Chapter 23:4 Introduction to Credit

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Presentation transcript:

Chapter 23:4 Introduction to Credit Family and Consumer Science Family Living Mrs. Swope

CREDIT IS……. Derived from the Latin word “credo” meaning “I believe” The present use of future income A promise to repay an obligation according to mutually agreed upon terms. Using goods, services, or money with a promise to repay a definite sum of money in the future.

TYPES OF CREDIT: Installment Credit Also know as closed-ended credit Is a one time loan, borrower must repay the amount in a specified number of equal payments. Has a contract which must be signed outlining the terms of the loan The contract must state: number of payments, amount of each payment, down payment, and interest rate and /or fees. Examples:

TYPES OF CREDIT: Noninstallment Credit Also known as open-end credit or revolving credit An amount of credit (line of credit) is extended in advance. Individual can use the credit at any time so long as they do not exceed the line of credit. Line of credit varies from individual to individual, based on one’s creditworthiness. Can be repaid in one payment or in a series of equal or unequal payments. Examples:

Common Terminology: Cost of Credit APR - annual percentage rate; total interest rate to be repaid on credit over the course of a year. Variable interest rate- the APR changes periodically. Fixed interest rate - interest rate does not change over the course of the loan.

Common Terminology cont. Finance Charges-additional fees attached to using credit; late fees, over credit limit fees, origination fee( loan application fee), universal default fee. Grace period - interest free period , not greater than 28 days, previous balance must be zero to have a grace period.

Common Terminology cont. Credit reporting agency - Credit bureau, a data base of everyone’s credit transactions. They do not issue credit, credit cards or loans. Assets - the value of all things owned. Liabilities - amounts owed, all debts. Net worth - the difference between the value of owned items and owed items ( your debts)

Advantages of using credit? Safe Easy Convenient (online purchases) Sales Travel Builds credit history Emergencies

Disadvantages of using credit? Identity theft Easy to over spend Added fees, hidden fees, interest rates Misuse can cause serious financial problems Purchases may be repossessed Bankruptcy