“When I was young, people lived from paycheck to paycheck. Today, it seems like they live from credit card payment to credit card payment.” - Robert Kiyosaki

Learning Objectives Understand what credit is Types and sources of consumer credit Advantages and disadvantages of credit

What is Credit? Credit- Amount of money you are able to borrow. You will have to pay it back at some point in the future. If you were to make a purchase at your local grocery store with a credit card you are using credit. You are buying those groceries with the understanding that you will have to pay for them at some point. If used effectively and responsibly, credit can result in a better lifestyle.

What is Credit? Consumer Credit- credit used for personal (as opposed to business) needs. It includes stuff like automobiles, household goods, and education, but excludes things like home mortgages. Consumer Credit is a major force in our economy.

Question Cluster 1

Before you use credit consider: Do I have the cash for the down payment? Do I want to use my savings for this purchase? Does the purchase fit my budget? Could I use the credit I’ll need in some better way? Can I postpone this purchase?

Before you use credit consider: What are the opportunity costs of postponing this purchase? What are the dollar and psychological costs of using credit for this purchase? All in all do the benefits of using credit outweigh the costs? Credit can enhance your life when used safely and effectively.

Two Types of Consumer Credit Closed end credit- One-time loans for a specific purpose paid back in a specified period of time Examples: automobile loan, home mortgage, and installment loans for furniture and electronics.

Two Types of Consumer Credit Types of Close End Credit Installment Sales Credit- Allows you receive merchandise now. You will make a down payment and a promise to repay the balance, along with service and finance charges, over a certain period of time Installment Cash Credit- Allows you to receive cash. There is usually no down payment and payments are made over a specific period of time. Single Lump Sum Credit- Generally used to purchase a single item. It is usually short term and must be paid back by a specific day.

Two Types of Consumer Credit Open End credit- Not used for a single item. Rather is it used as needed until line of credit max reached. You will often have to pay interest and other charges. Examples: credit cards, Department store cards (Macys Card), Home Equity loans Revolving Check Credit

Sources of Consumer Credit- Loans Loans- Borrowing money with an agreement to repay in full along with interest within a certain amount of time. Loans can vary in how expensive they ultimately are. The least expensive loans are borrowing from friends or family. Borrowing from loved ones can come with many disadvantages however. Loans from commercial banks, savings and loan associations, and credit unions usually come with moderate interest. Credit unions sometimes charge much lower rates than banks. You must be a member of the credit union to take out a loan.

Sources of Consumer Credit- Loans Try to stay away from Finance Companies, Financing from retailers (auto & appliances), or credit cards and cash advances from your bank. Be especially aware of payday loans.

Sources of Consumer Credit- Loans Home equity loan (or home equity line of credit)- Is based on your home equity (Current market value of home or the amount you still owe of home). The interest you pay on this loan is tax deductible. These kind of loans must be used vary carefully. If you miss payments on a home equity loan the lender may take your home. These should only be used for necessary, major purchases, such as education or medical bills.

Question Cluster 2

Sources of Consumer Credit- Credit Cards Credit Cards- Credit Cards are very popular, they are one of the largest sources of debt in America. Credit Card Users are divided into convenience users and borrowers. Convenience users - Pay off their balances in full every month. Borrowers - Do not pay of their balances in full every month. They carry the balance and must pay charges. The cost of a credit card is due to f inance charges - the total dollar amount you use to pay credit.

Considerations When choosing a credit card it is important to take a variety of things into consideration: Shop around. It is important to compare rates at different banks. Think about what's most important to you when doing so: If you are going to pay your balance off in full each month the interest rate my not matter, but the rewards and fees will. However, if you don’t plan to or are unable to pay off your card in full each month the most important aspect will likely be the rate.

Considerations Questions to ask: Is there an introductory rate? What is it and how long does it last? After that, what will my rate be? Are there processing fees? Is there an annual fee? Is there a late fee? Is there an over-the-limit fee? May I pay my bill online? When and how can a variable rate be changed? What is the grace period before interest is applied? Will the company inform me if I am about to go over my limit? If I go over my limit, what happens? What is the company policy if I have trouble paying my bill?

Sources of Consumer Credit - Cards Debit Cards - Electronically subtracts money from your bank accounts. Very different from credit cards. Convenient and safe for purchases and ATMs.

Question Cluster 3

Advantages of Using Credit Allows you to buy things you might need for current use. Allows you to make purchases when your funds are low. Good in case of emergencies. Credit cards are convenient. Credit cards are essential for many purchases, such as renting a car, making a hotel reservation, and shopping on the internet. Many credit cards offer freebies when you use them, like cash back or airline miles. Safely using a credit card can indicate financial stability.

Disadvantages of using Credit Provide temptation to overspend, especially by buying non-essential items. Credit costs money. Using credit now ties up future income later. Late or non-payment may result in loss of merchandise, bankruptcy, even court action. Poor use of credit can destroy your future borrowing abilities.

Question Cluster 4