the use of credit. credit credit is when money, goods, services are received with the promise to pay...
TRANSCRIPT
The Use of Credit
Credit
Credit is when money, goods, services are received with the promise to pay back in the future
3,000 yrs ago in Iraq
Credit
Keys Interest Fees
Types Open-ended credit (revolving
credit, line of credit) Closed-end credit (installment
credit)
Advantages of Using Credit
1. Convenience2. Used in times of emergencies3. Good form of identification4. Purchase expensive items soon5. Higher standard of living than can afford right
now (higher income in future)6. Take advantage of free credit7. Debt-consolidation: one payment 8. Pay back other debt that has higher interest
rates
Disadvantages of Using Credit
1. Interest (the price of credit) is costly
2. Additional fees are common (ATM fees, annual fees)
3. Tempting to overspend4. Privacy & identity theft is a
concern5. Reduces spending flexibility
Cost of Credit
Annual Percentage Rate (APR)The cost of credit on a yearly basis
Mandated by law to be publicized – best way to compare options
Often charged monthly: 1.5% per month (periodic rate) = 18% per year
Cost of Credit
Basis for Monthly ChargesUsually use average daily balance (p. 204)
Grace period?New purchases?
Minimum payments for open-endOften just barely higher than the finance
chargeLarge penalties if do not payRead “Advice from a Pro…” (p. 205)
Sample closed-end (p. 210)
Cost of Credit
Annual Percentage Rate (APR) You charge $100 on your credit card with a 24% APR. What is your yearly finance charge? What is your first month’s finance charge?
If you pay $25.00 on your first month payment, what is your balance the second month?
APR Practice
1. You decide to purchase a $700 plane ticket for your Spring Break vacation on your credit card. Your card charges 15% APR. What is the annual finance charge? What is your first month finance charge?
2a.William spends $200 on his Visa card. If he leaves this on his card that charges 18% APR, what is his first month finance charge? 2b. Calculate the remaining balance at the end of the month if he pays $25.
Bellringer - APR Practice
a.William spends $500 on his Visa to buy things for his new apartment. If he leaves this on his credit card that charges 18% APR, what is his first month’s finance charge (interest)? b. Calculate the remaining balance at the end of the month if he pays $75. c. After this payment, what would be his second month’s finance charge?
Tues, Apr 16
Credit Vocabulary (Ch.’s 6 & 7)
credit history default credit grace period introductory rate annual fees APR credit limitcash advance periodic ratefinance charge minimum payment
average daily balance closed end credit
credit score open end credit
Applying for Credit: the Six C’s
Character: Will you repay your loan?
Capital: What are your assets and net worth.
Capacity: Will you be able to pay your loan?
Collateral: What if you are unable to pay back your
loan?Conditions:
Current market conditionsCredit History
Have you used credit responsibly in the past?
Credit Scores (FICO)
Range from 340 – 850
Dependent on 5 key factors (p.
177)
Kept by 3 different organizationsShould be checked regularly – can get a free copy of your report (not your score) once a year
Managing and Protecting Your Credit
Regular FICO scores checksErrorsStolen Identity – very messy
Be careful on internetMany consumer credit protection laws
Truth in Lending ActEqual Credit Opportunity ActFair Credit Opportunity ActFair Credit Reporting actConsumer Credit Reporting Reform Act
Debt ProblemsCollection Agencies
Financial Counseling Services
Bankruptcy“Chapter 7” straight bankruptcy (liquidation)
“Chapter 13” wage earner bankruptcy (reorganization)
“Chapter 11” Corporate bankruptcy (reorganization)