditors to arrange new payment plans, or help
you find other sources of income.
Consolidating Debts
A consolidation loan combines all your debts into
one loan with lower payments.
Monthly Credit Payments
Kohls $50.00
Shell $75.00
Menards $100.00
Target $60.00
Visa $325.00
Master Card $180.00
Total $790.00
Interest on these credit payments
ranges from 10-20%. Current balance
to pay off all this credit is $7500.00.
You can go to a bank and get a personal loan for
$7500 at a lower interest rated and pay off all these
creditors. Your bank monthly payment should be
much lower than the total for all these creditors.
Bankruptcy
The last resort is to declare bankruptcy.
This is a legal process in which you either
pay back your debts on a timed schedule or
don’t pay back your debts at all.
You should get an attorney that specializes
in bankruptcy cases. You will have to pay a
fee to the attorney and to file the proper
documents at the federal court .
Bankruptcy A federal judge will decide any of the following:
1. You pay back the debts in smaller amounts
which will take a longer period of time.
2. You do not pay back certain debts (complete
relief).
3. You give up (sell if necessary) your personal
assets, such as a car, savings, or business and
give the money to the creditors.
REMEMBER: You must pay back your student
loan.
Bankruptcy stays
on your credit
report 7-10 years.
End of Questions?
