 The Grand Canyon can hold around 900 trillion footballs  All the blinking in one day equates to having your eyes closed for 30 minutes  Lightning strikes the Earth 6,000 times every minute  A group of frogs is called an army AND a group of kangaroos is called a mob DID YOU KNOW?

CREDIT Unit VII: Credit and Banking Lesson 2

THOUGHTS  Credit can be your best friend and your worst enemy

CREDIT VOCABULARY  Credit: the ability to borrow money to pay for something now and agree to pay the lender at a later date  Predetermined limit, cash to be paid back, major amount paid back monthly  Debt: The entire amount of money that you owe to lenders  APR (annual percentage rate) is the total cost to use credit in a year  Term is how long you have to repay a loan, often expressed in months  Fees are charged to use credit. Examples: annual credit card fee, loan origination fee, over-the-limit fee

CREDIT VOCABULARY  Credit history is a record of your behavior related to borrowing and repaying loans  Credit report is a detailed record of your personal credit and financial transactions  Credit score is a rating used by credit reporting companies to help lenders decide whether and/or how much credit can be extended to a borrower  Universal default allows a credit card company to increase your interest rate if you make just one late payment

SOURCES OF FINANCING  Sources of financing:  Banks/credit unions, retail stores, finance companies, payday loans, title loans, pawn shops, private lenders  Secured loan: the borrower will pledge some asset as collateral  Unsecured loan: Loans are not secured against a borrowers assets  Subsidized loan: Loan in which the interest is reduced by an explicit or hidden subsidy  Payday loan: a small amount of money lent at a high rate of interest on the agreement that it will be repaid when the borrower receives their next paycheck  Title loans: short-term loans in which collateral is used. The collateral is typically something which you have a “title” to- car or home

TYPES OF CREDIT  Open-end (Revolving) Credit: a pre-approved loan between a financial institution and borrower that may be used repeatedly up to a certain limit and can subsequently be paid back prior to payments coming due  Closed-end Credit: a loan or extension of credit in which the proceeds are dispersed in full when the loan closes and must be repaid, including any interest and finance charges, by a specified date  Mortgage: Used specifically to purchase a home, usually 15 to 30 years of monthly payments  Home equity loan: using equity (value) of your home to get a loan

JOINT CREDIT  Joint credit: credit issued to two or more people- joint responsibility to pay off the debt  Can be a potential problem when one party does not pay their part (affects the other parties credit score)

CREDIT COSTS  Interest paid on loans (Variable v Fixed)  Finance charges and fees- annual, late fees, etc.  The longer the loan, the higher the total cost  The higher the interest rate, the higher the total cost of the product  Opportunity cost of credit: money used to pay interest cannot be used to pay something else

CREDIT RISKS  Default/foreclosure/repossession  Overspending  Credit Card debt and possible bankruptcy  Difficult to save when in debt  Low (minimum payment)- Greater the total cost  Sales abuses, addiction to spending  Gambling on the internet using a credit card  Taking unnecessary loans/opening unnecessary cards  Future Credit problems

WHEN SHOULD I USE CREDIT?  Use credit on expensive goods that last a long time and will be around when paid off (furniture, appliances)  Avoid credit on nondurable goods- goods that will be gone before you pay them off (gas, food)

DID YOU KNOW  If you dug a hole to the center of the earth and dropped a book down it, it would take 42 minutes to reach the bottom  Turtles can breathe out of their butts  For every human on earth there are approximately 1.6 million ants  M&M's chocolate stands for the initials for its inventors Mars and Murrie and Coca-Cola originally contained cocaine

CREDIT CARDS!

CREDIT CARD VOCABULARY  Credit Line- Total amount of credit allowed to a customer  Finance Charges- amount of interest and other fees accumulated in a month  Cash advance- option to borrow actual currency against current credit card balance

CREDIT CARD VOCABULARY  Previous balance- amount owed after last payment(s)  New balance- Amount owed after adding: Previous balance, payments made, purchases, late fees, finance charges, and other fees  Minimum payment- lowest amount that can be paid for a month

BENEFITS AND COSTS OF CREDIT CARDS  Benefits of using Credit Cards  Convenience, capability to conduct online transactions, fraud protection, payment over time, establishing your credit, track your expenses, earn rewards  Costs of using Credit Cards  Credit cards tend to have high interest rates (possibly 30%), are loaded with fees, they encourage impulse purchases they increase your spending, risk of identity theft, risk of borrowing beyond the ability to repay

 Must be connected to a bank account (funds taken directly out)  No bill at the end of each month  Requires a PIN  No impact on credit score  Can act as a credit card  ATM Card: can only take money from account  Money is borrowed from financial institution  Not always connected to a bank  Billed at the end of each month  Interest builds when not paid  Affects one’s credit score TYPES OF CARDS Credit Card Debit Card

CREDIT CARDS  Credit Cards are regulated by the office of the Comptroller of the Currency, part of the US treasury  Issuers have to give card account holders “a reasonable amount of time” to make payments on bills- 21 days after mailed or delivered  There is a legal limit on the interest rate hikes and fees that banks can charge for a credit card

THE RULE  Overall, a good way to keep debt in check is to follow the rule  Spend 70 percent of your income on living expenses such as rent, food, gasoline  Save or invest 20 percent of your income for financial goals and emergency expenses  Spend 10 percent on debt payments for items such as credit cards and school loans

THE RULE 70% Living Expenses 10% Pay Off Debt 20% Save or Invest

TIPS WITH CREDIT CARDS  Avoid the temptation to pay only the minimum every month  If possible, pay off the full balance every month  Do not charge excess goods to your card!