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OBJECTIVES• Explain how you can develop a
credit history
• Examine factors to consider when
deciding which credit card to
secure
• Define three factors that creditors
consider when granting credit
THE MAIN IDEA• Developing a credit history is important
• The first step will be choosing a credit card
and applying for it
• Before deciding to issue credit to a
customer, a creditor looks at the applicant’s
oCapacity
oCharacter
oCapital
DEVELOPING A CREDIT HISTORY• Using credit responsibly
can make life easier
• Using credit in an
irresponsible way will
harm the ability of a
consumer to make
future purchases
SELECTING A CREDIT CARD• There are five main factors to consider
when selecting a credit card:
1. Interest rate
2. Extra fees
3. Whether the interest rate will change
4. Whether a cosigner is needed
5. Whether there is a grace period
SELECTING A CREDIT CARD• Questions you should ask before
selecting a credit card include:
1. What will the cost of credit be?
2. Who will accept the card?
3. What is the credit limit?
4. Will I be able to use the card to get
cash?
COST OF CREDIT• For all their conveniences,
credit cards come with
costs such as interest
rates and various fees
• To gauge the cost of
credit, first look at the
annual percentage rate
(APR)
Annual Percentage Rate (APR)the cost of credit on a yearly basis
COST OF CREDIT• A credit card might offer a low introductory
APR but change to a much higher rate after
a few months
• Credit card companies will usually charge a
fee for a cash advanceCash Advancea loan given in cash by a credit card company in anticipation of the borrower’s being able to repay it
COST OF CREDIT• Credit card companies
will usually charge a
fee for late or missed
payments
• Another fee is charged
if the card holder is
over their credit limit
OTHER CONSIDERATIONS
• You may need a cosigner
when you apply for
credit.
• You should consider
whether there is a grace
period for payments on
your credit card.
Grace Periodan amount of time allowed to repay a debt without having to pay interest charges
Cosignersomeone who agrees to be responsible for a debt if the main applicant does not repay it
APPLYING FOR CREDIT
• A credit card
application asks for
information about your
address, your job,
what other credit you
have, and details
about your income
and savings
CREDITWORTHINESS
• Before creditors give a
consumer a charge or
credit account, they
want to make sure the
consumer is worth the
risk
THE THREE Cs of CREDITWORTHINESS
The Three Cs of
Creditworthiness
C
C
C
Capacity: An applicant’s ability to pay.
Character: An applicant should be trustworthy.
Capital: The money an applicant has beyond debts.
CREDIT LIMITS• Creditors also consider
capacity, character, and
capital when determining a
card holder’s credit limit
• If a person pays his or her bills
on time, most creditors will
raise the person’s credit limitCredit Limitthe maximum amount a card holder can charge on a credit card
MAKING THE MINIMUM PAYMENT• Consumers who pay more than the
minimum amount each month will
pay less interest and pay off their
debt more quickly
• The credit card agreement is a
contract
• If a consumer does not make at least
the minimum payment, the
consumer is not meeting his or her
legal obligation
REVIEW QUESTIONS
1. How can a consumer develop a
credit history?
Apply for credit, be approved, use the
credit, and make payments to the creditor
REVIEW QUESTIONS
2. What is an annual percentage rate?
Why is it important?
The cost of credit on a yearly basis; it
determines the amount of interest that a
consumer will pay on a debt