MAINTAINING CREDITIntroduction to Business and MarketingChapter 26.2

THE MAIN IDEA• There are several similarities and

differences between credit cards,

installment loans, and

mortgages.

• Keeping a good credit rating is

important if the consumer is

interested in getting loans at a

reasonable cost.

UNDERSTANDING LOANS AND MORTGAGES• Loans and mortgages are

similar to other types of

credit

• They allow consumers to

borrow money that will

be paid back with

interest

HOW INSTALLMENT LOANS & MORTGAGES WORK

• A loan is money lent by one

party to another with interest,

usually requiring collateral.

• A mortgage is a loan

agreement secured by

property, usually the item that

the mortgage is for, such as a

home.

HOW INSTALLMENT LOANS & MORTGAGES WORK• Installment or mortgage

loans can have a

variable rate of interest

or a fixed rate of

interest.

Variable Ratean interest rate that fluctuates or changes over the life of the loan

Fixed Ratean interest rate that stays the same over the life of the loan

HOW INSTALLMENT LOANS & MORTGAGES WORK• Installment and mortgage

loans usually require the

applicant to give a down

payment.

• On a simple interest loan,

interest is based on the

original principal alone

Down Paymenta portion of the total cost that is paid when a product or service is purchased

Principalthe amount of borrowed money that is still owed and on which interest is based

HOW INSTALLMENT LOANS & MORTGAGES WORK

• A finance charge

includes the interest

and any other

charges, such as the

application fee.Finance Chargethe total amount it costs the borrower to have the lender finance the loan

SECURED & UNSECRED LOANS• A mortgage is an example of a

secured loan.

• A credit card debt is an example

of an unsecured loan.

• Secured loans usually carry a

lower

interest rate.

Secured Loana loan that is backed by collateral

Unsecured Loana loan that is not backed by collateral

KEEPING A HEALTHY CREDIT RECORD• To continue using credit

or to get new credit,

you need to maintain a

good credit rating score.

• To get the best credit

rating, you need to pay

your bills on time.

FACTORS THAT AFFECT YOUR CREDIT SCORE

STAYING WITHIN YOUR INCOME LIMITS

• Experts say

consumers should not

use more than 20% of

their income for credit

payments

SIGNS OF CREDIT TROUBLE

Your Income

$2,000 per month

$1,500 after taxes

You should not use more

than 20 percent of your

income for credit payments.

Your Debt$120 for Student Loans

$160 for Car Payments

Your Wants

A new entertainment center for $50 per month for three years

CanYou

AffordIt?

No

Your total payments each month would be $330, or 22 percent of your take-home pay.

Remember

SIGNS OF CREDIT TROUBLE

1. You cannot make monthly loan payments

and minimum monthly payments on your

credit cards.

2. You receive second and third payment-

due notices.

3. You get calls from bill collectors.