Unit 4 Credit

Good Debt, Bad Debt: Using Credit Wisely

Unit Objectives:
● Know what is credit
● Types of credit
● Know 4 C’s of credit
● Know advantages & disadvantages of credit
● Know how to apply for credit
● Be able to understand your credit bill
● Explain credit scores from credit reporting agencies
● Understand credit card debt

What is Credit?
Credit--
is the amount of money or something of value that is loaned on trust with the expectation
value that is loaned on trust with the expectation it will be repaid later to lenders
List uses of credit--
personal, car loan, student loan, home loan,
Principal--
the amount you actually borrow
Interest--
the amount you pay to use someone else's money.
What are the types of credit?
● Credit Card—
borrow up to a predetermined limit
● Installment Loan—
borrow cash to be repaid by a specific date
● Student Loan--borrow to pay tuition
● Mortgage Loan--borrow money for a major purchase to be repaid in regular….
Where can you get credit from (sources of credit)?
● banks
● credit unuons
● department stores
● automobile dealers
● oil companies( for gas stations)
● Federal Government

What is the difference between installment credit and revolving credit?

● Installment Credit—
● fixed payments
● set period of time to repay
● set or varying interest rates
● car loans and home loans are typical examples
 Unit 4 Credit
Good Debt, Bad Debt: Using Credit Wisely
● Revolving Credit—
● no stated payoff time
● limit to credit
● minimum monthly payments
● interest rates vary or not
● finance charges
● credit card most typical example

What are the 4 C’s of Credit?

● Collateral—asset of value that lenders can take if you don't pay (secured
loan)
● Capital—personal items of value (stocks)
● Capacity—ability to repay the loan ( job history)
● Character—History of paying bills ( credit score)

10 Questions to Ask before signing on the dotted line

1. Do I really need this item right now, or can I wait?
2. Can I qualify for credit?
3. What is the interest rate (APR) on this card?
4. Are there additional fees?
5. How much is the monthly payment, and when is it due?
6. Can I afford to pay the monthly payments?
7. What will happen if I don't make the payments on time?
8. What will be the extra cost of using credit?
9. What will I have to give up to pay for it?
10. All things considered, is using credit worth it for this purchase?

Credit Terms
● Annual Percentage Rate (APR)--
is the total cost to use credit in a year

● Credit Limit--
the maximum amount of credit a lender will extent a customer

● Finance Charge--
the actual dollar cost of using credit to maintain a balance

● Fees--
are charged to use credit. Example, annual credit card fee, loan or

● Loan Term—
is how long you have to repay a loan, often expressed in months

● Grace Period--
length of time you have before you start accumulating interest
 Unit 4 Credit
Good Debt, Bad Debt: Using Credit Wisely

● Over-the-Limit Fee--
spending more than your credit limit. fee that is applied

● Late Fee--
penalty for making a payment after the due date

● Universal Default--
allows a credit card company to increase your interest rate if you make just one late
payment

● Debt--
total amount of money owed to others

What are the advantages of using a credit card?

– convenient
– Useful for emergencies
– Often required to hold a reservation
– Purchase ‘big ticket’ items earlier
– Easy form of debt consolidation
– Protection against rip-offs and fraud
– Establish a good credit rating
– Quicker gratification

What are disadvantages of using a credit card?

– interest is costly
– Additional fees are common
– Tempting to overspend
– Privacy is an increasing concern
– Personally responsible for lost/stolen cards
– Identity theft easier
– Can lose financial freedom from overspending

What things do you need to have when applying for credit?

• social security number
• drivers license number
• Date of birth
• address and phone number
• Name of employer
• monthly income amount
• ___________ monthly payment on other _________
• Amount of ______ or ______________ payment
 Unit 4 Credit
Good Debt, Bad Debt: Using Credit Wisely

Understanding the Bill

Charges, payments, and credits –
The transactions which occur with
the use of a credit card
Important to keep receipts to
compare them to the bill for
accuracy
Closing date – Last day for
transactions to be reported on the
statement

Finance charge – Charges

assessed for credit card use
Minimum payment due – The
minimum amount to be paid
If this amount is paid and a balance
is left on the account, additional
finance charges will be included in
the following month’s balance
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Good Debt, Bad Debt: Using Credit Wisely

Due date – The day by which the

company requires a payment to be
made
Past due amount – The required
amount not paid before the due
date Balance transfer – Transfer the
New balance – The total amount balance from one card to another
owed on a credit card Companies will advertise a
Credit Line – The maximum lower interest rate for balance
amount of charges allowed to an transfers
account These are often introductory
Over the limit fee – credit card rates and will only last for a
companies will charge consumers a short time
fee if they charge over their limit
within one month

Credit Scores
Credit History--a RECORD of your BEHAVIOR related to borrowing and repaying
loans.
Credit Report--a detailed DETAILED of your personal credit and financial transactions
Credit Score--a RATING used by credit reporting companies to help REPORTS decide
whether and/or how much CREDIT can be EXTENDED to a BORROWER.
● FICO Score (Fair Issac Corporation)—they determine your credit score. You
are entitled TO ONE free report each YEAR from ______ of the credit reporting
agencies. FICO Score ranges from 300-850 (good is 680)

How Credit Scores are Determined

● Your PAYMENT HISTORY
– INFORMATION about how you make your payments on credit cards, store
accounts, car loans, finance companies, mortgages
– Accounts in collection or PAST DUE, and how long past due
– Information in _________ records, such as bankruptcy, judgments, liens, wage
attachments or child support
● Your OVERALL DEBT
– How much you OWE on all your accounts
– How much CREDIT you have AVAILABLE to use
● Your CREDIT ACCOUNT HISTORY
– When you OPENED and USED each of your accounts
– How recently you APPLIED for new credit
– Recent GOOD credit history following past payment PROBLEMS
● TYPES OF CREDIT
– The DIFFERENT types of credit accounts you have
 Unit 4 Credit
Good Debt, Bad Debt: Using Credit Wisely
– The TOTAL number of accounts you have

Who looks at your credit report?

● LENDERS
● LANDLORDS
● SOME BUSINESSES
● EMPLOYER

List the 3 main credit reporting agencies

● EQUIFAX
● EXPERIAN
● TRANSUNION
– You are entitled to one free report each year.
– Scores range from 300 – 850 (good is 680)

Protect Yourself Against Inaccurate Credit Reports

● Get a copy of your FREE credit reports from all credit rating agencies.
● EXAMINE it thoroughly.
● If you find something that is INCORRECT, ask the agency to INVESTIGATE the
information.
● If that doesn’t resolve the issue, you can ATTACH a short statement to your
credit report.

Get and Keep a Good Score

● Make sure your credit report is _______________.
● ______ all your ________ on _______.
● Apply for ___________ only when you ________ it.
● ________ the ____________ on all your credit accounts.
● _____ off ________ rather than moving it around.
● Maintain a ______ balance on one card and _____ it off each month.
● Don’t use more than _______ of the credit limit

Tips for Using Credit:

● The HIGHER the interest rate and the longer the loan term, the HIGHER the
cost of credit.
● Making MINIMUM payments RAISES the cost of whatever you bought in
the first place and can take a LONG time to pay off.
● Charging SMALL, everyday purchases will come back to HAUNT you if you
don’t pay your credit card BALANCE at the end of every month.
● Having too much available credit or debt for your income level will make you
look RISKY to a lender.
● You should pay AS MUCH AS YOU CAN every month.
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Good Debt, Bad Debt: Using Credit Wisely
● Arrange for AUTOMATIC payments for your monthly bills so you don’t
make late payments.
● Always read the FINE PRINT of a credit application.

Safety tips
● Sign card with a signature and “______________________”
● Do not leave _________ lying around
● ________ unused accounts in __________ and by _______, then ____ up the card
● Do not give out _____________ numbers unless making purchases
● Keep a _______ of all cards, account numbers, and phone lists separate from
cards
● __________ lost or stolen cards promptly
● If a consumer is a victim of identity theft, _____ all major credit bureaus to
request a “_______________” be put on file

Tackle credit card debt

● Put away the _____________
● Create a ______________ plan
● Pay the ______________ interest rate first
● Contact your _____________ and ask for ______

Bankruptcy
Bankruptcy is a LEGAL process to get out of DEBT when you can NO longer make all
your REQUIRED payments.
Chapter 7 – _________ most of your _______ and you must go to ________ counseling
Chapter 13 – allows you to repay ________ over time (usually no more than ____ years)
through the ___________

Fair Debt Collection Practices Act

● Protects you from harassment by creditors
● Creditors can’t:
– Use ABUSIVE language
– Call at UNREASONABLE hours or EXCESSIVE number of times
– THREATEN to notify your EMPLOYER or friends
– Attempt to COLLECT more than you owe
– Send you MISLEADING letters

Financial Consequences of Debt

● Could put you in a state of _______________ and perpetual debt, where you get
used to carrying a __________ and paying extremely ______ interest rates.
 Unit 4 Credit
Good Debt, Bad Debt: Using Credit Wisely
● Could adversely affect your credit rating, making it _________ to get ______
when you really need them.

Don’t forget the 70-20-10 Rule

____ Living Expenses
____ Save or Invest
____ Pay off Debt

Adding It All Up: An Understanding of Credit comes down to 4 things:

1. KNOW THE REAL COST OF DEBT
2.DONT USE CREDIT TO LIVE BEYOND YOUR MEANS
3.ITS ALL ABOUT THE DETAILS
4.PAY AS MUCH AS YOU CAN, AS EARLY AS YOU CAN