Presentation on theme: "What is a Consumer Credit?"— Presentation transcript:
1What is a Consumer Credit? Name_________________________________
2Using Consumer Credit Wisely Why is having good credit important? When you borrow money or charge an item to a credit card, you are using creditCredit - an arrangement to receive cash, goods, or services now and pay for them in the future.Consumer Credit – use of credit for personal needs.Creditor – financial institution, merchant, or individual – an entity that lends money.Good credit is very valuable
3Using Consumer Credit Wisely Why is having good credit important Using Consumer Credit Wisely Why is having good credit important?(cont)Buy things we would have to save for years to afford: homes, cars, educationCredit is an important financial tool, but it can be dangerousLeading people into debt beyond their ability to payInvolves responsibility and risk!Today consumer credit is a major force in the American economyAny forecast or evaluation of the economy includes consumer spending trends/consumer creditWhen misused, credit can result in default, bankruptcy, and loss of creditworthiness
4Factors to Consider Before Using Credit Before you decide to finance a major purchase by using credit, consider:Do you have the cash you need for the down payment?Do you want to use your savings instead of credit?Can you afford the item?Could you use the credit in some better way?Could you put off buying the item for a while?What are the costs of using credit?
5Factors to Consider Before Using Credit Agree to pay the fee that a creditor adds to the purchase price.Monthly interest if not paid off at end of monthPeriodic or annual feeLate fees if not paid on timeDoes the benefit outweigh the cost of credit
6Advantages of Credit Let’s you enjoy goods and services now Credit cards allow you to combine several purchases, making just one monthly paymentMaking hotel reservations, renting a car, shopping online, you will need a credit cardRecords your expensesShopping and traveling without a lot of cash is saferUsing credit wisely makes lenders view you as responsible
7Disadvantages of Credit Credit costs moneyTemptation to buy more than you can affordFail to repay – lose your good credit reputationMay lose some of your income or property to repay your debtsDoesn’t increase your total purchasing powerJust allows you to buy things now for which you must pay laterALWAYS APPROACH CREDIT WITH CAUTION
8Types of CreditClosed-End Credit – credit as a one time loan that you will pay back over a specified period of time in payments of equal amountsExamplesMortgagesCar loanLarge AppliancesLender will hold title, document showing ownership, until all payments are madeInstallment sales credit – high priced items, down payment and monthly paymentsInstallment cash credit – you receive cash - direct loan, personal, home improvements, monthly paymentsSingle lump-sum credit – repaid in total within 30/90 days
9Types of CreditOpen-Ended Credit – a loan with a certain limit on the amount of money you can borrow for a variety of goods and servicesLine of Credit – maximum amount of money a creditor will allow a credit user to borrowExamples:Department Store Credit Card (Macy’s, Target)VisaMasterCardMake as many purchases as you want, can’t exceed line of creditBilled monthly for partial payment of total owed
10LoansBorrowed money w/agreement to repay it with interest within a certain amt of time.Inexpensive Loans – parents or other family members, be aware, that loans can complicate family relationshipsMedium-Priced Loans – commercial banks, savings and loans, credit unions – moderate interestExpensive Loans – easiest and most expensive, finance companies and retail storesHome Equity Loans – based on your home equity (current market value of home minus what you owe) tax deductible, but could lose your home if not repaid
11Credit Cards Average card holder has 9 credit cards Grace period – time period during which no finance charges will be added, usually first 25 daysFinance charge –total dollar amt you pay to use creditDebit Card – Do not confuse credit cards with debit cards, electronically subtracts your money from your account
12Credit Score What is a Credit Score? Name_________________________________
13The Cost of CreditThe key factors will be the finance charge and the annual percentage rate (APR)APR - Cost of credit on a yearly basis, expressed as a percentage18% APR - $18/yr on each $100$20,000/$100 = 200200*$18 = $3,600/yr in Interest
14Tackling the Trade-Offs Term vs. Interest Costs – many people choose longer-term financing, they want smaller payments, longer terms cause more interest being paid…$6,000 loanAPR Term Mo. Pymt Interest Total Cost14% 3 yrs $ $1, $7,382.5214% 4 yrs $ $1, $7,870.08
15Applying for Credit The 5 “C’s” of Credit Character: Will you repay the Loan?Trustworthy and stablePersonal and Professional ReferencesCriminal HistoryHave you used Credit before?How long have you lived at your present address?How long have you held your current job?
16The 5 “C’s” Capacity: Can you repay the loan? Your Income and DebtWhat is your job, and how much is your salary?Do you have other sources of income?What are your current debts?Capital: What are your assets and Net Worth?If you loss your income, you can still repay your loan from savings or selling assetsWhat are your assets?What are your liabilities?
17The 5 “C’s” Collateral: What if you do not repay the loan? What kind of property or savings do you haveThe creditor may take whatever you pledge as collateralWhat assets do you have to secure the loan? (vehicle, home, furniture)Do you have any other assets (bonds or savings)Conditions: What if your job is insecure? Economic conditions, is your job and company secure?Credit History: What is your credit history?Credit ReportDo you pay your bills on time?Have you ever filed for bankruptcy?
18A Good Credit Rating is a Valuable Asset that You should PROTECT! The 5”C’s”Credit Rating – measure for a person’s ability and willingness to make credit payments on timeA Good Credit Rating is a Valuable Asset that You should PROTECT!
19Credit Score The FICO scoring system goes from 350 to 850 660 to 724 to be a good credit scoreVantageScore (a new score now used by all 3 credit bureaus) isTransUnion, Equifax, ExperianAmerican Express, requires at the very least a 750 fico score to be eligible for quite a few of their credit and charge cardsExcellent credit rating can change as the country's economy fluctuatesthe average credit score, 692 as of January 2011