Handling Credit and Managing Debt What is credit, and how should we use it?

Credit is more than just credit cards! All of the following are examples of credit. Car loans School loans Installment loans (mortgages, rent) Credit cards

How to use credit Much like any other resource, you can make smart decisions with credit or you can make poor decisions with it.

Components of credit Principle: The amount you borrow Interest: The amount you pay someone to borrow that money

Breaking Down Types of Credit: Credit Cards Banks, stores, credit unions and gas stations Some cards are store specific ( Best Buy Card) some can be used anywhere (Discover) No pay off deadline…you pay until the balance is zero Typically has a high interest rate…think back to the credit card application!

Breaking Down Types of Credit: Installment Loans Banks, credit unions, auto dealers Used for large purchases; cars home appliances Usually has a term limit, months-years Payments usually are fixed for the life of the loan Typically less APR than credit cards

Breaking Down Types of Credit: Student Loans Banks, credit unions, federal government Used for tuition and school expenses Repayment based on income level and graduation date Payments usually are set annually, grow with income Typically less APR than installment loans You can get a tax break on interest paid

Breaking Down Types of Credit: Mortgages Banks and credit unions Specific to home, town home, condo or property purchase Typical repayment period is years The type of loan taken will determine the APR; fixed, ARM’s, interest only Typically APR is less than installment loans A tax break is usually available for these as well

What Do You Think? Complete the exercise on page 42 (take five minutes and do this now)

Credit terminology APR: cost of the loan per year; is this fixed, or does it grow? Annual Fee: an PRIVILEGE expense Credit Limit: the amount of money available to you Finance cost: the dollar amount it costs to maintain a balance.

Credit terminology continued Origination Fee: the cost of setting up the loan (home) Loan Term: length of time to repay Grace Period: loan time without interest

Questions What ways have you already used credit? When do you think it is appropriate to use credit? When do you think it is not appropriate? Why do you think all that information on the credit card application we did last week is requested?

Something to think about… Why do credit card companies court college students? It’s obvious by the friendly representatives who offer a free t-shirt or CD just for signing up in the student center. Or the applications slipped into bookstore bags. Or mail boxes crowded with card offers. Credit card companies want college students to carry their card. Did you ever stop to wonder why?

One reason is loyalty once a person has a card in their wallet, they are likely to keep that particular card and its upgrades for years to come. Another reason: college students are good customers. While this may seem ironic considering that most college students are without a steady source of income, Robert Manning, Ph.D., Professor in the College of Business at Rochester Institute of Technology and author of Credit Card Nation, says this is one example of how the credit card industry has changed radically in the past decade or so. Robert Manning

Previously, conservative rules deemed a good customer as one that paid their bills on time, he says. Now, a good customer is one that can’t repay their debt. Credit is no longer an earned privilege, continues Dr. Manning. It’s now considered a social entitlement, and the screening criteria (for card applicants) is weak.