Understanding Credit!

What Is Credit?Credit: an arrangement that allows consumers

to buy goods or services now and pay for them later.

When you using a credit card to charge purchases, you must usually paya finance charge.

Finance ChargesFinance Charge: the total amount a purchaser must pay for the

use of credit (interest charges & fees)

3 Factors Affect Your Finance Charge:1. Amount of credit used

-The more you charge, the more interest you pay.

2. Annual Percentage Rate (APR)-The higher the interest rate, the more finance charges you pay.

3. Length of Repayment Time-The more time you take to repay, the more interest you pay.

Advantages Of Using Credit

#1: The use of goods and services as you pay for them.Example: Driving a car as you pay for it

#2: The opportunity to buy costly items that you might not be able to buy with cash.

Example: Can you imagine paying cash for a brand new car?

#3: A source of cash for emergency or unexpected expenses.Example: Medical, automotive, etc.

#4: Convenience.Example: Don’t have to carry large amounts of cash.

Disadvantages Of Using Credit

#1: The reduction of future income.Example: Spending future income now and living beyond your income

#2: Expense.Example: Using credit usually costs money.

#3: Temptation.Example: Easy to spend money you don’t/won’t have.

#4: The risk of serious consequences if you misuse credit.Example: Failure to pay debts on time, bankruptcy, repossession, damaged credit score

Types of Consumer Credit

Sales Credit: when you buy goods and services with a credit card or a charge account.– Example: Charge Accounts or Credit Cards

Cash Credit: when you borrow money.– Example: Loans

Types Of Credit CardsTravel and Entertainment Cards: you must pay entire bill each month

except for travel-related expenses.– No credit limit, minimum monthly payments at ≥18% APR on travel-related

expenses– Example: American Express

Company or Retail Store Cards: permit you to charge purchases only with the merchant issuing the card.– Credit limit, minimum monthly payments, APR varies– Example: Macy’s Card

General Purpose Cards: issued by banks and can be used at many places around the world.– Credit limit, minimum monthly payments, APR/fees vary– Examples: Visa and MasterCard

Establishing Credit4 Steps to building a sound financial reputation:

1. Start with a job.-Show that you can hold a job and earn money

2. Open a savings account and save regularly.-Saving show financial responsibility

3. Open a checking account and manage is carefully.-Show you have experience with handling money

4. Apply for a store or gas station credit card.-Make small purchases and pay your bill

Credit RatingCredit Rating: the creditor’s evaluation of a person’s willingness and ability

to pay debts.

Credit Report: a history or record of a person’s financial and credit practices.

Credit Score: numerical expression of a person’s credit worthiness (based on credit report)

Credit scores fall between 300 and 850• < 620 = high risk borrowers• 620 – 699 = ok to good• > 700 = excellent

The 3 C’s Of CreditA person’s credit rating is

measured by…The 3 C’s of Credit

1. Character: responsible financial history

2. Capacity: earning power & employment history

3. Capital: financial worth (home, car, savings…)

Maintaining A Good Credit Rating

• Only use as much credit as you can comfortably repay

• Pay bills on time

• Keep accurate records of charges, statements, and payments

• Contact credit card company immediately if you cannot pay your bill on time

• Resolve billing errors promptly