unit three—credit what is...

Unit Three—Credit �� What is Credit?��

Standard 4.2 Financial Literacy

Riverton High School Mrs. Morrey

OBJECTIVE:

Provide awareness and understanding of what credit is and the rights and responsibilities of using credit. •  Understand the reason for getting credit. •  Understand the advantages and disadvantages of

credit. •  Understand credit “worthiness”. •  Understand credit history and credit scores. •  Understand the three main types of consumer

credit.

American Credit Crisis •  13.1 billion open credit cards that currently

carry a balance •  Average American household has 13 credit cards

with balances •  Over 40% of Americans spend more than they

earn •  Ages 45-54 carry the largest credit card debt •  Alaska has the highest credit card debt in the

nation •  Men carry larger credit card balances than do

women

What is CREDIT?

CREDIT is the ability for a customer to receive goods and

services BEFORE payment based on “trust” that payment will be

made at a later date.

What is Credit

Why would someone need CREDIT?

•  Purchasing a home •  Purchasing a car •  Home improvements/repairs •  Paying for college—student loans •  Travel (airline tickets, rental cars, hotel rooms) •  Purchasing goods online (Amazon,

EBay, etc.) •  Medical bills

Why do banks issue CREDIT?

•  Banks extend credit to customers in order to make MONEY! – Interest paid on a loan is 100% profit for banking and lending institutions.

What is CREDITWORTHINESS?

An individual’s ability to

repay their debts.

How does a lending institution determine whether or not they will extend you

CREDIT?

Character

Conditions Capacity

Capital or Collateral

Four Cs of CREDIT

CHARACTER ��Will you repay the debt?

From your credit history, does it look like you posses the honesty and reliability to pay credit debts? •  Have you used credit before? •  Do you pay your bills on time? •  Can you provide character references? •  How long have you lived at your present

address? •  How long have you been at your present job?

CAPITAL & COLLATERAL �� What if you don’t repay the debt?

Do you have any valuable assets such as real estate savings or investments that could be used to repay credit debts if income becomes unavailable? •  What property do you own that can

secure the loan? •  Do you have a savings account? •  Do you have investments a collateral?

CAPACITY/CONDITION ��Can you repay the debt?

Have you been working regularly in an occupation that is likely to provide enough income to support your credit use? •  Do you have a steady job? What is your

salary? •  How many other loan payments do you

have? •  What are your current living expenses?

What are your current debts? •  How many dependents do you have?

CONDITIONS��What is the current state of

the economy? •  Unemployment Rates

– Number of working adults actively looking for a full time job

•  Interest Rates – The cost of borrowing money

Generally, when you first apply for credit you may be turned down because you have NO credit history—no record of you responsible repayment of debts. •  Other reasons you may be turned down:

–  Your income is not high enough –  You have not work at your job long enough –  You haven’t lived at your current address long

enough

What if you are turned down?

How to Build Credit

How do you establish CREDIT? •  Start small and build up

–  A local department store or bank credit card is a good first step.

•  Make small purchases using your credit card and pay the balance in full within the “grace period”.

•  Get a co-signer –  You can ask a parent, a family member or a friend

with an established history of good credit to cosign a loan or credit card application for you.

•  Make purchases and pay the balance in full within the “grace period.

•  Make sure you pay as agreed, since you are putting your cosigner’s good credit at risk.

Benefits of Having Good Credit

•  Lower interest rates on mortgages, car loans and credit cards

•  Increased credit card limits •  Ease of renting an apartment •  Ease of obtaining other loans (home and

car) •  Help in getting a job •  Better car insurance rates

Building Good CREDIT

o  ESTABLISH A STEADY WORK HISTORY o  Lenders will verify how long you have been working at your

place of employment—the longer the better o  PAY ALL BILLS PROMPTLY

o  Late payments, called delinquencies, negatively affect your ability to get credit since they indicate a stronger likelihood that you will make late payments again or will be unable to pay your debts in the future.

o  OPEN A CHECKING ACCOUNT o  Open a checking account and keep a positive balance in your

checking account—do NOT BOUNCE checks

Building Good CREDIT

o OPEN A SAVINGS ACCOUNT o Open a savings account and make regularly scheduled deposits

o APPLY FOR A LOCAL STORE CREDIT CARD o Apply for a local store credit card and pay the monthly

balance IN FULL to avoid interest charges o  Store credit card interest rates are generally twice as much as other

credit card rates

o GET A CO-SIGNER ON A LOAN o Have someone co-sign on a loan and pay the loan back on

time or early

What is on a CREDIT REPORT? •  Personal Data

–  Name, address, date of birth, social security number –  Employment (current and past jobs and how long you were employed at each

job) •  Credit History

–  Number of loans and credit accounts open and closed, payment history and account balances

•  Credit Cards •  Mortgages •  Car Loans •  Student Loans

•  Collections Debt collector generally is a person or a company that regularly collects debts owed to others, usually when those debts are past-due. –  Any accounts turned over to a collection agency –  Income garnishments--income garnishment is when a court issues an order

requiring your employer to withhold a certain amount of your paycheck and send it directly to the person or institution to whom you owe money, until your debt is paid off.

Credit experts recommend you check your credit ONCE A YEAR! freecreditreport.com

Credit History & Score

Good Credit Score FICO Credit Score

Advantages and Disadvantages of Credit

Advantages •  Able to buy needed items

NOW •  Don’t have to carry cash •  Creates a record of

purchases •  More convenient than

writing checks •  Consolidates bills into

one payment

Disadvantages •  Interest (pay more for

the item) •  May require additional

fees •  Ease of access. Leading

to overspending and excessive debt

•  Increased impulse buying may occur

Should they use credit?

Fran and Bud recently found themselves in the middle of a terrible wind storm. During the course of the storm, the wind and rain damaged the roof the their home. The roof was in bad repair and was leaking, leaving the possibility of water damage in their home. Fran and Bud do not have the cash to fix their roof. Should Fran and Bud take out a loan for the roof repair?

Patrick is planning for his senior prom. He is taking the girl he has been dating since homecoming. He would like to take her to a nice restaurant before the dance, but he only has enough money in savings to rent his tux and buy the tickets to the dance. Dinner at the dance is included in the price of the prom tickets, but he really wants to go to a fancy dinner. He recently got a credit card to use for emergencies. Should he use the credit card to buy dinner?


Carla graduated from high school and is halfway through a program to become a dental hygienist. She expects to earn about $55,000 after she graduates, but right now she needs a student loan to finish the last year of her associate’s degree. She is confident that her summer internship in a dentist’s office will lead to a full-time job.


Joe’s car is becoming increasingly unreliable. Twice in the past month, he has paid for expensive repairs. Joe drives almost 20 miles to work each way, and public transportation is not located close to his house or job. He has been saving to buy a more reliable car, but the repair bills have kept him from saving in the past month. He has found a reliable used car. When he talked to the loan officer at his bank, he found that he could get a loan with payments that are well within his budget.


Alex has collected comic books for years. He regularly attends conventions and trade shows and is knowledgeable about the books’ value on the open market. At the latest show, a dealer that he knows well showed him a particularly rare edition that is in mint condition. The dealer has offered him a fair price, and Alex expects the value to increase steadily over the next several years. Alex does not have the money right now, but if he charges the purchase, he can pay off the balance in three months and pay less than $5.00 in finance charges.


Susan graduated from college last month, and she has a great new job. She has just moved into her new apartment and bought some furniture. She has been driving the same car since her freshman year, but it is still in good shape. She would like to buy a new car, but the furniture purchase used up her savings. She could still get a loan, but she will have to finance the car for 72 months, resulting in several thousand dollars in extra finance charges.


Marcia loves to cook. She enjoys making gourmet meals that require expensive and rare ingredients. Marcia does not have the cash to pay for the ingredients to make her gourmet meals. Should she use her credit card to purchase her groceries?


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