Embed Size (px)
Citation preview
Unit 6: CreditDollars & Sense
Mrs. McGlynn
Chapter 10.1: What is Credit?
• Credit is…
– The ability to borrow money in return for a promise of future repayment (usually including interest)
• The Opportunity Cost of Using Credit is…
– Giving up the ability to spend money in the future in order to spend money now
Chapter 10.1: What is Credit?
• From time to time, consumers have needs that they do not have the money to pay for
– This is when they use credit!
– Credit can be in the form of Credit Cards or Loans from a bank
– A Debit Card is NOT a form of “credit”
Chapter 10.1: What is Credit?
• People use credit for a variety of reasons
– Home (Equity & Tax advantages)
• Renting vs. Ownership
– Vehicles
– Education
– Health
• It is best to borrow money for things that are still worth something when the loan is repaid
Chapter 10.1: What is Credit?
Which of these will last longer
at room temperature?
If you need to borrow
money, buy “stones,”
not “ice cubes.”
Qualifying for Credit
Up Next!
Chapter 10.2: Qualifying for Credit
You are a loan officer for a bank and someone comes in asking for a loan.
• With a partner, brainstorm a list of things you would want to know about someone (be specific) before you lent them money.
Chapter 10.2: Qualifying for Credit
• The 3 C’s of Credit
– In order to determine your creditworthiness, lenders look at the following…
– Character: financial responsibility
– Capacity: financial ability
– Capital: value of your assets
Chapter 10.2: Qualifying for Credit
• How can you find out about someone’s ability to repay a loan?
• How can you find out about someone’s assets?
• How can you find out about someone’s character?
Chapter 10.2: Qualifying for Credit
• Creditworthiness Information Sources
– Loan Applications
– Credit Card Applications
– Credit Reports
Chapter 10.2: Qualifying for Credit
• Credit Reports
– Reported through 1 of 3 Credit Bureaus
• Experian
• TransUnion
• Equifax
– A Credit Bureau is a company that collects information about consumers and sells it to lenders
Chapter 10.2: Qualifying for Credit
• Credit Ratings
– A measure of your creditworthiness
– FICO score (American average 600-650)
• Below 620 is “subprime” or risky
– Payment history
– Current debt
– Length of credit history
– New accounts
– Type of credit used
Sources of Consumer
Credit
Coming up Next!
Chapter 10.3: Sources of Credit
• Secured Loans
– Backed by something of value, called collateral
– Installment Loans are secured (also known as Closed-End Credit)
• Installment loans are used to purchase vehicles and houses (fixed interest rate, fixed payment amount, fixed amount of time)
Chapter 10.3: Sources of Credit
• Unsecured Loans
– Based on creditworthiness, more risky for lenders
– Generally have higher interest rates than secured loans
– Credit Cards are unsecured
– Also called Open-End Credit
Chapter 10.3: Sources of Credit
• Where can you get credit?
– Financial Institutions like banks & credit unions
– Finance Companies
– Payday Loans
– Life Insurance Companies
– Credit Card Cash Advances
– Rent-to-Own Companies
400%+
Chapter 10.3: Sources of Credit
• Types of Credit Card Accounts
– Regular Charge
– Revolving Charge
• Credit Card Incentives?
• The COST of Credit?
– Annual Fees
– Interest
– Penalties
Credit Rights &
Responsibilities
Review of…
Chapter 10.4: Credit Rights
• Truth in Lending
• Equal Credit Opportunity Act
• Fair Credit Reporting Act
• Fair Credit Billing Act
• Fair Debt Collections Practices Act
Chapter 10.4 : Responsibilities
• Lenders are not there to protect you; YOU must know your own debt capacity!
• Practice self-control!
– Pay more than the minimum balance
– Avoid too many credit cards
– Pay cash when possible
Maintaining a Good
Credit Rating
This is it…The LAST section!
Chapter 10.5: Credit Ratings
• How to establish your credit rating?
– Start small
– Don’t miss payments
– Establish your own credit
– Read what you sign
Chapter 10.5 : Credit Ratings
• Acceleration Clause
– Your entire “loan” is due if you miss a single payment
• Balloon Payment
– Smaller monthly payments with a final, larger payment
Chapter 10.5: Credit Ratings
• Identity Theft
– True-Name Fraud
– Guard your personal documents
– A survey from the Federal Trade Commission in 2007 states that…
• Over 8 million Americans have been victims of Identity Theft
Chapter 10.5 : Credit Ratings
• Credit Problems?
– Debt Consolidation Loans
– Credit Counseling Services
– Bankruptcy
It’s next Monday! ☺☺☺☺
Ready for your Test?
