1. Going Into Debt Americans and Credit

2. What is Credit? Credit: is the receiving of funds either directly or indirectly to buy goods and services now with the promise to pay for them later The amount owed is called debt

3. What is debt Debt is equal to the principal (money borrowed) + the interest which is the money you must pay for using someone else's money like a bank, store or credit card company

4. Installment Debt Consumers repay this type of debt with equal payments, or installments, over a period of time Ex. 36 equal payments over 36 months Durable Goods: these are often bought on installment loans because they will last much longer than it will take to pay off the debt The longer it takes to pay off the debt/loan the more expensive it is to purchase the item

5. Installment Debt Cont. A mortgage is the most common type of installment debt. It is owed on real property,-houses, buildings, or land Look at figure 4.2 to see how interest is applied to the principal of a loan over time

6. Why People Use Credit People buy goods on credit because the believe they require these items immediately Of course most things people buy on credit can wait until they have enough money to pay cash for them

7. Deciding to Use Credit The decision to borrow or use credit involves weather the borrower gets from the purchases is greater than the interest payments The benefit of borrowing is being able to buy and enjoy the good or service now rather than later The cost is whatever the borrower must pay in interest of lost opportunities to buy other items

8. Types of Financial Institutions Different Institutions offer different interest rates so before to shop around before you apply for a loan Commercial Banks: these institutions control the largest amounts of money and offer the widest range of services

9. Types of Financial Institutions Savings and Loan Associations: these institutions accept deposits and lend funds. They also finance commercial mortgages and auto loans They also offer savings and checking accounts as well The also provide interest rates that are often lower than banks

10. Types of Financial Institutions Cont. Savings Banks: First set up to serve small investors that were overlooked by commercial banks Credit Unions: A credit union is owned and operated by its members to provide savings accounts and low interest loans only to its members

11. Types of Financial Institutions Cont. Credit unions primarily make personal, auto, and home improvement loans, although larger credit unions offer home mortgages as well. Finance Companies: A finance company takes over contracts for installment debts from stores and adds a fee for collecting the debt. The consumer pays slightly higher interest than he/she would have paid the retailer

12. Finance Companies The borrower usually pays interest rates of 20% or higher People usually use these loan sharks because their credit is poor due to unpaid debts in the past Charge Accounts: allows a customer to buy goods or services from a particular company and pay for them later

13. Regular Charge Accounts Use have credit limits of 500.00 to 1000.00. This is the maximum amount you can borrow. No interest is charged but the entire bill most be paid on time or interest is charged on the unpaid amount and sometimes on the entire amount

14. Revolving Charge Accounts Revolving Charge Accounts: these allow you to make additional purchases from the same store even if the previous month’s bill is unpaid Installment Charge Accounts: Major items such as sofas, TVs, and refrigerators. Like mortgages the payments are spread in equal parts over time.

15. Credit Cards A credit card like charge account, allows a person to make a purchase without paying cash. The difference is that credit cards can be used at many kinds of stores, restaurants, hotels, and other businesses throughout the US and other countries

16. Credit Cards Cont. In order to make online purchases you have to have a credit card Visa, MasterCard, and others issue cards through banks This gives consumers access to loans at all times without having to apply for them The better your credit score the lower the interest rate and vise versa

17. Finance Charges and Annual Percentage Rates The terms finance charge and annual percentage rate tell the consumer the same thing-the cost of credit The finance charge is the cost of credit expressed in dollars and cents It must take into account interest costs plus any other charges connected with credit. i.e. membership fees and finance charges

18. Annual Percentage Rates The annual percentage rates (APR) is the cost of credit expressed as a yearly percentage The APR must take into account any noninterest cost of the credit such as membership fees Remember to go with the credit card company with the lowest interest rate

19. Debit Cards There is another method of payment, known as a debit card. This is not a loan and come directly out of your checking account

20. Applying for Credit Creditworthiness: Credit bureaus check your credit scores to investigate your credit history The investigation will reveal your income, any current debts, details about your personal life, and how well you have repaid debts in the past

21. The Credit Rating The information supplied by the credit bureau provides the creditor with a credit rating for you This is a rating of the risk good, average, or poor-involved in lending funds to a specific person or business

22. Capacity to Pay This is related to income and debt. It’s referred to as the debt to income ratio The amount of debt you’re already paying is a factor If your debt is large creditors will be reluctant to loan you more