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7. Know the history and role of credit A legal agreement to receive cash, goods, or services now and pay for them in the future.

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Presentation on theme: "7. Know the history and role of credit A legal agreement to receive cash, goods, or services now and pay for them in the future."— Presentation transcript:

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3 7. Know the history and role of credit

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

5 Born over 100 years ago 1960s – reported only negative financial information 1971 – Fair Credit Reporting Act (FCRA)

6 The average credit card balance per household for 2013 was $15, Utahs average was $

7 8. List basic types of credit

8 Credit Cards Installment Loans Service Credit Revolving Credit Student Loans IOU Single Payment Credit

9 Plastic cards with electronic information that can be used by the holder to make purchases or obtain cash advances using a line of credit made available by the card-issuing financial institution.

10 A loan in which the amount of payment and the number of payments are predetermined, such as an automobile loan. Fixed payment Set period of time Set or varying interest rates Examples: Car loans and mortgages

11 A type of credit that does NOT have a fixed number of payments, such as a credit card. No stated payoff time Limit to credit Minimum monthly payments Finance charges Example: credit card

12 A member's earned service, prior service, and purchased service.

13 Loans offered to students to assist in payment of the costs of professional education. These loans usually charger lower interest than other loans, and are also usually issued by the government. Allows a person to finance their education and defer payments until after graduation.

14 Debit cards are plastic cards with electronic information, that look very similar to credit cards, that you can use to take money out against your checking account. When you swipe your debit card remember that the money is taken immediately from your checking account.

15 9. Explain the function of credit ratings (establishing and maintaining)

16 Bank accounts Employment history Residence history Utilities in borrowers name Department store or gas credit card

17 Establish a good credit history. Pay monthly balance on time. Use credit cards sparingly and stay within the limit. Do not move balance to other cards. Check credit report regularly.

18 5. Calculate and compare credit costs

19 SCENARIO: Interest Rate 17% Minimum Payment 2.5% or $10.00 Balance Time to Pay Off Interest Charged Total Pay $1, years$979.00$1, $2, years$2,941.00$5, $5, years$6,210.00$11,210.00

20 SCENARIO: Interest Rate 24% Minimum Payment: 4% of current balance or $10 BalanceTime to Pay Off Interest Charged Total Pay $2, yrs & 9 mo$1,774.96$ , $6, yrs & 4 mo $5,775.08$11, $10, yrs & 5 mo $9,774.89$19,774.89

21 6. Calculate how low it takes to repay a debt

22 You owe $4500 APR = 21% Minimum Payment: 4% of current balance or $15

23 You owe $4500 APR = 21% Minimum Payment: 4% of current balance or $15

24 3. Infer that comparison shopping allows for the best rates on credit

25 10. Identify how to apply for a loan (co- signer, collateral)

26 Interest Overspending Debt Identity Theft

27 Know the real cost of debt. Dont use credit to live beyond your means. It is all about the details…read the fine print! Pay as much as you can, as early as you can.

28 The person who agrees to be responsible for loan payments if the borrower fails to make them.

29 A form of security to help guarantee that a creditor will be repaid.

30 Convenient Immediate No need for cash Zero liability on fraud Helps on reservations Bonuses, points It is a loan Interest rate Additional fees Easy to overspend Can promote impulse purchases Risk of identity theft Responsible if lost Disadvantages

31 11. Identify signs of credit abuse (late fees, missed payments, collection notices, bounced checks)

32 Delinquent Payments Default Notices Repossession Collection Agencies Judgment Lien Garnishment

33 2. Compare the advantages and disadvantages of different payment methods

34 $ cash û If you have saved enough in your buy stuff account, you can withdraw your money and buy the TV. If you use a credit card, and pay off the balance within the billing cycle, you pay no interest (if it is a credit card which has the grace period). û Suppose you see a TV you want to buy with a retail price of $400.

35 $ by smart shopping û If you shop around and find the same TV for $350, you just saved $50. But what did you save in terms of your ability to earn money? If you are in an average tax bracket of about 20%, you must earn $62.50 before you can spend $50. So if you avoid spending $50, that is like earning $ If you earn $10 per hour, you just saved the equivalent of 6 1/4 hours of work! $50 /.80 = $62.50 earn $62.50 / 10 = ~6 1/4 hrs

36 $59.00 /.80 = $74 earn $74 / 10 = ~7.4 hrs extra to pay the $59. Balance Time to Pay Off Interest Charged Total Pay $ months $59.00$ Paying $26.00/mo

37 36% A.P.R. 18 months $29.00/month $ interest Total Cost $ 523 $123 /.80 = $154 $154 / 10 = ~15.4 hrs

38 300% A.P.R. Car Title Pawn 18 months $ payment/month $1,433 interest Total Cost $1833 $1433 /.80 = $ / 10 = 179 hrs

39 12. Recognize how to correct credit problems

40 Use less revolving credit (less than maximum amount) Pay off your balance Pay balance on time Use fewer credit cards Leave good debts on your credit report as long as possible Comparison shop for the best rates When possible, transfer debt to a lower rate card Be consistent Be aware of your credit score

41 13. Distinguish costs associated with the use of credit (finance charges, interest, late fees, default rates, closing costs)

42 Finance charges- fee charged for using credit Interest- money paid for money lent Late fees- money charged being past the due date Default rates- percentage of people who did not repay a loan properly Closing costs- fees charged to a purchaser for services related to a sale

43 Overspending Paying high interest rates Lowers credit score Difficulty getting a loan

44 14. Recognize purposes of various financial institutions

45 Bank Credit Union Finance Companies Retail Stores Savings & Loan Associations Internet Stores

46 15. Explain value of credit scores to borrowers and lenders

47 BorrowersLenders Ensures fairness Objective measure versus subjective measure of credit risk Objective measure of credit risk Used with other information (income, how long you have lived at a given residence, other banking relationships) to determine loan amount and interest rate

48 4. Evaluate the relationship between credit worthiness, credit rating, and cost of credit


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