1. The Use of Credit

2. Credit Credit is when money, goods, services are received with the promise to pay back in the future 3,000 yrs ago in Iraq

3. Credit Keys Interest Fees Types Open-ended credit (revolving credit, line of credit) Closed-end credit (installment credit)

4. Advantages of Using Credit 1. Convenience 2. Used in times of emergencies 3. Good form of identification 4. Purchase expensive items soon 5. Higher standard of living than can afford right now (higher income in future) 6. Take advantage of free credit 7. Debt-consolidation: one payment 8. Pay back other debt that has higher interest rates

5. Disadvantages of Using Credit 1. Interest (the price of credit) is costly 2. Additional fees are common (ATM fees, annual fees) 3. Tempting to overspend 4. Privacy & identity theft is a concern 5. Reduces spending flexibility

6. Cost of Credit Annual Percentage Rate (APR) The cost of credit on a yearly basis Mandated by law to be publicized – best way to compare options Often charged monthly: 1.5% per month (periodic rate) = 18% per year

7. Cost of Credit Basis for Monthly Charges Usually use average daily balance (p. 204) Grace period? New purchases? Minimum payments for open-end Often just barely higher than the finance charge Large penalties if do not pay Read “Advice from a Pro…” (p. 205) Sample closed-end (p. 210)

8. Cost of Credit Annual Percentage Rate (APR) You charge $100 on your credit card with a 24% APR.  What is your yearly finance charge?  What is your first month’s finance charge?  If you pay $25.00 on your first month payment, what is your balance the second month?

9. APR Practice 1. You decide to purchase a $700 plane ticket for your Spring Break vacation on your credit card. Your card charges 15% APR. What is the annual finance charge? What is your first month finance charge? 2a.William spends $200 on his Visa card. If he leaves this on his card that charges 18% APR, what is his first month finance charge? 2b. Calculate the remaining balance at the end of the month if he pays $25.

10. Bellringer - APR Practice a.William spends $500 on his Visa to buy things for his new apartment. If he leaves this on his credit card that charges 18% APR, what is his first month’s finance charge (interest)? b. Calculate the remaining balance at the end of the month if he pays $75. c. After this payment, what would be his second month’s finance charge? Tues, Apr 16

11. Credit Vocabulary (Ch.’s 6 & 7) credit historydefault creditgrace period introductory rateannual fees APR credit limit cash advanceperiodic rate finance chargeminimum payment average daily balanceclosed end credit credit scoreopen end credit

12. Applying for Credit: the Six C’s Character: Will you repay your loan? Capital: What are your assets and net worth. Capacity: Will you be able to pay your loan? Collateral: What if you are unable to pay back your loan? Conditions: Current market conditions Credit History Have you used credit responsibly in the past?

13. Credit Scores (FICO) Range from 340 – 850 Dependent on 5 key factors (p. 177) Kept by 3 different organizations Should be checked regularly – can get a free copy of your report (not your score) once a year

14. Managing and Protecting Your Credit Regular FICO scores checks Errors Stolen Identity – very messy Be careful on internet Many consumer credit protection laws Truth in Lending Act Equal Credit Opportunity Act Fair Credit Opportunity Act Fair Credit Reporting act Consumer Credit Reporting Reform Act

15. Debt Problems Collection Agencies Financial Counseling Services Bankruptcy “Chapter 7”  straight bankruptcy (liquidation) “Chapter 13”  wage earner bankruptcy (reorganization) “Chapter 11”  Corporate bankruptcy (reorganization)