The Use of Credit

Credit

Credit is when money, goods, services are received with the promise to pay back in the future

3,000 yrs ago in Iraq

Credit

Keys Interest Fees

Types Open-ended credit (revolving

credit, line of credit) Closed-end credit (installment

credit)

Advantages of Using Credit

1. Convenience2. Used in times of emergencies3. Good form of identification4. Purchase expensive items soon5. Higher standard of living than can afford right

now (higher income in future)6. Take advantage of free credit7. Debt-consolidation: one payment 8. Pay back other debt that has higher interest

rates

Disadvantages of Using Credit

1. Interest (the price of credit) is costly

2. Additional fees are common (ATM fees, annual fees)

3. Tempting to overspend4. Privacy & identity theft is a

concern5. Reduces spending flexibility

Cost of Credit

Annual Percentage Rate (APR)The cost of credit on a yearly basis

Mandated by law to be publicized – best way to compare options

Often charged monthly: 1.5% per month (periodic rate) = 18% per year

Cost of Credit

Basis for Monthly ChargesUsually use average daily balance (p. 204)

Grace period?New purchases?

Minimum payments for open-endOften just barely higher than the finance

chargeLarge penalties if do not payRead “Advice from a Pro…” (p. 205)

Sample closed-end (p. 210)

Cost of Credit

Annual Percentage Rate (APR) You charge $100 on your credit card with a 24% APR. What is your yearly finance charge? What is your first month’s finance charge?

If you pay $25.00 on your first month payment, what is your balance the second month?

APR Practice

1. You decide to purchase a $700 plane ticket for your Spring Break vacation on your credit card. Your card charges 15% APR. What is the annual finance charge? What is your first month finance charge?

2a.William spends $200 on his Visa card. If he leaves this on his card that charges 18% APR, what is his first month finance charge? 2b. Calculate the remaining balance at the end of the month if he pays $25.

Bellringer - APR Practice

a.William spends $500 on his Visa to buy things for his new apartment. If he leaves this on his credit card that charges 18% APR, what is his first month’s finance charge (interest)? b. Calculate the remaining balance at the end of the month if he pays $75. c. After this payment, what would be his second month’s finance charge?

Tues, Apr 16

Credit Vocabulary (Ch.’s 6 & 7)

credit history default credit grace period introductory rate annual fees APR credit limitcash advance periodic ratefinance charge minimum payment

average daily balance closed end credit

credit score open end credit

Applying for Credit: the Six C’s

Character: Will you repay your loan?

Capital: What are your assets and net worth.

Capacity: Will you be able to pay your loan?

Collateral: What if you are unable to pay back your

loan?Conditions:

Current market conditionsCredit History

Have you used credit responsibly in the past?

Credit Scores (FICO)

Range from 340 – 850

Dependent on 5 key factors (p.

177)

Kept by 3 different organizationsShould be checked regularly – can get a free copy of your report (not your score) once a year

Managing and Protecting Your Credit

Regular FICO scores checksErrorsStolen Identity – very messy

Be careful on internetMany consumer credit protection laws

Truth in Lending ActEqual Credit Opportunity ActFair Credit Opportunity ActFair Credit Reporting actConsumer Credit Reporting Reform Act

Debt ProblemsCollection Agencies

Financial Counseling Services

Bankruptcy“Chapter 7” straight bankruptcy (liquidation)

“Chapter 13” wage earner bankruptcy (reorganization)

“Chapter 11” Corporate bankruptcy (reorganization)