1 Using Credit Wisely Chapter 31

2 Charge!!! What is Credit??What is Credit?? Discuss ads for sales or products that stress credit?Discuss ads for sales or products that stress credit?

3 CreditCredit –An arrangement in which someone receives money or merchandise now and promises to pay for it later CreditorCreditor –Bank, finance company, credit union, business or individual to whom money is owed

4 Finance ChargeFinance Charge –An addition to the purchase price that is the cost of using the creditor’s money –Car cost = $ –Paid $ down payment –Finance charge = $ –Owed = $

5 Serious Business using creditSerious Business using credit –Using future resources –Agreeing to pay more than if paid with cash

6 Types of Credit Credit CardsCredit Cards –Issued by banks, stores –Credit limit = maximum total to be charged LoansLoans –Large purchases, such as cars, homes –Loans from bank, credit union, consumer-finance company –Stores defer payment to spur sales (furniture, televisions, stereo, etc)(furniture, televisions, stereo, etc) Payment begins later + finance chargePayment begins later + finance charge

7 LayawayLayaway –Department stores –Give store portion of payment –When paid for, you can take it home

8 LeasingLeasing –Rent a product –Lease cars, equipment, computers –Consumer puts some money down when product is received –Remainder of cost of the lease is paid in monthly payments –Payments include funds to cover finance charge –Leases may have buyout option at the end of lease –Equipment/car is not yours at the end of the lease unless you pay additional costs –So no trade in if you are leasing a car

9 Shopping For Credit Compare Finance ChargesCompare Finance Charges Not easy if creditors use different termsNot easy if creditors use different terms The Fair Credit and Charge Card Disclosure Act of 1988The Fair Credit and Charge Card Disclosure Act of 1988 –Greatly simplified comparison shopping for finance charges –Creditors required to specify amount borrowed –Amount of each monthly payment –Number of payments that must be made –Date for payments –Extra charges for late fees if any –Allow consumers to compare finance charges

10 (APR) annual percentage rate(APR) annual percentage rate –Shows how much the finance charge is in relation to the amount borrowed –Save money by shopping for lowest APR

11 Credit Cards Card issuers try a number of promotions to interest consumerCard issuers try a number of promotions to interest consumer –Sports card –Airline miles –Nonprofit organizations (get money back when you use their card)(get money back when you use their card) May have higher interest ratesMay have higher interest rates

12 Real Life Application Claire and Trevor are furniture shopping. They saw a newspaper ad for one store that offers six months of interest-free financing on any amount they charge. It sounds like a great deal.Claire and Trevor are furniture shopping. They saw a newspaper ad for one store that offers six months of interest-free financing on any amount they charge. It sounds like a great deal. Should they take advantage of this deal?Should they take advantage of this deal? What else do they need to know about?What else do they need to know about? –May have inflated finance charges, hidden fees

13 Analyzing Added Charges 1- look for lowest APR.1- look for lowest APR. 2 – does the creditor charge a membership fee?2 – does the creditor charge a membership fee? 3 – how long is the grace period?3 – how long is the grace period? –Period of time in which the money can be repaid without incurring the finance charge

14 Bank Credit cardsBank Credit cards –Allows consumer to obtain cash –Emergency need for money –Treated differently than purchase May have higher APRMay have higher APR No grace periodNo grace period

15 Getting and Using Cards Applications –Form asking for details about an applicant’s job, bank accounts, and credit history Creditor examines information and performs a credit checkCreditor examines information and performs a credit check –(contact a credit bureau which keeps records of how people pay their bills) –May contact employer to verify job

16 Getting Credit Building Credit –1. Open a savings account –2. Open a checking account Co-signing = person agrees to be responsible for loan payments if the other party fails to make them.Co-signing = person agrees to be responsible for loan payments if the other party fails to make them.

17 Credit Problems Needs to be used wiselyNeeds to be used wisely Charge too much = can’t make paymentsCharge too much = can’t make payments May lose car in repossession if no payments are madeMay lose car in repossession if no payments are made Create a poor credit historyCreate a poor credit history May have to declare bankruptcyMay have to declare bankruptcy

18 Tips for Using Credit Try to reserve credit for meeting emergenciesTry to reserve credit for meeting emergencies Avoid using credit for goods and service that you want and not needAvoid using credit for goods and service that you want and not need Use credit for expensive purchases that last a long timeUse credit for expensive purchases that last a long time

19 Pay credit card charges off within the grace periodPay credit card charges off within the grace period Make payments on time to avoid costly late feesMake payments on time to avoid costly late fees Shop wisely for creditShop wisely for credit

20 Safeguarding Your Rating Valuable assetValuable asset The way you repay your debts will follow you for a long timeThe way you repay your debts will follow you for a long time

21 Improve Your Credit Rating Own your homeOwn your home Owning a carOwning a car Living in one place for many yearsLiving in one place for many years Having same job for many yearsHaving same job for many years Receive a report of your credit reportReceive a report of your credit report –TRW IS & S BAC –Box 2106 –Allen, Texas 75013

22 High School Students BEWAREBEWARE Credit card companies will send applications to those who may or may not have full time jobs and are unable to afford creditCredit card companies will send applications to those who may or may not have full time jobs and are unable to afford credit –Is it ethical for card companies to target this audience? –What are the pros and cons?

23 Activity Fill out applications for creditFill out applications for credit

24 Activity Go to the library and use financial calculators and borrow $2000 at 18.99%Go to the library and use financial calculators and borrow $2000 at 18.99% Monthly paymentsMonthly payments When debt is paid offWhen debt is paid off Cost of creditCost of credit