Presentation on theme: "4.1 Introduction to Consumer Credit"— Presentation transcript:
1 4.1 Introduction to Consumer Credit Ch 4: Consumer Credit4.1 Introduction to Consumer Credit
2 A couple fun tips…There are almost a billion MasterCard and Visa credit cards in use in the USIn 2006, Visa cardholders made more than $1,000,000,000,000 in purchasesToday’s consumer owes money, on average, to 13 different lending institutions, including credit cards and loansMore than half of the US has at least 2 credit cards
3 What do you need to know before using credit???? Answer the following questions with your groups!Why does credit compel people to overspend?Have you ever seen an advertisement about obtaining your credit score on TV, on radio, or in print media?How is your credit score like a credit “report card?”
4 What do you need to know before using credit???? Using cash or debit = buy now, pay nowPurchasing something but not paying immediately means you are using creditPeople who use credit are called debtorsEvery time you use electricity, you are using credit. You use the electricity and then pay for it when the monthly bill arrivesOrganizations or people that extend credit to consumers are called creditorsFor example, Bank of America
5 Advantages vs. disadvantages YAY!!!Don’t have to carry lots of cashCan use something while still paying it offDon’t have to pay something in full before purchasingBut…Interest!Tendency to overspend (think you have more money than you do)
6 With your group… Create a pros and cons list of having a credit card You may not use the ones on the previous slideMust have 5 of each
7 When getting a credit card… Creditors have you fill out an application and they will check your financial history. The history includes three basic items…Assets – everything you own (car, home, bank accounts etc)Earning Power – your ability to earn money now and in the future. They look to make sure you have enough income to pay back debtCredit rating – aka your “credit report card”. Creditors report how well you met your financial obligations to a credit reporting agency. You are given a score from
8 When getting a credit card… A credit reporting agency compiles records on all credit users.These records are used by creditors before they issue credit to a consumerHow do you start a good credit history?Open a checking and savings accountPay all bills on timeSuccessfully handle all credit transactionsGiven score based on those 3 criteriaMost popular score is called FICO score300 – 850Higher the score the better the credit
9 What else??Some stores offer an installment plan to creditworthy customers. This gives consumer the convenience of paying for merchandise or services over a period of time.The consumer pays part of the selling price at the time of purchase. This is called a down paymentPayments made on monthly basisInstallment buyers are charged an interest fee or finance charge that is added to the cost
10 Example 1Heather wants to purchase an electric guitar. The price of the guitar with tax is $2,240. If she can save $90 per month, how long will it take her to save up for the guitar?
11 Check your understanding If Heather’s guitar costs x dollars and she could save y dollars per month, express algebraically the number of months it would take Heather to save for the guitar.
12 Example 2Heather, from Example 1, speaks to the salesperson at the music store who suggests that she buy the guitar on the installment plan. It requires a 15% down payment. The remainder, plus an additional finance charge, is paid back on a monthly basis for the next two years. The monthly payment is $ What is the finance charge?
13 Check your understanding Assume the original price of the guitar was p dollars, and Heather made a 20% down payment for a one-year installment purchase. The monthly payment was w dollars. Express the finance charge algebraically.
14 Example 3Carpet King is trying to increase sales, and it has instituted a new promotion. All purchases can be paid on the installment plan with no interest, as long as the total is paid in full within six months. There is a $20 minimum monthly payment required. If the Schuster family buys carpeting for $2,134 and makes only the minimum payment for five months, how much will they have to pay in the sixth month?
15 Check your understanding The Whittendale family purchases a new refrigerator on a no-interest- for-one-year plan. The cost is $1,385. There is no down payment. If they make a monthly payment of x dollars until the last month, express their last month’s payment algebraically.
16 Example 5Mike has a credit rating of 720. Tyler has a credit rating of 560. Mike and Tyler apply for identical loans from Park Bank. Mike is approved for a loan at 5.2% interest, and Tyler is approved for a loan that charged 3 percentage points higher because of his inferior credit rating. What interest rate is Tyler charged?