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Lesson 16: Using Credit.

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Presentation on theme: "Lesson 16: Using Credit."— Presentation transcript:

1 Lesson 16: Using Credit

2 Loans and Credit Cards: Buy Now, Pay Later
Credit—the ability to obtain goods and services now, based on an agreement to pay for them later Credit includes: bank loans and credit cards Credit is convenient and allows us to enjoy goods before we actually pay for them, but it also increases the cost of the things we buy with the addition of interest to the original cost Credit can lead to spiraling debt that can destroy an individual or family’s financial health Part of becoming successful is learning: how to build a good credit history, how to obtain credit at the lowest possible cost (interest rate) how to use credit wisely

3 Becoming Creditworthy
Creditworthy—one who is willing and able to repay a loan Depends on: are you able to pay the money back and are you likely to pay the money back To decide if a person is credit worthy, the bank looks at: how much you make, how much you have saved, what your current expenses are, how many people depend on you for their support, how much you already owe and what property you own that can be used as collateral (something the bank could take away from you if you do not repay the loan)

4 To decide if you are likely to repay the loan, the bank looks at:
your employment history, your credit history (how well you have managed your bills and credit in the past To obtain the information needed, banks look to credit bureaus Your credit history includes: every bill you have ever paid, whether you have paid it on time, whether you have received loans in the past, how well you have repaid those loans This information is used to give you a credit score and the higher your credit score the more likely you are to receive a loan

5 Your credit history follows you your whole life (if you make mistakes and get behind in your bills, it can take up to 7 years of paying everything on time for the negative information to be removed from your credit report Your credit history affects whether or not you can get a loan and how much interest you pay on that loan Also, your credit history can determine how much you pay for car insurance and whether you are able to get certain jobs

6 To build a good credit history, you need to:
establish a steady work history, pay all your bills on time, open a checking account and don’t bounce checks, open a savings account You can also buy something from a local department store on an installment plan (credit plan in which you agree to pay a fixed amount per month for a specified number of months)

7 Making Wise Credit Decisions
Even if you have good credit and a bank is willing to give you a loan, you must be responsible enough to decide whether you can really afford the debt In order to decide if you can afford the debt, you need to: If you have enough money left you may be able to afford the additional expense, if not then you cannot afford it Add up your monthly income, minus all deductions Subtract your fixed expenses (rent, auto, utilities) Subtract your variable expenses (food, entertainment, clothes, etc)

8 Interest Rates: The Cost of Borrowing Money
Interest—the cost of using credit. Is most often expressed as an interest rate, a percentage of the total amount owed In order to compare the cost of different credit options, you need to know: Is the interest rate an annual rate (the amount of interest charged per year) Is the interest rate fixed (never changes) or variable ( can change at any time) Is the interest rate calculated as simple interest or compound interest

9 Simple Interest

10 Compound Interest

11 Credit Card Interest Are usually higher than bank rates Are variable
Some change an annual fee (a yearly charge just for having the card) Interest rates are compounded, meaning you pay interest on interest, if you do not pay off the full amount every month

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