1. Using Credit Wisely Ch. 14

2. Understanding Costs  Before you can compute the cost of credit, you have to know four things:  The amount you are borrowing (the principal)  How much time you will take to repay it.  The rate of interest.  Fees and other charges.  THEN you can decide if you want to make the purchase using credit

3. Principal  Principal – the amount of money originally borrowed or still owed, on which interest is charged; also the amount of money deposited or invested, on which interest is credited.  EX: suppose you borrowed $12k for a car…as you make payments part of your payment goes to the interest on the loan and the rest goes to paying off the principal.

4. Time  When repayment is longer, monthly payments are usually smaller.  This usually means the total cost of your loan is HIGHER.  You can usually save a great deal of money if you opt for a shorter term to pay off your loan.

5. Interest Rates  On larger loans, a small change in the interest rate can have a drastic affect on the amount paid over time. This is why it is important to monitor the rates when making decisions regarding your investments and purchases.  For EX: on a 30 year home loan of $200K, if the interest rate goes from 6-8% the total cost for interest will increase by roughly $96K!

6. Fees and Other Charges  Finance Charges – cost you pay for using credit, including interest, late charges, etc.  Make sure when applying for credit you assess the fees associated with obtaining that credit!

7. Computing the Cost of Credit  1. Multiply the amount of your monthly payments X the number of months you will be paying off the loan.  2. Add the down payment (if any)  3. Subtract the price of the item if you had paid cash, or subtract the amount of cash you receive if you are getting a loan. The difference is the cost of using credit.

8. FOR EXAMPLE  Car Cash Price: $5,500  Down Payment: $500 (borrowing the rest)  Loan required monthly payments: $225/mth for 24 mths.  $225 x 24 months = $5,400  Plus down payment = + $500  Total amount paid $5,900  Less cash price of car – $5,500  Cost of using credit = $400

9. Understanding Contracts  You are required to sign a credit contract if you use credit.  Make sure to read and understand the contract BEFORE signing ANYTHING.

10. Qualifying for Credit  1. Fill out an application form. This information is personal and is used by the creditors to assess risk associated with lending you money.  How they assess risk:  1. Character – your willingness to pay your bills on time.  2. Capacity – your ability to pay your bills.  3. Capital – things of value, like your car.  Larger loans may ask for collateral. In this case you may be asked to provide a statement of your net worth. This will include your assets, and your liabilities.

11. Assets and Liabilities  Assets – Liabilities = your net worth  Assets – all of the things of value that you own  Liabilities – amounts that you owe.

12. Credit Bureaus  This is where creditors receive most of their information on you.  The 3 major credit bureaus are:  Equifax  Experian  TransUnion.  Credit Bureau – a for profit agency that collects and sells personal credit information about individuals.

13. Credit Bureaus Your Credit Information  The credit bureau obtains their consumer credit information from creditors such as banks, credit card companies, and other lenders. These Checking Your Credit Report  The Fair Credit Reporting Act requires each bureau to provide consumers with one free credit report every 12 months (credit scores may not be free).

14. Consumer Protection Laws  Several laws protect consumers in credit transactions.  Equal Credit Opportunity  Truth in Lending Act  Fair Credit Reporting Act  Fair Debt Collection Practices Act

15. CW – Due End of Class  You will work in pairs and research one of the laws listed on the last slide. You will need to answer the following:  1. Tell me the history of the Act  2. What do they do?  3. Why are they important?  4. Present to the class on Wednesday.  5. “Student-Teach” (10 min. max)  6. You MUST bring a 3 question quiz to class for the rest of the class to take after you present.