1. Understanding Credit What is credit Advantages and disadvantages
Teens 2
Understanding Credit
What is credit
Advantages and disadvantages
Types of Credit
Your responsibilities
Creditworthiness
Credit Bureaus
Credit Score
Myfico.com

2. What is Credit? Fancy definition:
A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company.
Simply said . . .
Buy now—Pay Later!
Debtor
Person buying on credit
Creditor
Person extending credit

3. Trust and Risk Trust and Credit
You have to TRUST the debtor will pay back the creditor
Risk and Credit
There is always a RISK the person might not pay
Creditors use the following to determine if they have trust and can afford to risk lending money
Credit reference
Someone/organization that can show how you have used credit in the past
Credit card companies, landlords, banks that have extended you credit
Credit scores
Collected by credit bureaus to show your history with credit
3 C’s of Credit

4. the 3 C’s Character Will you repay the debt?
Are you honest and reliable?
Have you used credit before?
Do you pay your bills on time?
Do you have a good credit report?
Do you have character references?
How long have you lived at your present address?
How long have you been at your present job?
Teens 2 – Lesson 7 - Slide 7-2a

5. the 3 C’s 2. Capital These are known as collateral
What if you don’t repay the debt?
Do you have any valuable assets?
These are known as collateral
Cash
Vehicle
Home
Retirement
Do you own property?
Do you have a savings account?
Do you have investments?
Teens 2 – Lesson 7 - Slide 7-2b

6. the 3 C’s 3. Capacity Can you repay the debt? Are you CAPABLE?
Do you earn enough income to support your credit use?
Do you have a steady job?
What is your salary?
How many other debts do you have?
What are your current living expenses?
What are your current debts?
How many dependents do you have?
Teens 2 – Lesson 7 - Slide 7-2c

7. You don’t have to carry cash. You have a record of your purchases.
Advantages Of Credit
Using credit means…
You can buy items now.
You don’t have to carry cash.
You have a record of your purchases.
Convenience.
Your bills are combined into one payment.
Teens 2 – Lesson 7 - Slide 7-1a

8. Disadvantages Of Credit
Using credit also means…
You pay more for items (interest payments).
Your credit cards may be lost or stolen.
Possible added fees.
You may do more impulse buying.
It’s easy to lose track of how much you spend.
Possible financial problems.
Teens 2 – Lesson 7 - Slide 7-1b

9. Your Responsibilities
Borrow only what you can repay.
Read and understand the credit contract.
Pay debts promptly.
Notify the credit company immediately if you cannot meet payments.
Report lost or stolen credit cards immediately.
Never give your card number over the phone unless you placed the call.
Teens 2 – Lesson 7 - Slide 7-1c

10. building a credit history
Establish a steady work record.
Pay all bills on time.
Open a checking account. Don’t bounce checks.
Open a savings account. Make regular deposits.
Apply for a local store credit card. Make regular payments.
Get a co-signer on a loan. Pay off the loan as agreed.
Teens 2 – Lesson 7 - Slide 7-2d

11. Types of Charge Accounts
Regular Charge Account
Often used with services such as:
Cell phone bill
Dental service
Furnace repairman
Idea is that you will receive service and then pay
Still a buy now, pay later
Usually given a 30 day notice for payment; and then make full payment
Typically not a service charge if you pay on time

12. Types of Charge Accounts
Budget Charge Account
Used for services like electric/gas
Typically this service fluctuates; allows you to take an average and pay that monthly
Winter months could be much more expensive
Pay at the end of the month and typically not a finance charge

13. Types of Charge Accounts
Revolving Charge Account
Typical with charge cards
Credit Limit—can charge up to an amount
Could be $2500
Minimum payment due is a % of the amount you have charged
Let’s say you have a balance of $600
Minimum payment might be $50
But, now you still owe at least $550—but usually more
Due to finance charges
Realistically, you could go charge more
This is often an area of concern for people
Finance charge for balance due

14. Installment Credit
Cars loans and homes (mortgages) are examples of installment credit
Adds the following
Total purchase + Finance Charge = Total borrowed
Determines a monthly payment
Total borrowed/number of payments = Monthly payment
Pay a set amount each month until the item is paid off

15. Terms with loans Single payment loan
Short term loan that is paid off in a single payment
Promissory note
A special form that the creditor has the debtor sign
Basically says, “I promise to pay back what I am borrowing”
Collateral
Something of value that is pledged to the creditor if the debtor does not/is not able to pay back the loan
Secured loan
A loan that used collateral; gives a sense of security for the creditor
Cosigner
Signs on behalf of the debtor if they are not able to receive credit on their own
Would be held liable if debtor does not pay creditor
Truth in Lending Act
Creditors are required by law to disclose how much the credit is costing the debtor—before they agree to purchase

16. P x R x T = I (Cost of Credit/Interest)
The Cost of Credit
3 Variables
Principal
The amount of the purchase/how much you are borrowing
Interest Rate
The % of interest that you are being charged for the use of the creditor’s money
Can vary based on purchase, economic factors, and your credit score
Credit Score—the worst your credit score—the higher the interest rate
Time
How long are you borrowing money for?
The longer you are borrowing—generally a higher interest rate
A shorter term loan—generally a lower interest rate
P x R x T = I (Cost of Credit/Interest)

18. a credit report
Teens 2 – Lesson 7 - Slide 7-2e

19. what is a debt load?
Teens 2 – Lesson 7 - Slide 7-3a

20. how much can you afford?
How much can you afford to borrow? (the rule)
20:
Never borrow more than 20% of your yearly net income.
Example:
You earn $400 a month after taxes.
Your yearly net income is: $400 x 12 months = $4,800
20% of your yearly net income is: $4,800 x 20% = $960
You should have less than $960 of debt!
______________________________________________________
10:
Your monthly payments should be less than 10% of your monthly net income.
10% of your monthly net income is: $400 x 10% = $40
You should pay less than $40 per month for all debts!
Teens 2 – Lesson 7 - Slide 7-3b

21. comparing credit cards
Type of account/ Name of card
Acceptability
Annual fee
APR
Grace period
Credit limit
Minimum monthly payment
Late payment fee
Other features
Teens 2 – Lesson 7 - Slide 7-4a

22. are you thinking about a credit card?
1. Shop around…
Look at different sources.
2. Read and understand the contract…
Read the contract carefully.
Take your time before you sign.
Get a copy of your signed contract.
3. Know your cost…
Figure out total price.
Make the largest payments possible.
Know the charges for missed payments.
Teens 2 – Lesson 7 - Slide 7-4b

23. credit card promotions
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You can’t afford to pass this up!
Teens 2 – Lesson 7 - Slide 7-4c

24. keep it or discard it?
Teens 2 – Lesson 7 - Slide 7-4d

25. reading a credit card statement
Teens 2 – Lesson 7 - Slide 7-4e

26. Equifax credit bureau

27. warning signs of financial difficulties
You don’t know how much you owe.
You often pay bills late.
You obtain a new loan to pay old loans.
You pay only the minimum balance each month on credit cards and other charge accounts.
You spend more than 20% of your net income (after paying rent) on loans and credit card payments.
You would have an immediate financial
problem if you lost your job.
You are spending more than
you earn.
You use savings to pay
day-to-day expenses.
Teens 2 – Lesson 7 - Slide 7-5a

28. first steps to take if you can’t pay your bills
Take a close look at your budget.
Trim your expenses.
Be realistic about what you can afford.
Contact your creditors.
Tell them: why you can’t pay.
that you intend to pay.
when/how much you will be able to pay.
Ask if you can work out a new payment schedule.
If possible, continue to make minimum payments.
Teens 2 – Lesson 7 - Slide 7-5b

29. understanding credit National Foundation for Consumer Credit (NFCC)
Offers information on financial and consumer topics.
Reviews your income.
Helps you set up a realistic personal budget.
May contact your creditors and make arrangements for reduced payments on your bills.
Helps you plan for future expenses.
Services may be available for no charge or reasonable fee.
Listed in yellow pages under “credit counseling.”
Watch out for “credit repair” companies!
Offer for-profit counseling.
May advertise they can erase a poor credit history quickly — DON’T BELIEVE IT!
Teens 2 – Lesson 7 - Slide 7-5c

30. FICO Scores of U.S. Consumers FICO Score Percent of Population
credit score
FICO Scores of U.S. Consumers
FICO Score Percent of Population
percent
750– percent
700– percent
650– percent
600– percent
550– percent
500– percent
499 or less 2 percent

32. Questions?
How much can I afford?