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Published byAlannah McCoy Modified over 8 years ago
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The Grand Canyon can hold around 900 trillion footballs All the blinking in one day equates to having your eyes closed for 30 minutes Lightning strikes the Earth 6,000 times every minute A group of frogs is called an army AND a group of kangaroos is called a mob DID YOU KNOW?
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CREDIT Unit VII: Credit and Banking Lesson 2
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THOUGHTS Credit can be your best friend and your worst enemy
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CREDIT VOCABULARY Credit: the ability to borrow money to pay for something now and agree to pay the lender at a later date Predetermined limit, cash to be paid back, major amount paid back monthly Debt: The entire amount of money that you owe to lenders APR (annual percentage rate) is the total cost to use credit in a year Term is how long you have to repay a loan, often expressed in months Fees are charged to use credit. Examples: annual credit card fee, loan origination fee, over-the-limit fee
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CREDIT VOCABULARY Credit history is a record of your behavior related to borrowing and repaying loans Credit report is a detailed record of your personal credit and financial transactions Credit score is a rating used by credit reporting companies to help lenders decide whether and/or how much credit can be extended to a borrower Universal default allows a credit card company to increase your interest rate if you make just one late payment
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SOURCES OF FINANCING Sources of financing: Banks/credit unions, retail stores, finance companies, payday loans, title loans, pawn shops, private lenders Secured loan: the borrower will pledge some asset as collateral Unsecured loan: Loans are not secured against a borrowers assets Subsidized loan: Loan in which the interest is reduced by an explicit or hidden subsidy Payday loan: a small amount of money lent at a high rate of interest on the agreement that it will be repaid when the borrower receives their next paycheck Title loans: short-term loans in which collateral is used. The collateral is typically something which you have a “title” to- car or home
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TYPES OF CREDIT Open-end (Revolving) Credit: a pre-approved loan between a financial institution and borrower that may be used repeatedly up to a certain limit and can subsequently be paid back prior to payments coming due Closed-end Credit: a loan or extension of credit in which the proceeds are dispersed in full when the loan closes and must be repaid, including any interest and finance charges, by a specified date Mortgage: Used specifically to purchase a home, usually 15 to 30 years of monthly payments Home equity loan: using equity (value) of your home to get a loan
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JOINT CREDIT Joint credit: credit issued to two or more people- joint responsibility to pay off the debt Can be a potential problem when one party does not pay their part (affects the other parties credit score)
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CREDIT COSTS Interest paid on loans (Variable v Fixed) Finance charges and fees- annual, late fees, etc. The longer the loan, the higher the total cost The higher the interest rate, the higher the total cost of the product Opportunity cost of credit: money used to pay interest cannot be used to pay something else
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CREDIT RISKS Default/foreclosure/repossession Overspending Credit Card debt and possible bankruptcy Difficult to save when in debt Low (minimum payment)- Greater the total cost Sales abuses, addiction to spending Gambling on the internet using a credit card Taking unnecessary loans/opening unnecessary cards Future Credit problems
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WHEN SHOULD I USE CREDIT? Use credit on expensive goods that last a long time and will be around when paid off (furniture, appliances) Avoid credit on nondurable goods- goods that will be gone before you pay them off (gas, food)
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DID YOU KNOW If you dug a hole to the center of the earth and dropped a book down it, it would take 42 minutes to reach the bottom Turtles can breathe out of their butts For every human on earth there are approximately 1.6 million ants M&M's chocolate stands for the initials for its inventors Mars and Murrie and Coca-Cola originally contained cocaine
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CREDIT CARDS!
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CREDIT CARD VOCABULARY Credit Line- Total amount of credit allowed to a customer Finance Charges- amount of interest and other fees accumulated in a month Cash advance- option to borrow actual currency against current credit card balance
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CREDIT CARD VOCABULARY Previous balance- amount owed after last payment(s) New balance- Amount owed after adding: Previous balance, payments made, purchases, late fees, finance charges, and other fees Minimum payment- lowest amount that can be paid for a month
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BENEFITS AND COSTS OF CREDIT CARDS Benefits of using Credit Cards Convenience, capability to conduct online transactions, fraud protection, payment over time, establishing your credit, track your expenses, earn rewards Costs of using Credit Cards Credit cards tend to have high interest rates (possibly 30%), are loaded with fees, they encourage impulse purchases they increase your spending, risk of identity theft, risk of borrowing beyond the ability to repay
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Must be connected to a bank account (funds taken directly out) No bill at the end of each month Requires a PIN No impact on credit score Can act as a credit card ATM Card: can only take money from account Money is borrowed from financial institution Not always connected to a bank Billed at the end of each month Interest builds when not paid Affects one’s credit score TYPES OF CARDS Credit Card Debit Card
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CREDIT CARDS Credit Cards are regulated by the office of the Comptroller of the Currency, part of the US treasury Issuers have to give card account holders “a reasonable amount of time” to make payments on bills- 21 days after mailed or delivered There is a legal limit on the interest rate hikes and fees that banks can charge for a credit card
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THE 70-20-10 RULE Overall, a good way to keep debt in check is to follow the 70-20-10 rule Spend 70 percent of your income on living expenses such as rent, food, gasoline Save or invest 20 percent of your income for financial goals and emergency expenses Spend 10 percent on debt payments for items such as credit cards and school loans
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THE 70-20-10 RULE 70% Living Expenses 10% Pay Off Debt 20% Save or Invest
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TIPS WITH CREDIT CARDS Avoid the temptation to pay only the minimum every month If possible, pay off the full balance every month Do not charge excess goods to your card!
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