Bellwork 1-1Bellwork 1-1

What is your definition of credit?What is your definition of credit?

List 3 forms of credit of which you List 3 forms of credit of which you know. know.

How can credit be misused?How can credit be misused?

Protecting Personal CreditProtecting Personal Credit

Unit 8Unit 8

Objective 7.02Objective 7.02

What is Credit?What is Credit?Obtaining goods and services with a Obtaining goods and services with a promise to pay for them from future promise to pay for them from future incomeincomeA temporary money substitute since it A temporary money substitute since it allows a person to buy today and pay allows a person to buy today and pay tomorrowtomorrowCredit involves two parties, a lender and a Credit involves two parties, a lender and a borrowerborrowerCan be a valuable resource when used Can be a valuable resource when used wiselywisely

Types of Consumer CreditTypes of Consumer Credit

Sales creditSales credit-credit to purchase -credit to purchase goods and services from retailersgoods and services from retailers– 3 Types:3 Types:

Regular charge accountRegular charge account– Borrower promises to pay in full within 20-30 daysBorrower promises to pay in full within 20-30 days– If not paid in time, there is a finance chargeIf not paid in time, there is a finance charge– Example: Accounts with utility companies Example: Accounts with utility companies

Types of Consumer CreditTypes of Consumer CreditSales CreditSales Credit– 3 Types (Cont):3 Types (Cont):

Installment accountInstallment account– Borrowers agree to schedule of payments of Borrowers agree to schedule of payments of

equal dollar amounts, including interestequal dollar amounts, including interest– Creditors hold the title or “own” the merchandise Creditors hold the title or “own” the merchandise

until payments are complete.until payments are complete.– Borrowers typically asked to sign a written Borrowers typically asked to sign a written

contractcontract– A small down payment may be requiredA small down payment may be required– Examples: Accounts used to purchase appliances Examples: Accounts used to purchase appliances

and furniture and furniture

Types of Consumer CreditTypes of Consumer CreditSales CreditSales Credit– 3 Types (Cont):3 Types (Cont):

Revolving credit accountRevolving credit account– Borrowers may choose to pay in full each month Borrowers may choose to pay in full each month

or spread payments over timeor spread payments over time– A minimum payment (a percentage of unpaid A minimum payment (a percentage of unpaid

balance) must be made each monthbalance) must be made each month– Unpaid balance may be carried overUnpaid balance may be carried over– A finance charge is applied to the unpaid balance. A finance charge is applied to the unpaid balance.

– The lender sets a credit limit for the borrowerThe lender sets a credit limit for the borrower– Examples: Retail stores (Target, Sears); credit Examples: Retail stores (Target, Sears); credit

card issuers (Visa, MasterCard)card issuers (Visa, MasterCard)

Types of Consumer CreditTypes of Consumer Credit

Cash creditCash credit-money granted to use for a variety -money granted to use for a variety of purposes; may be secured or unsecured; may of purposes; may be secured or unsecured; may be installment, single-payment, or credit be installment, single-payment, or credit card/check credit loanscard/check credit loans– Unsecured loansUnsecured loans

Require borrower’s signature as evidence of agreement Require borrower’s signature as evidence of agreement with terms of the loanwith terms of the loanNo collateral requiredNo collateral requiredGenerally available for borrowers with a good credit historyGenerally available for borrowers with a good credit history

– Secured loansSecured loansRequire some form of collateral (property) to secure the Require some form of collateral (property) to secure the loanloanCollateral reduces lender’s risk; can take property if the Collateral reduces lender’s risk; can take property if the borrower does not repayborrower does not repayA cosigner can sign the loan if a borrower has neither A cosigner can sign the loan if a borrower has neither collateral nor good creditcollateral nor good creditCosigner typically has good credit and agrees to pay if Cosigner typically has good credit and agrees to pay if borrower fails to repayborrower fails to repay

Types of Consumer CreditTypes of Consumer Credit

Cash CreditCash Credit– 3 Types3 Types

Installment loansInstallment loans– Provide a specific amount of money with promise Provide a specific amount of money with promise

of repayment with interest according to a of repayment with interest according to a schedule of monthly payments in a set amount schedule of monthly payments in a set amount

Single-payment loansSingle-payment loans– With collateral, provide a specific amount of With collateral, provide a specific amount of

money with the promise of repayment with money with the promise of repayment with interest in a single payment at a specified time. interest in a single payment at a specified time.

Types of Consumer CreditTypes of Consumer CreditCash CreditCash Credit– 3 Types (Cont):3 Types (Cont):

Credit card/check credit loansCredit card/check credit loans– Allow borrowers to use their credit cards to obtain Allow borrowers to use their credit cards to obtain

money or write a check connected to the card money or write a check connected to the card account knowing the bank will cover up to a given account knowing the bank will cover up to a given maximum amount; borrowers repay with interestmaximum amount; borrowers repay with interest

– 3 Types of Credit Cards:3 Types of Credit Cards:Company or retail store credit card loan (ex. Company or retail store credit card loan (ex. Sears)Sears)Travel and entertainment credit card loan (ex. Travel and entertainment credit card loan (ex. Motel 6)Motel 6)General-purpose credit card loan (ex. Credit General-purpose credit card loan (ex. Credit Union)Union)

Credit Types AssignmentCredit Types AssignmentYou are to find 3 examples of each of the You are to find 3 examples of each of the following types of credit:following types of credit:– Regular Charge Account (ex. Light Bill)Regular Charge Account (ex. Light Bill)– Installment Account/Loan (ex. Car Loan)Installment Account/Loan (ex. Car Loan)– Revolving Accounts:Revolving Accounts:

Retail Credit Card (ex. Lowe’s Hardware)Retail Credit Card (ex. Lowe’s Hardware)Travel/Entertainment Credit Card (ex. American Travel/Entertainment Credit Card (ex. American Airlines/Motel 6/Exxon)Airlines/Motel 6/Exxon)General Purpose Credit Card (ex. VISA, MasterCard)General Purpose Credit Card (ex. VISA, MasterCard)

– Single Payment Account (ex. Repay a neighbor for home Single Payment Account (ex. Repay a neighbor for home repair)repair)

For each example answer the following:For each example answer the following:– Name of Financial InstitutionName of Financial Institution– What is the Interest Rate? Is it Fixed or Variable? What is the Interest Rate? Is it Fixed or Variable? – Term (how long is the loan?)Term (how long is the loan?)– Is it Secured or Unsecured?Is it Secured or Unsecured?– If Secured, what it the Collateral? If Secured, what it the Collateral?

Complete in PowerPoint and submit to Edmodo by Complete in PowerPoint and submit to Edmodo by end of class. end of class.

Bellwork 1-2Bellwork 1-2Which purchase is most suitable for installment Which purchase is most suitable for installment credit?credit?– A. Fast food mealA. Fast food meal– B. Pair of movie ticketsB. Pair of movie tickets– C. RefrigeratorC. Refrigerator– D. Gas for the carD. Gas for the car

Which is Which is MOSTMOST suitable use of revolving credit? suitable use of revolving credit?– A. Buying a new automobileA. Buying a new automobile– B. Buying new furniture for a bedroomB. Buying new furniture for a bedroom– C. Paying for electrical power for the past monthC. Paying for electrical power for the past month– D. Shopping for clothes in a retail department storeD. Shopping for clothes in a retail department store

Credit applications usually request income Credit applications usually request income information as evidence of a borrower's:information as evidence of a borrower's:– A. capacity.A. capacity.– B. capital.B. capital.– C. character.C. character.– D. credit.D. credit.

Advantages and DisadvantagesAdvantages and Disadvantagesof using Creditof using Credit

AdvantagesAdvantages– Can be used to purchase a Can be used to purchase a

variety of goods and variety of goods and servicesservices

– Frees consumers from Frees consumers from having to carry cash to having to carry cash to make purchasesmake purchases

– Enables consumers to Enables consumers to make purchases online make purchases online and over the telephoneand over the telephone

– Initially expands Initially expands borrower’s incomeborrower’s income

DisadvantagesDisadvantages– Typically pay more for Typically pay more for

goods and services goods and services because of finance because of finance charges (interest and fees)charges (interest and fees)

– Retailers increase prices Retailers increase prices to cover costs associated to cover costs associated with accepting credit and with accepting credit and paying bad debts paying bad debts

– Limits current buying Limits current buying power as income is power as income is required to repay old required to repay old debtsdebts

– Must protect credit cards Must protect credit cards from unauthorized usefrom unauthorized use

Advantages and DisadvantagesAdvantages and Disadvantagesof using Creditof using Credit

AdvantagesAdvantages– Makes recordkeeping of Makes recordkeeping of

purchases simplerpurchases simpler– Usually makes returning Usually makes returning

items easieritems easier– When used responsibly, When used responsibly,

helps establish good helps establish good creditcredit

– Having the means to Having the means to pay for emergencies pay for emergencies provides a sense of provides a sense of comfortcomfort

DisadvantagesDisadvantages– May lead to impulse May lead to impulse

purchasespurchases– May lead to May lead to

overspendingoverspending– May lose track of how May lose track of how

much is actually being much is actually being spentspent

– If debts not repaid, If debts not repaid, merchandise may be merchandise may be repossessed by repossessed by creditorscreditors

Advantages and DisadvantagesAdvantages and Disadvantagesof using Creditof using Credit

AdvantagesAdvantages– Allows use of goods and Allows use of goods and

services before or while services before or while paying for thempaying for them

– Allows consumers to Allows consumers to purchase expensive purchase expensive items they would not items they would not otherwise be able to otherwise be able to purchase with cashpurchase with cash

– Good credit indicates Good credit indicates that a consumer is that a consumer is responsible financiallyresponsible financially

– Convenient to useConvenient to use

DisadvantagesDisadvantages– If debts not repaid, If debts not repaid,

credit may be damagedcredit may be damaged– If credit rating becomes If credit rating becomes

poor, could impact their poor, could impact their ability to get credit in ability to get credit in the futurethe future

– Bad credit indicates Bad credit indicates that consumers are that consumers are irresponsible and irresponsible and untrustworthy when it untrustworthy when it comes to financescomes to finances

– Credit not always Credit not always available because some available because some retailers don’t accept retailers don’t accept creditcredit

Establishing CreditEstablishing CreditCreditors only lend to people who can be Creditors only lend to people who can be expected to pay them backexpected to pay them backCreditors look at credit-related information Creditors look at credit-related information to determine if one is a good riskto determine if one is a good riskA creditor’s evaluation of one’s ability and A creditor’s evaluation of one’s ability and willingness to repay debts is a credit ratingwillingness to repay debts is a credit ratingCredit ratings are based on 3 CsCredit ratings are based on 3 Cs– Character---a person’s reputation for being Character---a person’s reputation for being

honest and their financial historyhonest and their financial history– Capacity---a person’s employment history and Capacity---a person’s employment history and

ability to earn moneyability to earn money– Capital---a person’s financial worthCapital---a person’s financial worth

Establishing CreditEstablishing Credit

Ways to establish creditWays to establish credit– Open/manage checking/saving accountsOpen/manage checking/saving accounts– Pay utility bills in your namePay utility bills in your name– Obtain a credit card from a local storeObtain a credit card from a local store– Get help from a cosignerGet help from a cosigner– Obtain a secured credit cardObtain a secured credit card

Establishing Credit AssignmentEstablishing Credit AssignmentGo to: Go to: http://www.practicalmoneyskills.com/personalfinance/creditdebt/historyhttp://www.practicalmoneyskills.com/personalfinance/creditdebt/history//On the “Credit History” Section answer:On the “Credit History” Section answer:– What is Credit History?What is Credit History?– Who can see your Credit Report?Who can see your Credit Report?– Who are the 3 Credit Bureaus? Who are the 3 Credit Bureaus?

On the “Credit Scores” Section answer:On the “Credit Scores” Section answer:– What score range is considered “Poor”?What score range is considered “Poor”?– What score range is considered “Fair”?What score range is considered “Fair”?– What score range is considered “Good”?What score range is considered “Good”?– What score range is considered “Excellent”?What score range is considered “Excellent”?– List 3 ways to keep your credit score strong.List 3 ways to keep your credit score strong.

On the “Your Credit Report” Section answer:On the “Your Credit Report” Section answer:– How often can you request a free credit report?How often can you request a free credit report?– List and describe the 5 parts to a credit report.List and describe the 5 parts to a credit report.

On the “Three C’s of Credit” Section answer:On the “Three C’s of Credit” Section answer:– How do lenders judge character?How do lenders judge character?– How do lenders determine your capacity?How do lenders determine your capacity?

Based on your notes, what method/s would you choose to establish Based on your notes, what method/s would you choose to establish your credit? Write a 50 word essay explaining your reasons. your credit? Write a 50 word essay explaining your reasons. Put in PowerPoint and submit to Edmodo by end of class. Put in PowerPoint and submit to Edmodo by end of class.

Bellwork 1-3Bellwork 1-3An An ADVANTAGEADVANTAGE of using credit is the: of using credit is the:– A. increase of debt resulting from credit use.A. increase of debt resulting from credit use.– B. payment of interest on the amount borrowed.B. payment of interest on the amount borrowed.– C. potential to misuse credit and spend too much.C. potential to misuse credit and spend too much.– D. use of goods and services while making payments.D. use of goods and services while making payments.

A A DISADVANTAGEDISADVANTAGE of using credit is: of using credit is:– A. buying items at a low price on sale.A. buying items at a low price on sale.– B. having a source of cash for emergencies.B. having a source of cash for emergencies.– C. the convenience of paying on the Internet.C. the convenience of paying on the Internet.– D. the payment of interest on the amount borrowed.D. the payment of interest on the amount borrowed.

Jose is nineteen and is trying to establish credit. Jose is nineteen and is trying to establish credit. What should he do?What should he do?– A. Borrow a friend's credit cardA. Borrow a friend's credit card– B. Fill out a college applicationB. Fill out a college application– C. Get a loan from his parentsC. Get a loan from his parents– D. Get a secured credit card from a financial institutionD. Get a secured credit card from a financial institution

Loan SourcesLoan SourcesPreferred lendersPreferred lenders– Most reliable lendersMost reliable lenders– Examples: banks, credit unions, savings and Examples: banks, credit unions, savings and

loan associations, consumer finance loan associations, consumer finance companies, insurance policy loans, credit card companies, insurance policy loans, credit card companies, private loanscompanies, private loans

Non-preferred lendersNon-preferred lenders– May take advantage of people with poor credit; May take advantage of people with poor credit;

typically charge high interest ratestypically charge high interest rates– AKA “Sub-Prime Lenders” or “Predatory AKA “Sub-Prime Lenders” or “Predatory

Lenders”Lenders”– Examples: “payday” lenders, pawnbrokers, Examples: “payday” lenders, pawnbrokers,

loan sharks, auto title loan lenders, tax refund loan sharks, auto title loan lenders, tax refund loanloan

Considerations When Shopping for Considerations When Shopping for LoansLoans

Conditions of loansConditions of loans– Annual feesAnnual fees– Annual percentage rate (APR)---the amount Annual percentage rate (APR)---the amount

and whether it changesand whether it changes– Method used to calculate interestMethod used to calculate interest– Minimum paymentMinimum payment– Grace periodGrace period– Minimum finance charge and other feesMinimum finance charge and other fees– Credit limitCredit limit– Special features and servicesSpecial features and services

Considerations When Shopping for Considerations When Shopping for LoansLoans

Cautions when seeking loansCautions when seeking loans– Always “read the fine print” and know the terms of loans Always “read the fine print” and know the terms of loans

before signingbefore signing– Consider if this would be wise or unwise use of creditConsider if this would be wise or unwise use of credit– Remember that, once signed, borrowers are bound by Remember that, once signed, borrowers are bound by

the terms of the agreementthe terms of the agreement– Consumers can apply for loans in person, online, over Consumers can apply for loans in person, online, over

the telephone or in writingthe telephone or in writing– Typically, provide information about income, Typically, provide information about income,

employment history, residence, credit historyemployment history, residence, credit history– The lender will likely run a credit check. The lender will likely run a credit check. – If approved, borrowers may have right to rescission If approved, borrowers may have right to rescission

(cancel) within three days if they choose; a provision of (cancel) within three days if they choose; a provision of the Truth in Lending Actthe Truth in Lending Act

Maintaining Good CreditMaintaining Good CreditEvaluate the need to borrow. Can the purchase Evaluate the need to borrow. Can the purchase be avoided, delayed or bought on lay-away?be avoided, delayed or bought on lay-away?Identify and use the right type of credit for the Identify and use the right type of credit for the intended purchase and shop for the best termsintended purchase and shop for the best termsKnow how you will pay it back before you borrowKnow how you will pay it back before you borrowOnly use the amount of credit that you can afford Only use the amount of credit that you can afford to repayto repayMeet all the terms of credit contracts and Meet all the terms of credit contracts and agreementsagreementsKeep accurate records of charges, statements, Keep accurate records of charges, statements, and paymentsand paymentsConsult creditors immediately if you cannot pay Consult creditors immediately if you cannot pay on timeon timeResolve billing errors promptlyResolve billing errors promptly

Credit ReportsCredit ReportsA credit report is like a report card reflecting how A credit report is like a report card reflecting how well a person has used credit resourceswell a person has used credit resourcesCredit reporting agencies maintain records on Credit reporting agencies maintain records on how people manage their credit accountshow people manage their credit accountsEquifax, Experian, and TransUnion are three Equifax, Experian, and TransUnion are three national credit-reporting agenciesnational credit-reporting agenciesContains information about employment history, Contains information about employment history, credit accounts, balances, payment patterns credit accounts, balances, payment patterns Consumers should check each of the three credit Consumers should check each of the three credit reports annually to verify accuracyreports annually to verify accuracyThe Fair Credit Reporting Act---can get a free The Fair Credit Reporting Act---can get a free copy of credit reports every 12 monthscopy of credit reports every 12 monthsThe FTC site http://www.ftc.gov/freereports The FTC site http://www.ftc.gov/freereports explains how to obtain the free reportsexplains how to obtain the free reports

Lender Types AssignmentLender Types AssignmentGo to: http://relistr.com/real-estate/prime-loan-vs-subprime-Go to: http://relistr.com/real-estate/prime-loan-vs-subprime-loan.htmlloan.html– What is a “Prime Loan”?What is a “Prime Loan”?– What is “Subprime Lending”?What is “Subprime Lending”?– What are “Subprime Borrowers”?What are “Subprime Borrowers”?– What are “Subprime Lenders”?What are “Subprime Lenders”?

Go to: http://relistr.com/real-estate/avoid-being-a-victim-of-Go to: http://relistr.com/real-estate/avoid-being-a-victim-of-predatory-lenders.htmlpredatory-lenders.html– What is “Predatory Lending”?What is “Predatory Lending”?– List and describe the 8 ways to “Avoid Predatory Lenders”. List and describe the 8 ways to “Avoid Predatory Lenders”.

Go to: http://www.forbes.com/2007/02/02/credit-score-fico-pf-Go to: http://www.forbes.com/2007/02/02/credit-score-fico-pf-ie-in_cc_0202creditscore_inl.htmlie-in_cc_0202creditscore_inl.html– Write a 50 word summary of this articleWrite a 50 word summary of this article

Go to: http://www.forbes.com/2007/02/02/credit-score-fico-pf-Go to: http://www.forbes.com/2007/02/02/credit-score-fico-pf-ie-in_cc_0202creditscore_inl_slide_2.html?thisSpeed=15000ie-in_cc_0202creditscore_inl_slide_2.html?thisSpeed=15000– Make sure you pause the videosMake sure you pause the videos– List and describe the “10 ways to improve your credit”List and describe the “10 ways to improve your credit”

Complete in PowerPoint and submit to Edmodo by end of class. Complete in PowerPoint and submit to Edmodo by end of class.

Bellwork 1-4Bellwork 1-4Which is an example of a prime or preferred lender?Which is an example of a prime or preferred lender?– A. Gregory obtained a payday loan but the interest rate was very high.A. Gregory obtained a payday loan but the interest rate was very high.– B. Haley went to a loan shark when no one else would give her a loan.B. Haley went to a loan shark when no one else would give her a loan.– C. Judy obtained a personal loan from the credit union.C. Judy obtained a personal loan from the credit union.– D. Katie took jewelry to a pawnbroker to get some cash.D. Katie took jewelry to a pawnbroker to get some cash.

Which is an example of a sub-prime or non-preferred lender?Which is an example of a sub-prime or non-preferred lender?– A. Carla went to a pawnbroker to get money in exchange for her mother's A. Carla went to a pawnbroker to get money in exchange for her mother's

pearl ring.pearl ring.– B. Dean borrowed money from the value of his life insurance policy.B. Dean borrowed money from the value of his life insurance policy.– C. The Coleys obtained a home mortgage from the bank to buy their new C. The Coleys obtained a home mortgage from the bank to buy their new

home. home. – D. The Dells obtained a loan from a consumer finance company. D. The Dells obtained a loan from a consumer finance company.

As Larry walked across airport terminal, he was stopped by a As Larry walked across airport terminal, he was stopped by a representative of a credit card company recruiting people to become representative of a credit card company recruiting people to become cardholders in exchange for the free gift of two large soft drinks. What cardholders in exchange for the free gift of two large soft drinks. What should he do?should he do?– A. Avoid accepting the offer without thoroughly checking terms, including A. Avoid accepting the offer without thoroughly checking terms, including

fine printfine print– B. Find his friends so they can all benefit from the free drinksB. Find his friends so they can all benefit from the free drinks– C. Leave his personal information so the representatives can contact him C. Leave his personal information so the representatives can contact him

laterlater– D. Walk the other way to avoid talking to the representativesD. Walk the other way to avoid talking to the representatives

Signs of a Debt ProblemSigns of a Debt ProblemConsumers find themselves stressed and Consumers find themselves stressed and constantly worrying over their financesconstantly worrying over their financesHaving no savingsHaving no savingsHaving reached the credit limit on most of their Having reached the credit limit on most of their credit cardscredit cardsSkipping payments on some bills in order to pay Skipping payments on some bills in order to pay othersothersUsing cash advances on one credit card to pay Using cash advances on one credit card to pay anotheranotherRelying on credit cards to purchase day-to-day Relying on credit cards to purchase day-to-day items like groceries and fast fooditems like groceries and fast foodRelying on credit cards to pay monthly billsRelying on credit cards to pay monthly billsOpening new credit card accounts in response to Opening new credit card accounts in response to reaching the credit limit on othersreaching the credit limit on othersRegularly receiving contacts from Regularly receiving contacts from creditors/collection agencies trying to collect creditors/collection agencies trying to collect unpaid debts unpaid debts

Strategies for Getting out of DebtStrategies for Getting out of DebtActively deal with the problem; ignoring it Actively deal with the problem; ignoring it will only make it worsewill only make it worseStop using credit; focus on repaying the Stop using credit; focus on repaying the debt oweddebt owedGet help from trained people---a credit Get help from trained people---a credit counselor or credit counseling servicecounselor or credit counseling serviceDevelop a spending plan that includes Develop a spending plan that includes living expenses and debt repayment living expenses and debt repayment funds. funds. Contact creditors immediately, let them Contact creditors immediately, let them know your situation, ask to have credit know your situation, ask to have credit terms adjusted terms adjusted

Bankruptcy (A Last Resort)Bankruptcy (A Last Resort)Legal relief or forgiveness from repaying certain Legal relief or forgiveness from repaying certain debtdebtTry to deal with debts using all means available Try to deal with debts using all means available before filing for bankruptcybefore filing for bankruptcyBankruptcy carries serious, long-term Bankruptcy carries serious, long-term consequences---part of one’s credit report for ten consequences---part of one’s credit report for ten yearsyearsChapter 7---must sell certain personal belongings, Chapter 7---must sell certain personal belongings, use proceeds to repay debtsuse proceeds to repay debtsChapter 13---can retain most personal property, Chapter 13---can retain most personal property, but must propose a repayment plan, go to credit but must propose a repayment plan, go to credit counseling, receive financial management counseling, receive financial management education, and be employed education, and be employed

Bankruptcy AssignmentBankruptcy Assignment

Find 3 Celebrities/Athletes who have Find 3 Celebrities/Athletes who have filed for bankruptcy:filed for bankruptcy:– For each describe how they became For each describe how they became

bankruptbankrupt– For each describe the end result of the For each describe the end result of the

bankruptcybankruptcy