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Credit
Bell Ringer
1. Is a credit card good or bad?
2. What would be considered good credit?
3. On average how many credit cards does the average household have?
4. How do credit cards make money?
Video
• Who are credit card companies best and worst customers?
• Should people use credit cards as an emergency fund? Why or why not.
• 0% interest• Late fees
Chapter 4 - Credit
Credit and Installment Debt Terms
• Credit - is receiving funds either directly or indirectly to buy goods and services today with the promise to pay for them in the future
• Principal - The amount that was originally borrowed
• Interest - the amount that the borrower must pay for the use of someone else’s funds.
Credit and Installment Debt Terms
• Installment Debt - One of the most common types of debt, this loan requires equal payments over time
• Period - the term used for the length of time of the loan
• Durable Goods - goods that last longer than 3 years and are often purchased using credit What are some examples of durable goods?
Consumer Installment Debt in U.S.
• http://glencoe.com/sites/common_assets/socialstudies/in_motion_08/ett/Figure4-1.swf
Consumer Installment Debt in U.S
Types of Credit
Characteristics Close-end Credit
Open-end credit (revolving credit)
Definition A one-time loan Credit is extended in advance
Purpose of the loan
Specified in application
May be used for a variety of purposes
Payments Specified number of equal payments
Vary depending upon amount charged
Loan amount Agreed upon during the application process
May be increased for responsible consumers
Examples Mortgage, Automobile Loan
Credit Card
Mortgages
• Mortgage - installment debt on real property such as houses, buildings or land. Largest form of
installment debt in the country
Pay Now or Pay Later!
$1,000 Installment Loan at 9% Interest
Term of Loan 24 Month 36 Months
Monthly Payments $45.69 $31.80
Total Interest $96.56 $144.80
Total Payments $1096.56 $1,144.80
Why People Use Credit - Advantages
• “Buy now, pay later” Using credit allows the
borrower to enjoy consumption now rather than later
Items that are too expensive would often take too long to save for
• Builds/establishes your credit history & credit score
• Convenient • Useful for emergencies• Often required to hold a
reservation• Easy form of debt
consolidation• Protection against rip-offs
and fraud
Credit - Disadvantages
• Missed payments hurt your score
• Opening too many cards hurts your score
• Late Fees, Finance charges
• Going over credit limit• Interest is costly
• Tempting to overspend• Privacy is an
increasing concern • Personally responsible
for lost/stolen cards• Identity theft easier • Can lose financial
freedom from overspending
Checklist for Buying on Credit
• The following questions should help you in determining whether to use credit or not. Do I really require this item? Can I postpone
purchasing this item until later? If I pay cash, what will I be giving up that I could buy
with these funds? If I borrow or use credit, will the satisfaction I get from
the item I buy be greater than the interest I must pay? Have I done comparison shopping for credit? Can I afford to use credit now?
Credit scores
• A FICO (Fair Isaac Company) score is an evaluation of a person’s ability to repay debt It is a number between 300 and 850
• A higher number is a better credit score Indicator of a person’s ability to pay back a loan
• A lower score may increase the interest rates a consumer pays or they may not receive credit The creditor has a greater risk that the individual may
not pay back the money they loaned
Credit Scores
• Credit cards may influence each component of how an individual’s credit score is calculated
10%10%
15%
30%
35%Credit Mix
Pursuit of New Credit
Credit History & Length
Outstanding Debt
Payment History
Credit scores
• Low credit scores will cost individuals more money long-term. This table is based upon a thirty-year fixed mortgage rate
on a $300,000 loan.
FICO Score Interest Rate
Monthly Payment
30 Year Amount
760 5.9% $1,787 $643,320650 7.2% $2,047 $736,920590 9.3% $2,500 $900,000
Credit Scores, cont.
• Check your credit score & credit report once a year – but not more than once in 12 months!
• If your credit is checked more than once every 12 mos, each inquiry after that starts to hurt your score
• 3 credit reporting agencies are: Equifax, Experian, and TransUnion