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The Facts on Credit Those who are wise never pay interest… they earn it!

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Presentation on theme: "The Facts on Credit Those who are wise never pay interest… they earn it!"— Presentation transcript:

1 The Facts on Credit Those who are wise never pay interest… they earn it!

2 What is Credit?  Another word for credit is loan…  3 Main types of credit:  Sales  Credit you receive when you make a purchase and promise to pay later.  Cash  Credit you receive when you borrow cash and promise to pay it back later.  Service  Credit given for a service one receives (utilities, dentist, hospital, etc.) that will be payed for later.

3 How much credit can I use?  The total amount of credit should not exceed 20% of one years NET income…  How much can a person borrow that makes $36,000 net? that makes $36,000 net?  Answer: $7200  (This includes your car loan…)  $7200/12 months= $600 a month!!! (not including interest)

4 The Cost of Credit Principal Interest (rate) YearsPaymentTotalInterest Total Cost $1, %2$47.07$129.79$1, $1, %2$51.39$233.21$ $5, %8$70.68$1,785.71$6, $5, %30$87.67$26,561.28$31, $150, %30$997.00$209,266.00$359,266 $150, %15$1,348.24$92,683.00$242, $350, %30$2,328.56$488,279.00$838,279.00

5 HIDDEN COST OF LOW INTEREST CREDIT CARDS  Balance transfers usually charge 3% on principal  $30 late fees with no grace period (Considered late one day after due date)  If late, interest rate bumps up to 21%  $30 over balance fees  Convenience checks have transaction fees

6 Advantages of Credit  Stimulates the economy  Helps us take care of emergencies  Convenient – ordering over the phone  Establishes a credit rating  Advance notice of sales and cask back on purchases  Easier to exchange and return items  Detailed monthly bill

7 Disadvantages of Credit  It always costs money  Risky to spend future income  Encourages careless buying (Needs vs. wants)  Facilitates over-buying which increases sacrifice that must be made eventually  Often increases family conflict  May lead to Bankruptcy  Increases the cost of doing business

8 Payday Loans *The borrower requests a loan for a short period of time, usually one to four weeks. *“Payday loan fee” - Up to 360% interest. *If the borrower continues to have a financial problems and cannot pay the loan as promised, the interest keeps building on the debt.

9 Other Options….  Try a small loan from a credit union  Ask for pay in advance from your employer  Consider a loan from family or friends, (be sure to have the terms of the loan in writing)  Use a credit card cash advance  Request additional time to pay the bill from your creditors.  Pawn Brokers  Or… just don’t borrow money!!!

10 Credit Rating/ FICO Score  A credit rating assesses the credit worthiness of an individual. Credit ratings are calculated from financial history and current assets and liabilities. credit worthinesscredit worthiness  A credit rating tells a lender or investor the probability of the person being able to pay back a loan. loan  In recent years, credit ratings have also been used to adjust insurance premiums, determine employment eligibility, and establish the amount of a utility or leasing deposit.  A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates, or the refusal of a loan by the creditor. defaultinginterest ratesdefaultinginterest rates

11 Establishing Credit  Have checking and savings accounts and manage them responsibly. (These are not reported to the credit agencies, but help individuals develop a pattern of budgeting.)  Use layaway plans at stores  Save for large down payments on cars and other purchases.  Ask someone to be a cosigner for the loan.  Always make payments for bills ON TIME!!! (cell phone, utilities, credit cards, house payment etc.)

12 If you are REJECTED…  Obtain a copy of your credit report to determine what the problem is.  If something is incorrect, notify the credit bureau in writing.  Fixing credit problems may take up to six months.

13 Let’s talk interest rates… Bad Credit vs. Good Credit  Bad Credit  $3000 on credit card  18% interest rate  If minimum payment of 2 ½% is only made…  It takes 22 years and $4100 dollars in interest to pay of the debt.  Total: $7100 to borrow $3000  Good Credit  $3000 on credit card  4% interest rate  If minimum payment of 2 ½% is only made…  It takes 11 years and $400 in interest to pay off the debt.  Total: $3400 to borrow $3000

14 Scary Statistics  The average American household has $9200 in credit card debt.  In 2005, 21,476 people declared bankruptcy in Utah.  At the end of 2005, Utah was ranked 3rd in the U.S.  In Utah, bankruptcies are filed at the rate of one in every 37 homes! The national average is one in every 73 homes!

15 Moral of the Story…  Don’t spend more than you earn!!!  Use credit wisely!!!  Don’t get into debt!!!

16 References   nkruptcy.html nkruptcy.html nkruptcy.html    UEN Data Base


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