Unit 7: Credit – You’re in Charge

Section 10.1- What is Credit?

Section 10.1- What is credit?Goals:

Identify reasons to borrow and the trade-offs you make when you borrow. Discuss how to plan: when and how much to borrow.

Key Terms

Credit Equity

What is credit?

Credit: the ability to borrow money in return for a promise of future repayment. Future repayment usually includes interest.

Example:

Suppose you use credit to buy a jacket for $100. If the interest rate is 15% per year, you must repay $115 at the end of the year.

$100 X 0.15 = $15 $100 + $15 = $115

You are really giving up $115 worth of future spending for the ability to spend $100 now.

Now let’s go shopping!

Congratulations, you have just been approved for your first credit card.

Go to the link below: http://www.channelone.com/life/swf_cre

dit/

Let’s compare each card to see what they offer, then we will go shopping!

When to borrow? Credit can help you buy things you want sooner

than you could get them by saving. Never borrow more money than you can easily

repay. Borrowing for your Goals:

1. For your Education- with a 4 year degree, people on average will earn $30,000 more per year throughout their working career. Borrowing for education makes good financial sense.

2. For your Health- if you become ill you may have to borrow to pay your living expenses until you can earn your salary again.

3. For your Home

Rules your borrowing

Basic rule of thumb is that your total debt payments should be no more than 20%-25% of your take home pay. (excluding housing costs)› For example if your net pay is $2,000 per

month your total debt payments should be no more than $500.

› $2,000 X 0.25 = $500

For your Home

Owning a home is a often a lifespan goal.

The average cost of a home is $245,000 and up to $450,000 in some areas.

Few people can pay for a home without borrowing.

By borrowing for a home, you get the benefit of living in it while you are making the loan payments.

Advantages of Home Ownership 1. An investment- home values can increase

over time which give you the opportunity to sell your home for more than you paid for it.

2. Equity- the difference between the amount you owe on a home and the home’s value.

If you own a home worth $250,000 and your mortgage is $200,000, how much equity to you have in your home? $250,000 (value) -$200,000 (mortgage) = $50,000 (equity)

3. Tax benefits: property taxes & mortgage interest are deductible on income tax forms.