Types of Credit

Focus Questions What types of credit are available? How does a revolving credit account work? What are some good sources of loans?

Short term consumer credit Usually refers to debts that are paid within one year

Service Credit The service is provided before you pay for it. Examples Utilities, Cable TV, Water, Garbage Collection

Installment Credit Repaid in equal amounts over a set period of time Usually a down payment is required A finance charge is added to the amount owed, and the total is divided by the number of months that payments will be made. Example iphone 6 with AT&T

Credit Cards Plastic cards issued by banks, retail stores, and other businesses that allow the user to buy products or services on credit, with an interest charge if the balance is not paid in full by the due date

Credit Card Rates Annual Percentage Rate (APR) the amount of interest expressed as a yearly rate https://creditcards.chase.com/?list=1,2,4&CELL=63WS

Credit cards are a form of revolving debt. You do not have to pay in full each month as long as you make the minimum payment. You are charged interest on the unpaid balance. https://creditcards.chase.com/?list=1,2,4&CELL=63WS

Charge Cards Similar to credit cards but the full balance must be paid each month No interest charges Usually there is an annual fee https://www304.americanexpress.com/credit-card/premier- rewards-gold/28009

Safeguarding Your Cards Sign your cards Carry only one or two cards Keep your eye on your card during transactions and get it back as soon as you can Don’t loan out your card Cut up expired and or cancelled cards Don’t give out your card number to unfamiliar people and businesses Keep your sales receipts and check them against transactions on your statement

Debit Cards They are a substitute for writing checks The amount of the purchase is immediately deducted from your checking account

Prepaid Card Similar to a prepaid credit card You load money onto the card and your limit will be the amount of your account https://www.americanexpress.com/us/content/prepaid/reloadable- cards.html

Gift Cards Also prepaid https://chipotle.com/en-US/shop/gift_cards/gift_cards.aspx

Loans Loans can be secured or unsecured. Loans can be short (less than one year) or long term. Term of a loan refers to the amount of time you have to repay it.

Types of Loans Secured loans are backed by collateral (an asset like a car or a house) Unsecured loans are not backed up by collateral.

Personal Loans Usually unsecured For personal use Cost for a personal loan is usually cheaper than installment credit

Auto Loans Secured loan Available through banks, credit unions, S&Ls, dealerships, and finance companies

Student Loans Made to help out with education beyond high school Available through banks, Federal government, etc. Unsecured Cannot get rid of this debt through bankruptcy

Home Loans Loan is secured by your house Down payment required General rule: monthly mortgage payment should not be more than 25% of your income (net?)

Home Equity Loan House serves as collateral May be able to borrow up to the amount of equity in the home Fixed rate of interest and a fixed term

Home Equity line of credit A line of credit is a preapproved loan amount that you can use anytime you want, for any purpose The bank charges interest only on the amount you use Your monthly payments would be whatever you wanted to pay, as long as you meet the minimum

Consolidation Loan Combining all the existing loans into a single new loan Provide the simplicity of a single loan

Sources of Loans Banks Credit Unions S&Ls Consumer Finance Companies

Banks Typically low rate Need a good credit score Require collateral

Credit Unions To borrow money, you need to be a member Usually easier to get a loan Interest rate is usually low

S&Ls Original purpose was to provide money for home loans You can obtain loans for other purposes as well

Consumer Finance Companies Make loans to people who might have a hard time obtaining a bank loan Charge a higher interest rate Operate under state law Maximum amount they can loan varies from state to state

Loans to Avoid Credit Card Cash Advance Payday Loans Tax refund anticipation loans Pawnshops Loan Sharks

Credit Card Cash Advances The bank charges a fee for the transaction The interest rate will be higher than the rate on purchases There is no grace period, interest charges begin as soon as you take the advance Payments you make to your credit card are applied first to purchases

Payday Loans Small, short term, high interest loans APRs of over 400% are not uncommon

Refund Anticipation Loans You borrow an amount equal to your tax refund Various fees High interest on the loan

Pawnshops Leave something of value as collateral If you don't repay the loan by the due date, item is sold Numerous fees Interest rates are very high

Loan Sharks People who loan money illegally and set very high interest rates