Going into Debt

Americans and Credit What is credit? What is credit? Receiving funds directly or indirectly, to buy goods and services w/ promise to pay them back Receiving funds directly or indirectly, to buy goods and services w/ promise to pay them back Principal – Amount originally borrowed Principal – Amount originally borrowed Interest – Amount of money, borrower must pay to use someone else's money. Interest – Amount of money, borrower must pay to use someone else's money. Everyone in the nation has a credit score based on your credit history. Everyone in the nation has a credit score based on your credit history. Anytime you borrow money, whether from back, store, or credit card company you go into debt. Anytime you borrow money, whether from back, store, or credit card company you go into debt.

Americans and Credit Installment Debt Installment Debt Most common type of debt, paid back with equal payments over a given amount of time. Most common type of debt, paid back with equal payments over a given amount of time. Monthly payment determined by length of contract, amount borrowed, and interest rate Monthly payment determined by length of contract, amount borrowed, and interest rate The longer the life of the loan, the more you will pay back. The longer the life of the loan, the more you will pay back. Largest and most common kind of ID is a mortgage Largest and most common kind of ID is a mortgage All debt is not bad; housing, student loans, car loans. All debt is not bad; housing, student loans, car loans.

Increase in Borrowing More and more Americans are choosing to buy durable goods on credit. Installment Debt (cont.)

Pay Now or Pay Later Your monthly payment is lower if you choose the 36-month loan. Installment Debt (cont.)

Americans and Credit Why people use Credit? Why people use Credit? People are impatient. Feel the need to satisfy wants immediately. People are impatient. Feel the need to satisfy wants immediately. Again, some responsible, some not Again, some responsible, some not Spread payments out over time Spread payments out over time Car, house, college Car, house, college Build credit for future important purchases Build credit for future important purchases Only works with on-time, full monthly payments Only works with on-time, full monthly payments

Sources of Loans and Credit Types of Financial Institutions Types of Financial Institutions Commercial Banks Commercial Banks Accept deposits, lend money, transfer funds among people and businesses. Typical bank; Sun Trust, Wachovia…. Accept deposits, lend money, transfer funds among people and businesses. Typical bank; Sun Trust, Wachovia…. Typically higher interest rates and longer loan life. Typically higher interest rates and longer loan life. Typically only do small loans Typically only do small loans Savings and Loans Savings and Loans Accepts deposits and gives out loans Accepts deposits and gives out loans Typically lower interest rates Typically lower interest rates Focus mainly on large loans; (Car, House) Focus mainly on large loans; (Car, House)

Sources of Loans and Credit Types of Financial Institutions Types of Financial Institutions Savings bank Savings bank Lend funds for homes, cars, loans… Lend funds for homes, cars, loans… Really non-existent anymore Really non-existent anymore Originally served less wealthy customers overlooked by commercial banks Originally served less wealthy customers overlooked by commercial banks Tend to have higher interest rates. Tend to have higher interest rates. Credit Union Credit Union Offer all services only to members. Offer all services only to members. Usually forms around a given job field. Usually forms around a given job field. Typically lower interest rates Typically lower interest rates

Types of Financial Institutions Types of Financial Institutions Types of Financial Institutions Finance Companies Finance Companies Basically store credit cards. Basically store credit cards. Take over installment debt for stores and charges higher interest rates Take over installment debt for stores and charges higher interest rates

Credit/Debit Cards Credit Cards The average American has 5 credit cards and about $12,000 in credit card debt “Revolving Limit” meaning as long as you are under the maximum amount you may use. Pay a certain amount back each month, plus interest Interest (APR/MPR) determined by amount borrowed, and credit score. Get charged a finance charge each month based upon amount owed and APR Example you owe $5000 on your VISA, w/24% APR Monthly Bill ~$ Finance Charge is $98.00 Next month you owe $

Debit Cards Link to checking account Limit is what you have in the bank Draws directly form your account. No Interest, or finance charge

Credit Rating What does your credit rating mean? The risk involved in lending you money What factors determine your credit Rating? Capacity to pay Ability to hold a job Current debt to income ration Character Educational background Legal troubles Collateral Size of your personal wealth Shows your past ability to pay or save as well as what you might be able to see off to pay back a debt

Bankruptcy Legal right/ability for American Citizens to be forgiven for debts For people who absolutely cant pay back debts Usually forced to give up most possessions to pay back debtors. Remains on your credit report and effects you for 10 years. Difficult to reestablish credit during 1 this period. Can only claim once every 7 years

Types of Bankruptcy Several types, only two really pertain to ordinary citizens. Chapter 7 Complete liquidation of assets. Possessions sold and profits split evenly among debtors. Savings (Not 401k), stock are distributed among debtors Remainder of debt forgiven by judge In most cases allowed to keep; home, car, 401k. Chapter 13 Restructuring of debts according to court order Court decides how much you will pay each debtor based on regular salary Debts repaid over 3-5 years, Keep possessions, usually works out in your favor

Assignment Pg. 87 #2,3 Pg. 94 #5 Pg. 99 #2, 3 Pg. 105 #3 Pg. 108 Recalling Facts and Ideas #2, 3, 9, 12.