1. What is a Consumer Credit?
Name_________________________________

2. Using Consumer Credit Wisely Why is having good credit important?
When you borrow money or charge an item to a credit card, you are using credit
Credit - an arrangement to receive cash, goods, or services now and pay for them in the future.
Consumer Credit – use of credit for personal needs.
Creditor – financial institution, merchant, or individual – an entity that lends money.
Good credit is very valuable

3. Using Consumer Credit Wisely Why is having good credit important
Using Consumer Credit Wisely Why is having good credit important?(cont)
Buy things we would have to save for years to afford: homes, cars, education
Credit is an important financial tool, but it can be dangerous
Leading people into debt beyond their ability to pay
Involves responsibility and risk!
Today consumer credit is a major force in the American economy
Any forecast or evaluation of the economy includes consumer spending trends/consumer credit
When misused, credit can result in default, bankruptcy, and loss of creditworthiness

4. Factors to Consider Before Using Credit
Before you decide to finance a major purchase by using credit, consider:
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 costs of using credit?

5. Factors to Consider Before Using Credit
Agree to pay the fee that a creditor adds to the purchase price.
Monthly interest if not paid off at end of month
Periodic or annual fee
Late fees if not paid on time
Does the benefit outweigh the cost of credit

6. Advantages of Credit Let’s you enjoy goods and services now
Credit cards allow you to combine several purchases, making just one monthly payment
Making hotel reservations, renting a car, shopping online, you will need a credit card
Records your expenses
Shopping and traveling without a lot of cash is safer
Using credit wisely makes lenders view you as responsible

7. Disadvantages of Credit
Credit costs money
Temptation to buy more than you can afford
Fail to repay – lose your good credit reputation
May lose some of your income or property to repay your debts
Doesn’t increase your total purchasing power
Just allows you to buy things now for which you must pay later
ALWAYS APPROACH CREDIT WITH CAUTION

8. Types of Credit
Closed-End Credit – credit as a one time loan that you will pay back over a specified period of time in payments of equal amounts
Examples
Mortgages
Car loan
Large Appliances
Lender will hold title, document showing ownership, until all payments are made
Installment sales credit – high priced items, down payment and monthly payments
Installment cash credit – you receive cash - direct loan, personal, home improvements, monthly payments
Single lump-sum credit – repaid in total within 30/90 days

9. Types of Credit
Open-Ended Credit – a loan with a certain limit on the amount of money you can borrow for a variety of goods and services
Line of Credit – maximum amount of money a creditor will allow a credit user to borrow
Examples:
Department Store Credit Card (Macy’s, Target)
Visa
MasterCard
Make as many purchases as you want, can’t exceed line of credit
Billed monthly for partial payment of total owed

10. Loans
Borrowed money w/agreement to repay it with interest within a certain amt of time.
Inexpensive Loans – parents or other family members, be aware, that loans can complicate family relationships
Medium-Priced Loans – commercial banks, savings and loans, credit unions – moderate interest
Expensive Loans – easiest and most expensive, finance companies and retail stores
Home Equity Loans – based on your home equity (current market value of home minus what you owe) tax deductible, but could lose your home if not repaid

11. Credit Cards Average card holder has 9 credit cards
Grace period – time period during which no finance charges will be added, usually first 25 days
Finance charge –total dollar amt you pay to use credit
Debit Card – Do not confuse credit cards with debit cards, electronically subtracts your money from your account

12. Credit Score What is a Credit Score?
Name_________________________________

13. The Cost of Credit
The key factors will be the finance charge and the annual percentage rate (APR)
APR - Cost of credit on a yearly basis, expressed as a percentage
18% APR - $18/yr on each $100
$20,000/$100 = 200
200*$18 = $3,600/yr in Interest

14. Tackling the Trade-Offs
Term vs. Interest Costs – many people choose longer-term financing, they want smaller payments, longer terms cause more interest being paid…$6,000 loan
APR Term Mo. Pymt Interest Total Cost
14% 3 yrs $ $1, $7,382.52
14% 4 yrs $ $1, $7,870.08

15. Applying for Credit The 5 “C’s” of Credit
Character: Will you repay the Loan?
Trustworthy and stable
Personal and Professional References
Criminal History
Have you used Credit before?
How long have you lived at your present address?
How long have you held your current job?

16. The 5 “C’s” Capacity: Can you repay the loan?
Your Income and Debt
What is your job, and how much is your salary?
Do you have other sources of income?
What are your current debts?
Capital: What are your assets and Net Worth?
If you loss your income, you can still repay your loan from savings or selling assets
What are your assets?
What are your liabilities?

17. The 5 “C’s” Collateral: What if you do not repay the loan?
What kind of property or savings do you have
The creditor may take whatever you pledge as collateral
What assets do you have to secure the loan? (vehicle, home, furniture)
Do you have any other assets (bonds or savings)
Conditions: What if your job is insecure? Economic conditions, is your job and company secure?
Credit History: What is your credit history?
Credit Report
Do you pay your bills on time?
Have you ever filed for bankruptcy?

18. A Good Credit Rating is a Valuable Asset that You should PROTECT!
The 5”C’s”
Credit Rating – measure for a person’s ability and willingness to make credit payments on time
A Good Credit Rating is a Valuable Asset that You should PROTECT!

19. Credit Score The FICO scoring system goes from 350 to 850
660 to 724 to be a good credit score
VantageScore (a new score now used by all 3 credit bureaus) is
TransUnion, Equifax, Experian
American Express, requires at the very least a 750 fico score to be eligible for quite a few of their credit and charge cards
Excellent credit rating can change as the country's economy fluctuates
the average credit score, 692 as of January 2011