1. Taking charge of your finances Credit

2. Taking charge of your finances Today’s goal The 5 C’s of credit. Installment vs. non-installment credit. Advantages and disadvantages of credit. How to establish credit

3. Taking charge of your finances Credit When goods, services or money is received in exchange for a promise to pay a definite amount of money at a future date.

4. Taking charge of your finances Lender Is the person or organization that has the resources to provide the individual the loan. The lender trust the borrower will repay the loan.

5. Taking charge of your finances Borrower Is the person or organization that is receiving the money from the lender. When the privilege of borrowing has been extended, the borrower is usually expected to pay interest, or some fees, such as processing.

6. Taking charge of your finances Credit Worthiness: When a lender is considering granting credit to the borrower, he/she needs to believe the prospective borrower has both the willingness and ability to pay the money back. When a person applies for credit, there are 5 C’s of credit.

7. Taking charge of your finances When evaluating an individual’s credit rating, lenders look at a person’s Character Capital Capacity Collateral Conditions

8. Taking Charge of your finances Character is a person’s honesty and reliability determined by their history of repaying bills on time. Capital is an evaluation of a person’s net worth. Capacity is the income a person has available to repay the loan determined by job longevity and having few other loans.

9. Taking charge of your finances Collateral is property which can be seized if a person does not repay the loan. Conditions refer to the general state of the economy. If an individual has these qualities, he/she is more likely to be perceived as having the ability and willingness to pay back a loan and will be granted one by a lender.

10. Taking charge of your finances 2 Types of Credit: installment and non-installment credit. Installment credit (also known as closed-end credit) is a one time loan which the borrower must repay the amount in a specified number of equal payments. Installment credit usually has an agreement (contract) which must be signed outlining the repayment terms.

11. Taking charge of your finances Generally, the contract specifies the number of payments, the payment amount, and how much the credit will cost (interest rate or fees). Sometimes, installment credit requires a down payment to be made. Examples of installment credit include automobile loans, mortgages, and education loans.

12. Taking charge of your finances Noninstallment credit (also known as open-end credit) credit is extended in advance so the borrower does not have to apply for credit each time credit is desired. Individuals can continue to borrow on the credit as long as they do not exceed the line of credit.

13. Taking charge of your finances Lenders require the borrower to pay interest, a periodic charge for using the credit. The credit can be repaid in one single payment or a series of equal or unequal payments, usually monthly. Minimum amount a person much pay each month. Examples of non-installment credit include Credit cards or department store cards

14. SALES CREDIT Granted by retailers who offer credit accounts/cards 30-day Charge Account- Use service with promise to pay bill, interest is charged if cannot pay. Example: Electric Bill, doctor bills Regular Charge Account- Pay balance within 25 days. Ex. American Express Revolving Charge Account- Choice of paying in full or paying “minimum amount due” Finance Charge on unpaid balances. Ex.Visa

15. Taking charge your finances Advantages vs. Disadvantages of Credit: The average college student has 4.25 credit cards in 2001, up from 3 in 2000. Americans spend over $1 trillion dollars in credit annually.

16. Taking charge of your finances Credit should not always be considered a ‘bad’ thing. It is okay to use credit if it will assist a person to make money. Such as, receiving a home loan is good if a person can afford the monthly payments, tax benefits are received, an asset is received, and the value of the home increases. Therefore, the financial advantages of a home loan greatly outweigh the costs. If credit is used for convenience, it should only be used if an individual can pay the monthly balance in full.

17. Taking charge of your finances Advantages of using credit include: Convenience Record of transactions in case there is ever a dispute. Buy now and pay later without finance charges. For emergencies Identification To enjoy the “good life” Increase the standard of living Increase buying power

18. Taking charge of your finances Advantages of using credit include: Hotel/Airplane reservations Obtain an education – With the rising tuition costs of higher education, many individuals are being forced to have a student loan to get through school. This is one of the only recommended uses for credit because the individual’s future earning power and quality of life increase as a result.

19. Taking charge of your finances The disadvantages of credit include: High interest rates and fees. Add-on fees late payment penalties, annual fees to have the credit, and/or transaction fees each time the credit is used. More Expensive Loss of privacy Loss of financial freedom Overspending Reduces the effect of comparison shopping

20. Taking charge of your finances Establishing credit Have a checking and savings account. Apply for a secured credit card.

21. Taking charge of your finances Advantages and Disadvantages of Credit Scenario Activity