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Credit Costs TODAY YOU WILL... EXAMINE THE COSTS OF CREDIT. 1 ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs
Which is better? Choose an Option Computer: Make payments for 24 or 36 months? Stereo System: Pay 13.5 or 18 percent interest? Car: Lower price at higher interest rate? TV: Delay payments for 90 days? Truck: $1,500 cash back or no cash back? ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 2
Today you will … Today we will answer these questions: How is credit used? What are typical costs of credit? How do I calculate the cost of using credit? Use what you learn today to consider borrowing options for a specific situation. 3 ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs
The Language of Credit Buying on Credit Making a purchase now and promising to repay later Principal $ the cost of the item bought on credit or the amount of money borrowed Interest % What the lender charges for using credit usually a percentage of the principal ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 4
Adding It Up Jesses brother had a flat tire on his car, but he didnt have the money on hand to buy a new tire that day. He was able to purchase a new tire by arranging to repay the $150 owed (principal) for the tire plus 10 percent (interest) in 30 days. Will Jesse pay more or less than $150 for the tire? How could Jesse have avoided paying more than the cost of the tire? ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 5
Simple Interest Calculate a lump sum to be prepaid on a due date. Interest = Principal x Interest Rate x Time (in dollars) (in dollars) (as decimal) (no. of years) $1.25 = $150 x.10 x 1/12 ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 6
Average Monthly Payments As principal is repaid, the interest owed changes Use the amortization calculation formula to determine the average payments Fit average payments into spending plan ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 7
Amortization Chart Monthly payments when $100 is borrowed at 40 percent interest to be repaid in six equal payments. ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 8 Monthly Payment Payment Amount Principal Repaid Interest Paid 118.6615.333.33 218.6615.842.82 318.6616.372.29 418.6616.921.74 518.6617.481.18 618.6618.06.60 Totals111.96100.0011.96
More Terms to Know Annual Percentage Rate (APR) % Consistent way to report interest; includes interest rate, fees, and loan costs Maturity Date When the final payment is due for a loan Grace Period The amount of time before interest starts accumulating on charged purchases if payment is not received ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 9
Credit Options Revolving credit (example: credit card) – Charge at any time – No interest charged if full payment is received by monthly due date – Very high interest rates if balance carried over each month Installment credit (example: car loan) – Make regular payments to repay amount owed by a set date – Know payments and total interest amount up front (helps in planning) Cash loans – Borrow a specific amount of cash to repay later by a set date – Interest rates vary; compare options Service credit (example: cellphone, electricity) – Payments may vary by use (electricity) or be predictable (phone plan) – Late fees or overuse fees add to cost ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 10
When You Charge Stuff You bought stuff with your credit card. In fact, you bought $500 worth of stuff with your credit card. Your APR is 18 percent. You plan to pay $10 a month to pay it off. You will pay $431 in interest. Final cost of your purchases = $931.40 It will take seven years and nine months to pay off balance. ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 11
How Long Will it Take? You owe $3,000. The credit card APR is 18 percent. You currently pay 4 percent of the current balance. You will pay $1,716 in interest Final cost of your purchases = $4,716 It will take nearly eleven years to pay off balance. ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 12 After the last payment is made, will you still have the items or want what you purchased?
Challenge 2-A: DECIDE the Best Deal Compare credit costs and options for a major purchase, loan, or phone plan. Use the DECIDE process to establish criteria and compare options to select the best credit option for your situation. ©2012 National Endowment for Financial Education | Lesson 2-2: Credit Costs 13
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