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Standard 3Students will understand

principles of money management.

• Objective 2– Understand credit uses and costs.

• Objective 3– Describe the impact of credit on

money management.

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Credit

• A legal agreement to receive cash, goods, or services now and pay for them in the future.

• Interest: the cost you pay for using credit. (On credit card statements it’s called Finance Charge.)

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Common Types of Credit

• Installment Loan: A loan in which the amount of payment and the number of payments are predetermined—monthly payments.– (Typically used for autos, appliances,

furniture…)– (Usually has a lower interest rate than

a credit card.)

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Common Types of Credit

• Student Loan: Used for tuition and college expenses.– Usually has a lower interest rate than

an installment loan.– Federal government through college

institution.

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• Credit Card: A plastic card that you can use to make purchases or obtain cash by using a line of credit. (Store cards generally have a higher interest rate than bank cards.)

– Grace Period: Time allowed in which you can pay off new purchases without being charged interest, usually 20 – 30 days.

– APR: Yearly interest rate for using credit.

– Credit Limit: Maximum amount you can charge.

Common Types of Credit

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Common Types of Credit

• Mortgage Loan: Used specifically for home purchase.– (Usually has a lower

interest rate than an installment loan

– May provide an income tax break on interest paid.

– Usually repaid over 15 – 30 years.) 6

Did you know 61% of adults said their knowledge of credit reports is fair to poor?

Did you know only 3% of adults can name the three main credit reporting agencies? Can YOU?

Source: Consumer Federation of America

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Credit Reporting Agencies

• EquiFax• Experian• TransUnion• www.annualcreditreport.com

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Credit Reports and Scores

• Credit Report: A detailed record of how you have repaid your credit obligations.

• Credit Score: A number that reflects your creditworthiness, based on your credit report– Ranges from 300 to 850, the higher the better.– A score of 700 or above is considered good. A

score ranging between 730 and 850 qualifies for the best interest rate.

– A low score can result in a higher interest rate or denied credit approval.

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Building Positive Credit--Students

• (Start with a checking account--Manage your checking account/debit card wisely)

• Qualify for overdraft protection (line of credit)

• Co-sign on a loan with parent (car loan, student loan…)

• Make a purchase using installment payments (tires…)

• Get one credit card or have your parents add you as an authorize user on their card. 10

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Ways to Improve Your Credit Score

• ***Pay your bills on time. (Accounts for 35% of score.)

• Watch your balances. (When you exceed 50% of your credit limit, your FICO will suffer—30%.)

• Old and long are good. (Longer credit history is an asset—15%)

• Resist opening new accounts. (Too many inquiries—10%)

• Diversify. (Variety and type of loans—10%)

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Concerning interest on debt…

Interest never sleeps nor sickens nor dies;

It never goes to the hospital;It works on Sundays and holidays;It never takes a vacation;It never visits or travels;It takes no pleasure;It is never laid off work nor discharged

from employment;It never works on reduced hours

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The Cost of Using CreditSCENARIO:• Interest Rate 17%• Minimum Payment 2.5% or

$10.00Balance

Time to Pay Off

Interest Charged

Total Pay

$1,000.00

12 years $979.00 $1,979.00

$2,500.00

19 years $2,941.00

$5,441.00

$5,000.00

24+ years

$6,210.00

$11,210.0013

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Cost of Credit

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Ways to Lower Credit Cost

• Pay off loan early.• Pay extra or higher than

minimum payment due.• Look for the lowest interest

rate.• Set up loan for shortest time

period possible.

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