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Chapter 6 Consumer Credit

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1 Chapter 6 Consumer Credit
Section 6.1 What is consumer credit?

2 Using Consumer Credit Wisely
Credit – an arrangement to receive cash, goods, or services now and pay for them in the future. Consumer credit – the use of credit for personal needs Creditor – person that lends money. (Merchant, financial institution, or individual)

3 Credit Uses and Misuses
Using credit may increase the amount of money you spend now, but the cost of credit decreases the amount of money you will have in the future. Cost of credit – the extra money that you pay over the actual price of what you are charging (interest and fees)

4 Factors to think of before using credit
Do you have the cash you need for a down payment Do you want to use your savings instead of credit Can you afford the item Could you use credit in some better way Could you put off buying the item for a while What are the costs of using credit ***Make sure the benefits of making the purchase outweigh the costs of credit*****

5 Advantages of Credit Let’s you enjoy goods and services now
Allows you to make several purchases with one monthly payment Gives you a record of your expenses If you use credit wisely, lenders view you as a responsible person

6 Disadvantages of Credit
Credit costs money The temptation to buy more than you can afford You can lose your credit reputation You can lose your income and property

7 Closed-End Credit Closed – end credit is a one time loan that you will pay back over a specified period of time Examples: Mortgage, vehicle loans, installment loans These types of loans usually carry lower interest rates than open ended credit

8 Open- Ended Credit Open-Ended Credit is a loan with a certain limit on the amount of money you can borrow for a variety of goods and services Examples: department store credit cards and bank credit cards Line of Credit – the maximum amount of money that the creditor allows you to spend With open ended credit you can use your card for an unlimited amount of purchases as long as you don’t exceed your line of credit.

9 Loans Borrowed money with an agreement to repay it with interest within a certain amount of time Inexpensive Loans – parents or other family members Medium Priced loans – commercial banks, savings and loans Expensive loans – finance companies and retail stores Home equity loans (HELOC) – based on your home equity, interest is tax deductible

10 Credit Cards Grace Period – a time period during which no finance charges will be added to your account Finance Charge – the total dollar amount you pay to use credit Most card companies have eliminated annual fees, some still charge fees, but typically $20 or less.

11 Types of Cards Debit Cards – money comes directly out of your checking account. Can also be used at ATM machines. Sometimes carry a fee for each purchase Smart Card – equipped with a computer chip that stores 500 times the amount of data of a normal card, keeps track of information such as frequent flyer miles Travel and Entertainment cards – the balance is due in full at the end of each month

12 Choosing a Credit Card Page 160 Figure 6.3
Before you enter the credit world you need to know what is best for you What factors should you be thinking about when choosing a credit card?

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