Credit

What YOU need to know!

What is Credit?

• Credit is borrowing money now to make an immediate purchase and promising to repay it later.

Credit Terms

• Lender: one who lends the money

• Borrower: one who receives the loaned money

• Credit Rating: an evaluation of the likelihood the borrower will default on the loan.

• Default: not being able to pay for the loan.

Credit Terms

• Credit Rating is based on:

-past credit experiences

-current financial situation

-job history

***once you ruin your credit rating it is VERY difficult to fix it****

Credit Terms

• Collateral: property or another valuable item that a borrower pledges as security for a loan.

• If a borrower defaults on the loan, the lender can seize (take) the collateral.

• If you don’t make your car payment they take your car!

Sources of Credit

• Banks

• Credit Unions

• Financial Corporations

• Most Common Source: Credit Cards

When you get a credit card…

• You will be given a credit limit (a maximum amount of money you can charge)

• You need to know the APR (Annual Percentage Rate). This is the interest rate the credit card charges.

• Current Average APR: 15.11%

When you get a credit card…

• To avoid interest charges, you MUST pay the ENTIRE balance EACH month!

• NEVER just pay the MINIMUM balance!

Example

• You charge a new computer and TV at Best Buy for $2000.

• Your Best Buy credit card’s APR is 27.99%.– Store credit cards ALWAYS have a MUCH higher interest rate!!

• If you only pay the minimum payment: $80 (4% of $2000), it will take you 11 ½ YEARS to pay it off and you will have paid $2,469.29 in interest

• Your original $2000 purchase really cost you $4469.29!

Credit…Pros and Cons

• Pros:

• You can purchase something immediately

• Using a credit card wisely can teach you discipline, responsibility and other life skills

• It can be used in an EMERGENCY!

Credit…Pros and Cons

• Cons:

• VERY easy to fall into debt!

• Debt can lead to bankruptcy

• If you file for bankruptcy, it stays on your credit rating for 7-10 years.

• During that time, it is extremely difficult to get a loan.

How to build a good credit history…

• Apply for 1 credit card with a low APR (if possible)

• Charge SMALL items that you NEED each month

• Pay off the ENTIRE balance EACH month

• NEVER pay just the MINIMUM balance