Introduction to Credit Personal Finance Iverson

What is Credit? Receiving cash, goods, or services now and paying for them later

Who Gives Credit Creditors Could be a Bank Credit union Any business selling a product or service (i.e. auto loans) The government (i.e. student loans) Credit card companies (backed by a bank or credit union) (i.e. Visa, Mastercard, Capital One)

Types of Credit Many people mistakenly believe that credit cards are the only way to get credit However, there are a variety of ways which can be narrowed down into three main categories

#1 – Single Payment Credit Also known as Service Credit– you receive services now and pay for them later with a single payment after a fixed period of time Typically pay no interest Examples Cell phone use – use minutes each day, pay once a month Electric use – use electricity each day, pay once a month Cable use – use Cable each day, pay once a month

#2 - Installment Credit Merchandise/services paid for in two or more regularly scheduled payments (installments) of a set amount I.e. You take out a auto loan for $8,000 for 5 years at 5% interest You pay $151 a month to pay off the balance (ends up costing you $9,060) Others examples include student loans, home loans, business loans

#3 – Revolving Credit Given a specific credit line you can not exceed Interest accumulates on outstanding balance I.e. You have a credit card, charge $400 and only pay $100, you will pay interest on the remaining $300. *high interest rates apply Main way to use revolving credit is to have a credit card and NOT pay in full each month (this is a BAD idea—you pay a lot of interest and thus whatever you bought ends up costing you a lot more)

Advantages of Using Credit Able to buy needed items now without cash and pay later Don’t have to carry large amounts of cash (i.e. when traveling for example) Creates a record of purchases (your statement) More convenient than checks

Advantages of Credit Consolidates bills into one payment Can help build a credit history Can pay bills online and shop online Credit cards are great for emergencies

Disadvantages of Credit Paying interest – it’s an extra costs beyond the original cost of the good or service High interest rates on credit cards May carry additional fees if you pay late If not managed, may be over-used – you can accumulate a lot of debt quickly if you’re not careful

Disadvantages of Credit If not managed, may increase impulse buying—easy to swipe a card or take out a loan for more than you can really afford Can hurt credit history – too much debt, not paying on time, etc. will hurt your credit report and credit score (more on this later)

CONCLUSION You will all use credit in your future Some types, like Service credit, are easily managed and help you use services now and pay later Some types, like Installment Credit, include loans, help you afford things now that you maybe couldn’t afford without borrowing (like student loans, auto loan, home loan) Revolving Credit, like credit cards, can be convenient but also dangerous