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B ANKING B ASICS Credit. H OW T O D O Y OUR B ANKING Chapter 6: A good credit rating sets wheels in motion.

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Presentation on theme: "B ANKING B ASICS Credit. H OW T O D O Y OUR B ANKING Chapter 6: A good credit rating sets wheels in motion."— Presentation transcript:

1 B ANKING B ASICS Credit

2 H OW T O D O Y OUR B ANKING Chapter 6: A good credit rating sets wheels in motion.

3 CREDIT G RAPHIC O RGANIZER The class will be divided into teams of 2 or 3. Each team will be assigned a section from Chapter 6. Each team will create a poster for the classroom graphic organizer. Posters should contain the following information: The name of the assigned section. Define any vocabulary words. Explain any advantages/disadvantages, do’s/don’ts, tips. Explain any criteria. Explain any steps in a process. Provide examples of vocabulary words and mathematical calculations. Include at least 1 picture/graphic. The team’s poster will be displayed in class so make sure the poster is legible and use correct grammar, capitalization, spelling, and punctuation. Also remember to identify each team member and the date on the poster. Each team will present its poster to the class. Each team member must speak an equal amount during the presentation.

4 CREDIT G RAPHIC O RGANIZER T OPICS What Is Credit? The Cost Of Credit How To Shop For Credit How To Apply For A Loan Types Of Loans Credit Ratings and Scores Identify Theft

5 W HAT I S C REDIT ? Credit is your reputation for financial responsibility Does the lender believe you will repay your debt? Credit is the time allowed for payment for something sold on trust Do you repay your debt on time? Credit is a source of revenue for financial institutions Pay low rates on savings accounts Charge high rates on loans Credit is “tomorrow’s” money You are spending future income so that you may have something today.

6 D ON ’ T A BUSE C REDIT Ask yourself Do the benefits greatly outweigh the cost of credit? A car A home Is it an emergency? Is this a profitable opportunity? Starting a new business

7 T HE C OST O F C REDIT Finance charges The rent you pay for using someone else’s money Consists of interest and any additional fees Principal The amount borrowed Term The length of time you have use of the money Annual Percentage Rate (APR) The true rate of the cost of credit on a yearly basis

8 C ALCULATING THE C OST OF C REDIT Finance Charge = A(N + 1)(APR) 2P Monthly Payment = A + FC N A = Amount of money borrowed N = Total number of payments APR = Annual Percentage Rate P = Number of payments per year FC = Finance Charge

9 C ALCULATING THE C OST OF C REDIT Refer to “The Cost of Borrowing” worksheet. Complete examples together: #1 and #4 Complete the remaining calculations on “The Cost of Borrowing” worksheet.

10 H OW T O S HOP F OR C REDIT Comparison Categories Finance charge Annual percentage rate (APR) Amount borrowed (principal) Total amount paid Principal + Finance Charges Down payment Initial payment toward purchase of the item Amount of each payment Total numbers of payments Collateral Something you promise to give up as repayment if you can’t repay the loan Refer to the Best Buy Worksheet on page 25. Identify at least 1 advantage and 1 disadvantage of each loan from Lenders A, B, C, and D.

11 H OW T O A PPLY F OR A L OAN The financial institution wants to know: Credit History Given your credit track record, will you repay the loan? Capacity Given your current income and expenses, do you make enough money to repay the loan? Collateral Given your current assets, do you have anything we can take if you don’t repay the loan? Character How stable is your lifestyle? Which of the items above do you believe is most important to the bank? Rank the 4Cs above in order of importance (1 most important – 4 least important) and explain why you chose the rank for each item.

12 H OW T O B UILD A C REDIT H ISTORY Open a checking account Open a savings account Choose 1 of the following if You can make payments consistently on time! AND You pay full balance of any credit card each month! Open a department store charge account Open a gasoline credit card Apply for a car loan

13 T YPES O F L OANS Personal vs. Business Personal Loan made to an individual Business Loan made to a business/company/corporation AKA Commercial Loan Installment Loan vs. Revolving Credit Installment Loan For a specific purpose Fixed total amount of money, length of time, monthly payment AKA: Closed-End Credit Revolving Credit Purpose not specified Maximum amount of money specified Variable length of time, monthly payment AKA: Line Of Credit, Open-End Credit Secured vs. Unsecured Secured Collateral required Unsecured Collateral not required AKA: Signature Loan Credit Card Repaid in monthly payments of a variable amount Type of revolving credit

14 C REDIT A PPLICATION You need a loan for _____. Here are some tips for filling out an application: Read the entire application first Get more than one copy in case you make mistakes Follow all instructions Print clearly and neatly Use blue or black ink Don’t leave blanks – If something does not apply to you write Does Not Apply Make sure everything is spelled correctly Make sure all information is accurate Complete the sample loan application. Evaluate your loan application. If you were a banker, would give yourself a loan (based on your loan application)? Why or Why not? What could you do to improve your chances of getting a loan in the near future?

15 C REDIT S CORE Based on your past use of credit A high number is better than a low one A good credit score results in a lower interest rate FICO One type of credit score Created by Fair Isaac Corporation Ranges from Most people are in the range A 720 guarantees the most favorable interest rate

16 W HAT D ETERMINES Y OUR C REDIT S CORE 35% = how you pay your bills 30% = the amount of money you owe and the amount of available credit you have 15% = length of your credit history 10% = mix of installment and revolving credit 10% = number of credit applications Complete Part 1 of the Credit History handout. Discuss answers to Part 1. Complete Part 2 of the Credit History handout. Discuss answers to Part 2.

17 I DENTITY T HEFT Guard personal identification Don’t write passwords on paper Don’t throw away documents containing personal information Scrutinize all statements and bills Annually review your credit report Use a secure computer system

18 B ANKING A CTS Equal Credit Opportunity Act Credit cannot be denied because of race, color, age, sex, marital status Truth In Lending Fair and Accurate Credit Transactions Act of 2003

19 H OW T O D O Y OUR B ANKING Chapter 7: Now you’re the lender.

20 M ARY W EEMS Read pages Watch the Mary Weems scenario. Read Mary’s credit report on page 31 and her loan application on page 32. Complete the loan sheet for Mary on page 33. Analyze Mary’s case by responding to the questions on the Mary Weems Case handout. Show your instructor the completed loan sheet and your case analysis (responses to the questions). Meet with the other members of the loan committee to determine if Mary’s loan will be approved or declined.

21 H AWLEY D AVIDSON Watch the Hawley Davidson scenario. Read Hawley’s credit report on page 31 and his loan application on page 34. Complete the loan sheet for Hawley on page 35. Analyze Hawley’s case by responding to the questions on the Hawley Davidson Case handout. Show your instructor the completed loan sheet and your case analysis (responses to the questions). Meet with the other members of the loan committee to determine if Hawley’s loan will be approved or declined.


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