Chapter 6: Consumer Credit Personal Finance Chapter 6: Consumer Credit

Objective Analyze advantages/disadvantages of consumer credit

Basic Definitions Credit: An arrangement to receive cash, goods, or services now and pay later Creditor: An entity (bank, finance company, credit union, business, individual) to which the money is owed Consumer Credit: The use of credit for personal needs

Questions How many of you have a credit card? What do you use it for? Do you think high school students should be allowed to have credit cards?

Credit Fact Using credit increases the amount of money you can spend now, but the cost of credit decreases the amount of money you will have in the future.

Agree or Disagree? “It is okay to use credit for necessities. However, you should always pay cash for luxuries.” Do you agree or disagree with that statement? Why?

Credit Factors Do you have cash for a down payment? Do you want to use your savings instead? Can you afford the item? Could you get a better deal? Could you put off buying the item now? What are the costs of credit? Interest: Periodic charge in exchange for the use of credit

Credit Advantages Buy now and pay later: Instant satisfaction You receive special discounts and deals Shopping Convenience Rent cars and hotels with credit cards If you use it wisely: Lenders will love you and give you better rates

Disadvantages of Credit Temptation to overspend If you fail to pay on time, your credit rating drops You could lose income or property Lower credit rating = Worse rates and be turned down for future loans

Closed-End Credit A one-time loan that is paid back over a specified period of time & in payments of equal amounts

Open-Ended Credit The ability to borrow money for a variety of goods & services up to a limit set by the company issuing the credit Example: Credit Card Charge

Line of Credit The maximum amount of money a creditor has made available to someone

Home Equity Loan A loan based on your home equity (the difference between the current market value of your home & the amount you still owe on the mortgage) Interest paid on home equity loans is tax deductible

Credit Cards Average person Has? 9 Convenience User: Pay off every month Borrowers: Don’t pay off every month

More Cards Debit: Electronically subtracts money from your savings or checking account Smart Cards: Computer chip in a credit card. Contains personal information. Travel and Entertainment Card (T&E): Balance is due end of every month Diner’s Club, American Express

Grace Period A time period during which no finance charges will be added to a person’s credit card account

Finance Charge The total dollar amount a person pays to use credit

Work Time Look up 5 credit cards Look for Interest Rates Special offers and deals/incentives Make a table Then pick a card and explain why you chose it