2Using Consumer Credit Wisely Credit is an arrangement to receive cash, goods, or services now and pay for them in the future.Borrowing money or using a credit card is ‘using’ credit.Consumer credit is the use of credit for personal needs.Most common form = credit card accountConsumer spending and demand indicator
3Using Consumer Credit Wisely An entity that lends you your money is a creditor.Examples: financial institution, merchant, or individualGood credit is valuable!!
4Brainstorm What are some reasons for using credit? When might it be inappropriate to use credit?Record answers in your notes
5Factors to Consider Before Using Credit Giving or receiving money is the act of finance.Before using credit, consider:Do you want to use your savings instead of credit?Can you afford the item?Could you put off buying the item for a while?What are the costs of using credit?
6Factors to Consider Before Using Credit You are also agreeing to pay the fee that the creditor adds on to your purchase.Example: If you do not pay your credit card bill in full every month, you are charged interest on the amount you have not paid.
7Advantages Enjoy goods and services now and pay for them later Combine several purchases, making one monthly paymentRecord of expenses and safe than carrying cashIf used wisely, other creditors view you as responsible
8Disadvantages Temptation to buy more than you can afford Risk of losing your good credit reputation.Risk of losing income and property to repay your debtsIf your income doesn’t increase, may have difficulty paying bills
9Two Basic Types of Credit Closed-end creditOpen-end credit
10Closed-End CreditOne-time loan, paid back over a specified period of time in payments of equal amounts.Involves an agreement, or contract.Examples: Vehicle loans (title), large appliances, furniture
11Closed-End Credit Three most common types: Installment sales credit – high priced merchandise (large appliances, furniture, etc), usually a down payment is requiredInstallment cash credit – direct loan for personal money (home improvements, vacation, etc.), no down paymentSingle lump-sum credit – must be repaid in full on a specified day, usually 30 to 90 days.
12Open-End CreditCredit as a loan with a limit on the amount of money you can borrow for a variety of goods and servicesLine of credit = maximum amount of money allowedExamples: Visa, MasterCard, Department StoresBilled for at least a partial payment of the total amount you oweMay have to pay interest or other finance charges
15LoansBorrowed money with an agreement to repay it with interest within a certain amount of time.Inexpensive Loans:Low interestFamily or parentsMedium-Priced Loans:Moderate interestSavings and Loan Associations, Commercial Banks, Credit Unions
16Loans (continued) Expensive Loans: Home Equity Loans: High interest Finance companies, retail storesHome Equity Loans:Based on your home equityDifference between the current market value of your home and amount your still owe on the mortgageInterest is tax-deductibleMissing payments = possible loss of home
17Credit Cards Average cardholder has more than nine credit cards. Grace period – time period during which no finance charges will be addedA finance charge is the dollar amount you pay to use credit.Pay in full and on time = no finance chargeIncludes late payment fees, interest, and annual fee.
18Do not confuse the following with basic credit cards: Debit Cards:Electronically subtracts money from your savings or checking account to pay for goods/services.Some can be used as credit and delays automatically subtracting from your accountCobranding:Linking a credit card with a business trade name offering “points” or “premiums”Increasingly popularOffers cash rebates on specified products/services
19Smart Cards:Contains a computer chip and stores 500 times as much data as a normal credit card.Example: Purchase a plane ticket, store it digitally, and track frequent flyer miles
20Textbook Page 231Figure 2Summarizes the major sources of consumer credit.Which credit source would you use for the following loans and why:MortgageVehicle LoanYour first credit cardRecord answers in your notes
21Review Key Concepts Page 233 #1-4, 6 (one or two sentences) Turn in when completeMini-QUIZ TOMORROW on Ch.8.1Homework: Research two colleges of interest to you and locate the tuition for the Fall Semester. Include on a piece of paper your name, each college, and the tuition.DUE FRIDAY