Borrowing Econ 10/13

Warm Up When is it ok to borrow money? When is it not a good idea to borrow money?

Credit Credit: borrowing money to buy something now and pay for it later Revolving credit: Borrow for multiple purchases without going over a certain credit limit Pay off each month Ex. Credit card Installment credit: borrow a specific amount of money to buy something now Pay regular amts over time by a set date Ex. Car loan, mortgage Cash loans: borrow a specific amount of cash to repay by a set date Service credit: promise to pay a service used each month Ex. Cell phone

Credit Buying on credit: making a purchase now and promising to pay it back later Principal: the cost of the item bought on credit or the amount borrowed Interest: what the lender (usually a bank) charges for using credit

Calculate Simple Interest Interest= Principal x interest rate (as a decimal) x time (in yrs) Ex. Jared gets a flat tire on his car but he doesn’t have the money to get it fixed that day. He is able to buy a new tire but owes $150 a month at 10% interest for 30 days. I= 150 x .10 x 1/12 I=$1.25

More Terms Annual Percentage Rate “APR”: A consistent way to report interest. Includes interest rate, fees, and loan costs Maturity Date: When the final payment for a loan is due Grace Period: The amt of time before interest starts accumulating if payment is not received

Example Compound Interest: Interest is charged on top of accruing interest You bought $500 worth of stuff on your credit card. You decide your going to pay $10 each month and your APR is 18%. You will end up paying $431.40 in just interest. That means your final cost is $931.40!!! If you continue at this rate and don’t charge any more, it will take you 7 years and 9 months to pay off the balance.

Credit Reporting Credit reporting: a history of how you have used credit Where you live and work Credit account amounts (balances and limits) Payment history (late or on time) Recent inquiries from creditors Any collection or legal action to collect debt

If you Don’t Pay off Your Credit Embarrassment of card being declined Property repossessed State of perpetual debt which leads to stress Paying higher interest rates and/or late fees Having wages garnished Collection agency Can open new lines of credit or borrow

The 70-20-10 Rule Spend 70% of your income on living expenses such as rent, food, gas, utilities Spend 20% of your income on saving and investing in your financial goals and emergency expenses Spend 10% of your income on debt payments such as credit cards, school loans, car loans, etc.

Tips for Building Good Credit If you can, pay off your credit card completely every month Know the consequences of late or no payments Don’t open too many credit cards or apply for too many loans in a short time Don’t use credit cards to pay off other credit cards Don’t check your credit excessively (Credit karma) Check your statements and be notified of purchases. Be careful who you give your SSN to 15-18 year olds are the main target for identity fraud (10% have someone else using their SSN) Don’t overspend!!!!!!