CONTEMPORARY ECONOMICS© Thomson South-Western 20.2Using Credit Responsibly  Understand whether to use cash or credit to pay for purchases.  Name the two sources of consumer credit.  Describe how lenders decide who qualifies for credit.  Explain how you can avoid credit problems. Objectives

CONTEMPORARY ECONOMICS© Thomson South-Western 20.2Using Credit Responsibly  consumer loan  consumer sales credit  secured loan  unsecured loan Key Terms  creditworthy  credit history  credit rating  credit scoring

CONTEMPORARY ECONOMICS© Thomson South-Western 20.2 Using Credit Responsibly SLIDE 3 Paying for Your Purchases Will that be cash or charge? Benefits and costs of paying cash Benefits and costs of using credit

CONTEMPORARY ECONOMICS© Thomson South-Western 20.2 Using Credit Responsibly SLIDE 4 Percentage Distribution of Consumer Payments, 2000 and 2008 Figure 20.2

CONTEMPORARY ECONOMICS© Thomson South-Western 20.2 Using Credit Responsibly SLIDE 5 Sources of Consumer Credit Consumer loan—borrowing money to be repaid in regular installments over time Consumer sales credit—amounts charged to an account that involves variable payments over time

CONTEMPORARY ECONOMICS© Thomson South-Western 20.2 Using Credit Responsibly SLIDE 6 Consumer Loans Secured loan—loan for which property is pledged to back its repayment Unsecured loan—loan for which no specific property is pledged by the borrower that can be used to satisfy the debt if payments are not made

CONTEMPORARY ECONOMICS© Thomson South-Western 20.2 Using Credit Responsibly SLIDE 7 Consumer Sales Credit Credit-card account Credit-card fees Interest on credit-card debt

CONTEMPORARY ECONOMICS© Thomson South-Western 20.2 Using Credit Responsibly SLIDE 8 The Three Cs of Credit The term creditworthy refers to the measure of your dependability to repay a loan. Lenders typically consider three primary factors when they evaluate creditworthiness. Character is a measure of your financial responsibility. Capacity is a measure of a consumer’s ability to repay a debt on time. Capital is a measure of the value of things a consumer owns that could be sold or cashed in to repay a loan.

CONTEMPORARY ECONOMICS© Thomson South-Western 20.2 Using Credit Responsibly SLIDE 9 Credit-Reporting Agencies Credit-reporting agencies, or credit bureaus, gather, maintain, and share financial information about almost every adult in the United States. Three primary credit-reporting agencies: Equifax Experian TransUnion

CONTEMPORARY ECONOMICS© Thomson South-Western 20.2 Using Credit Responsibly SLIDE 10 Credit-Reporting Agencies Credit history—a person’s record of paying bills and debts over time Credit rating—the measure of a person’s creditworthiness Credit scoring—a system that assigns a number, or score, to each consumer indicating whether this person is a good or bad credit risk (continued)

CONTEMPORARY ECONOMICS© Thomson South-Western 20.2 Using Credit Responsibly SLIDE 11 Accessing Your Credit File Legal rights Online access Annual review Corrections

CONTEMPORARY ECONOMICS© Thomson South-Western 20.2 Using Credit Responsibly SLIDE 12 Avoiding Credit Problems Use credit wisely Establish a positive credit history Repair a damaged credit rating