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Chapter 6.1
Credit
Objectives
● Explain the advantages and disadvantages of using credit
● Identify the different types of consumer credit
● Describe secured and unsecured loans
● Describe how to establish a sound credit rating
● Describe situations in which it is smart to use credit and others in which it is not
● Explain what makes up the cost of credit
Question of the Day….
What percent of 18-29 year olds have a credit card?
Question of the Day….ANSWER
Article - Click Here
Article Questions1. How did your estimate compare with the actual answer?
2. Why do you think that only ⅓ of 18-29 year olds have a credit card?
3. Do you currently have a credit card? If not, do you think you will get one in the next few years? Why or why not?
4. In looking at the graph, what is the relationship between age and card ownership?
5. What do you think are the pros and cons of having a credit card?
Consumer Credit● Credit = a medium of exchange that allows individuals to buy goods or
services now and pay for them later
2 Parties Involved in Credit
Creditor Debtor / Borrower
Supplies to the other party:1. Money
2. Goods
3. Services
Agrees to make future payment by:1. Particular Date
2. According to an agreed-upon schedule
Types of CreditClosed-End
Definition - a loan for a specific amount that must be repaid with finance charges by a specified date
What’s included?
● Finance Charge - the total amount paid by a borrower to a lender for the use of credit
● Contract - a legally binding agreement between the borrower and the creditor
○ States the terms of the loan
● Principal - the amount of money borrowed
Open-EndDefinition - an agreement that allows the borrower to use a specific amount of money for an indefinite period of time
What’s included?
● Line of Credit - a preapproved amount of money that an individual can borrow
Guidelines?
● Makes payments ON TIME● Pays any finance charges/fees● Stays within borrowing limit
Types of LoansSecured
Definition - a loan that requires collateral (property that a borrower promises to give up in case of default)
Examples?
● Closed-End Credit○ Smaller risk for creditor○ Can take back property for debt
repayment● Installment Loans
○ A loan for a specific amount of money that is repaid with interest in regular installments
UnsecuredDefinition - a loan made on the strength of a signature alone
Examples?
● Open-End Credit○ Credit Cards○ Strong Credit Rating is needed
■ Co-signer - a responsible person who signs the loan with the person to whom the loan is granted. This person promises to repay to loan if the borrower fails to pay
Establishing Credit
Steps to take:
1. Start with a job - prove you can earn money
2. Open a savings account - shows financial responsibility & can be used as collateral
3. Open a checking account - shows you have experience in handling money
4. Get a Credit Card - gives a record of steady payments
Three C’s of Credit
1. Character
Based on your reputation & financial
history
2. Capacity
Your earning power and employment history
3. Capital
Financial worth
Creditworthy - having the assets, income and tendency to repay debt
Credit ReportsDefinition - a record of a person’s credit history and financial behavior
What’s included?
● Every credit account ever opened● Outstanding balances on current credit
accounts● Lists negative information
○ Delinquent or late payments○ Overdue taxes
Who keeps track?
● National Credit reporting agencies○ Equifax, Experian, TransUnion
Credit ScoresDefinition - a numerical measure of a loan applicant’s creditworthiness at a particular point in time
Also known as ….. FICO Score
● Fair Isaac Corporation - developed the rating system
● Calculated on 5 categories
Using Credit
Advantages:
1. Use of goods & services as you
pay for them
2. Opportunity to buy costly items
3. Source of cash for emergency or
unexpected expenses
4. Convenience and safety
5. Taking advantage of sales
6. Long-range Goals
Using Credit Disadvantages:
1. Reduction of future spendable
income
2. Expense
3. Temptation
4. Risk of serious consequences
Cost of Credit
1. Interest Rate Charged
2. Amount of Credit Used
3. Length of the repayment
period
Annual Percentage Rate (APR) the annual cost of credit a lender charges
3 Factors that determine the amount you pay for the use of credit:
Checkpoint 6.1
1. What are some items that consumers use credit to buy?
2. What are 4 common types of open-end credit?
3. List 1 advantage and 1 disadvantage of using credit.
4. List the 5 primary factors your credit score is based on.
5. What 3 factors determine the amount you pay in finance charges?
In your class folder & a new Google Doc, complete the
following with the Doc labeled as “Today’s Date Checkpoint 6.1”