1 Essential Question: Explain how lenders make profit on loans, explore the factors that influence a credit rating, List the pro’s and con’s of using credit.

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Presentation transcript:

1 Essential Question: Explain how lenders make profit on loans, explore the factors that influence a credit rating, List the pro’s and con’s of using credit for our economy. Borrowing and Credit SECTION 4

2 Ways lenders make money on loans: Interest- As long as you owe money (loan, mortgage, credit card) you must pay interest. The lower the credit score or riskier the loan, the higher the interest rate will usually be. Repossession- If you default on a loan for a major purchase (house/car) the lending agency takes back the item to cover the debt. Borrowing and Credit SECTION 4

3 Credit Rating or Credit Score Each person in the U.S. is eligible to apply for credit once they turn 18 They will have a credit rating or a score, a number between The higher the score, the better the terms of lending (amount/interest) Most lenders will use a score offered by one of the three major credit reporting agencies: Experian, Equifax, or Transamerica Borrowing and Credit SECTION 4

4 Factors that influence a credit rating: Ability to Pay Does borrower have a verifiable job Length of time at job? (probation?) How much money do you have available to you to repay your debt Borrowing and Credit SECTION 4

5 Assets: Lenders have to assume the worst (that borrowers will fail to repay debt), and therefore want to know if you have items of value (house/car) that they could take to get their money back. The better your stuff, the better the terms of the loan (interest/length of time). Borrowing and Credit SECTION 4

6 Credit History: How long have your accounts been open (bad accounts get closed usually) Have you CONSISTANTLY repaid your debts (every month without skipping) Do you pay a significant amount or only the “minimum amount due” If you ever default (fail to pay) on one account, the others can treat it like you defaulted on them! Borrowing and Credit SECTION 4

7 Pro’s of using credit: stimulates growth- Allows people to spend money that can be used to create more jobs promotes stability- Allows people to attain those emergency items that they need even if they do not have the money at the time of need Borrowing and Credit SECTION 4

8 Con’s of using credit: Can impact economic contributions since high credit debt, results in money not being spent purchasing new items Has long lasting effects if not used wisely. This may include not being able to purchase a house, or being forced to take a loan with high interest. Borrowing and Credit SECTION 4