Credit Basics

Credit Issues

• We live in a society that wants everything now.

• The power of credit is what allows us to have what we want, when we want it.

• The pain of credit is what it will cost us in the future.

Plastic has become an American way of life.

Why Talk About Credit?

• Why are we talking about credit to teens?– 80 % of Teens between the age of

18-20 have credit cards.– In 2002 Teens in the U.S. spent

$179 Billion dollars– Many college students leave

college with $2000-$10,000 in credit card debt besides their student loans.

We are overextended.

• Utah ranks as the fourth-highest state in the amount of debt per capita and leads the nation in personal bankruptcy. The average age of the filer in Utah is 27.

The Simple (and Scary) Truth• In 2001, Americans charged up

more than $400 billion on their credit cards.– They were charged $50 billion in

interest.

• In 2003, one billion credit cards were in circulation.– The average household carried a

balance of $7500 on their cards from month to month, and paid 18.3% in interest ($950 a year).

Today –What’s going on?

• In January 2005 the average household had seven credit cards and carried a balance of $14,000.

The last day before the the new bankruptcy law took effect, more people filed for bankruptcy than in the total month of January.

Credit Basics

• What is credit?

• What are the costs of credit?

• What are the consequences of not paying credit as promised?

• What types of credit accounts are available?

• What is the difference between secured and unsecured credit?

Credit Basics

Credit: Allows the immediate use of products or services in exchange for a promise to pay in the future.

Credit Basics

• Interest: Cost of Credit

• Collateral: Security on a loan.

• Default: Failure to repay the loan.

• Bankruptcy: Legally getting out of having to repay debts; destroys credit rating for 10 years, admitting and accepting financial failure.

Types of Credit

3 main types:

1.Sales

2.Cash

3.Service

Types of Credit: Sales

I. Sales Credit is the credit you receive when you make a purchase now and promise to pay later.

A. Installment Credit– Specific number of payments of a set amount– Example: Mortgage and auto loans

B. Charge Accounts – -- Store tells you have much you can charge and sometimes there is no limit. A bill will be sent each month telling you how much you owe.

Types of Credit: Charge Accounts

a) Open Charge Account--• You pay the entire amount owed when you

get the bill• Example: American Express

b) Divided Charge Accounts• Amount due is divided into 3 equal monthly

payments • Sometimes call 90-day account or 90day no

interest accounts.

Types of Credit: Charge Accounts

c) Budget Account • Easy payment plans, you must pay a certain

amount each month until the balance is zero.

d. Revolving Credit• Payment is a certain percentage of what you

owe. You pay interest.

II. Cash Credit is credit you receive when you borrow cash and pay it back later.

A. Personal Loans can be installment or single payment loans. Usually to help you through some unforeseen emergency or a period of unexpected financial stress.a) Term or Single-Payment loan – Repayment

and interest are due in one lump sum 30,60.90,or 120 day from the date of securing the loan.

b) Installment Loan – Monthly payments of principle and interest one loan made over 36 month period.

c) Checking Account with Overdraft – Consumer arranges a credit limit with a bank, which is available to be drawn against, interest is taken, and up until consumer pays off the overdraft loan.

III. Service Credit

• Credit given for a service one’s family receives and pays for later.

• Examples: – Not pay-telephone, gas, electricity.– Doctor, dentist, or hospital at the end of

the month.

Advantages– Convenient– Useful for

emergencies– Often required to

hold a reservation– Purchase expensive

items earlier– Eliminate the need to

carry around large amounts of cash

Disadvantages

– Paying interest– Additional fees are common– Tempting to overspend– Responsible for lost/stolen

cards– Identity theft may occur easier– Can cause large amounts of

debt

Top 10 Reasons:Why People Use Credit

10. Education

9. Protection against rip-offs and frauds

8. Debt consolidation

7. To take advantage of free credit

6. To enjoy the good life

Top 10 Reasons:Why People Use Credit

5. To consume expensive products earlier

4. To make reservations

3. Identification

2. Emergencies

. . . And the Number One reason people use credit is:

1. Convenience

Installment Debt

• Should not exceed one third of your annual net income

List 4 places to go for credit.

1. Commercial Bank

2. Savings & Loan

3. Credit Union

4. Cash Value Life Insurance Policy

5. Cash Advance Credit Card

6. Finance company

7. Pawn Broker

“APR” is

• Annual Percentage Rate:

• The cost of a loan over a full year expressed as a percentage.

Credit Rating

• A rating determined by how promptly you paid past debts.

Ways to establish Credit:

1. Have checking and saving accounts

2. Use the lay away plans at local stores

3. Ask a merchant who knows you well to give you a line of credit

4. Many stores offer special teenage accounts if their parents have an account at the store

5. Make a big down payment

6. Get a cosigner for a loan.

Summary• Before using credit identify why you

are spending and if you can afford it.

• Consider how taking on new debts will affect your present obligations.

• Repay your debts to make credit work for you.

• Think before you use that card…do you have the money to pay the bill now? If not will you when the bill comes?