2 Why is having good credit important? Credit – is an arrangement to receive cash, goods, or services now and pay for them in the future.Consumer Credit – is the use of credit for personal needs.Creditor – is a financial institution, merchant, or individual that lends moneyGood credit is very valuable
3 Credit Uses and Misuses Factors to Consider BEFORE Using Credit Do you have the cash you need for the down payment?Do you want to use your savings instead of credit?Can you afford the item?Could you use the credit in some better way?Could you put off buying the item for a while?What are the opportunity costs of postponing the purchase?What are the costs of using credit?
4 Advantages vs. Disadvantages of Using Credit Let’s you enjoy goods and services now and pay for them laterCredit cards allow you to combine several purchases and make just one monthly paymentHotel reservations, renting a car, shopping by phone or online you will probably need a credit cardCredit costs money!Temptation to buy more than you can affordCan get into trouble fast!Can lose your good credit reputationBad credit affects many different aspects of your lifeRenting a residenceBuying a carGetting a job
5 Types of Credit Closed-End Credit & Open-End Credit One-time loan that is paid back over a specified period of time in payments of equal amounts.Installment sales credit – down payment, pay over set period of timeInstallment cash credit – direct loan for money personal purposes, home improvements, or vacation expensesSingle lump-sum credit – loan that must be repaid in total on a specified day, usually within 30 to 90 days
6 Types of Credit Closed-End Credit & Open-End Credit Credit as a loan with a certain limit on the amount of money you can borrow for a variety of goods and servicesLine of credit – is the maximum amount of money a creditor will allow a credit user to borrowStore credit cards, VISA, MasterCard, DiscoverOnce approved, company bills you monthly
7 Sources of Consumer Credit “Loans” Loans – borrowed money with an agreement to repay it with interest within a certain amount of timeInexpensive Loans – parents or family members, with little or no interestMedium-Priced Loans – banks, credit unions – loans with moderate interest chargesExpensive Loans – easiest to obtain; finance companies and retail stores; high interest ratesHome Equity Loans – loan based on your home equity; the difference between the current market value of your property and the amount you still owe on the mortgage
8 Sources of Consumer Credit “Credit Cards” Credit cards – most companies offer grace periodsFinance Charge – cost of creditDebit Cards – electronically allows you to subtract money from your savings or checking accountsCobranding – linking of a credit card with a business trade name offering “points” toward the purchase of a product or serviceSmart Cards – equipped with a computer chip; stores 500 times as much as a credit card; Example: frequent flyer milesStore-Value (or Gift) Cards – prepaid gift cards