Working Copy
Standard 3Students will understand
principles of money management.
• Objective 2– Understand credit uses and costs.
• Objective 3– Describe the impact of credit on
money management.
1
Working Copy
Credit
• A legal agreement to receive cash, goods, or services now and pay for them in the future.
• Interest: the cost you pay for using credit. (On credit card statements it’s called Finance Charge.)
2
Working Copy
Common Types of Credit
• Installment Loan: A loan in which the amount of payment and the number of payments are predetermined—monthly payments.– (Typically used for autos, appliances,
furniture…)– (Usually has a lower interest rate than
a credit card.)
3
Working Copy
Common Types of Credit
• Student Loan: Used for tuition and college expenses.– Usually has a lower interest rate than
an installment loan.– Federal government through college
institution.
4
Working Copy
• Credit Card: A plastic card that you can use to make purchases or obtain cash by using a line of credit. (Store cards generally have a higher interest rate than bank cards.)
– Grace Period: Time allowed in which you can pay off new purchases without being charged interest, usually 20 – 30 days.
– APR: Yearly interest rate for using credit.
– Credit Limit: Maximum amount you can charge.
Common Types of Credit
5
Working Copy
Common Types of Credit
• Mortgage Loan: Used specifically for home purchase.– (Usually has a lower
interest rate than an installment loan
– May provide an income tax break on interest paid.
– Usually repaid over 15 – 30 years.) 6
Did you know 61% of adults said their knowledge of credit reports is fair to poor?
Did you know only 3% of adults can name the three main credit reporting agencies? Can YOU?
Source: Consumer Federation of America
7
Working Copy
Credit Reporting Agencies
• EquiFax• Experian• TransUnion• www.annualcreditreport.com
8
Working Copy
Credit Reports and Scores
• Credit Report: A detailed record of how you have repaid your credit obligations.
• Credit Score: A number that reflects your creditworthiness, based on your credit report– Ranges from 300 to 850, the higher the better.– A score of 700 or above is considered good. A
score ranging between 730 and 850 qualifies for the best interest rate.
– A low score can result in a higher interest rate or denied credit approval.
9
Working Copy
Building Positive Credit--Students
• (Start with a checking account--Manage your checking account/debit card wisely)
• Qualify for overdraft protection (line of credit)
• Co-sign on a loan with parent (car loan, student loan…)
• Make a purchase using installment payments (tires…)
• Get one credit card or have your parents add you as an authorize user on their card. 10
Working Copy
Ways to Improve Your Credit Score
• ***Pay your bills on time. (Accounts for 35% of score.)
• Watch your balances. (When you exceed 50% of your credit limit, your FICO will suffer—30%.)
• Old and long are good. (Longer credit history is an asset—15%)
• Resist opening new accounts. (Too many inquiries—10%)
• Diversify. (Variety and type of loans—10%)
11
Working Copy
Concerning interest on debt…
Interest never sleeps nor sickens nor dies;
It never goes to the hospital;It works on Sundays and holidays;It never takes a vacation;It never visits or travels;It takes no pleasure;It is never laid off work nor discharged
from employment;It never works on reduced hours
12
Working Copy
The Cost of Using CreditSCENARIO:• Interest Rate 17%• Minimum Payment 2.5% or
$10.00Balance
Time to Pay Off
Interest Charged
Total Pay
$1,000.00
12 years $979.00 $1,979.00
$2,500.00
19 years $2,941.00
$5,441.00
$5,000.00
24+ years
$6,210.00
$11,210.0013
Working Copy
Cost of Credit
14
Working Copy
Ways to Lower Credit Cost
• Pay off loan early.• Pay extra or higher than
minimum payment due.• Look for the lowest interest
rate.• Set up loan for shortest time
period possible.
15