credit is an arrangement to receive cash, goods, or services now and pay for them later financial...
Post on 16-Dec-2015
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Credit and Its Use
Credit is an arrangement to receive cash,
goods, or services now and pay for them later Financial institutions and merchants issue
credit – called a creditor Having the ability to borrow funds that we
normally could not pay for with cash Homes, cars, education, appliances, electronics
Using credit wisely keeps people out of trouble
What is credit and why is it so important to have good credit?
Do you have the cash you need for the down
payment Do you want to use your savings instead of
credit? Can you afford the item? Could you use the credit in some better way? Could you put off buying the item for a while? What are the costs of using credit?
Factors to Consider Before Using Credit
2 basic types Closed-end credit
One-time loan that you will pay back over a specified period of time in payments of equal amounts
Is used for specific purpose and involves a definite amount of money
Open-end credit Is a loan with a certain limit on the amount of
money you can borrow – line of credit
Types of Credit
Loans
Inexpensive loans with low interest – parents, family members, friends
Medium-Priced Loans with moderate interest – banks, credit unions
Expensive loans with high interest – finance companies, retail stores
Credit Cards Use money over time and pay it back Grace period – a time period with no finance charge Finance charge – total $$ amount you pay to use credit
Sources of Consumer Credit
Annual Percentage Rate (APR) is the cost of
credit on a yearly basis, expressed as a percentage
Variable Interest Rate – changes throughout the term of the credit issued
Fixed Interest Rate – stays the same throughout the term of the credit used
Simple Interest – is the interest computed only of the principal (which is the amount you borrowed)
The Cost of Credit
1. Character: Will you repay the loan?2. Capacity: Can you repay the loan?3. Capital: What are our assets and net worth?4. Collateral: What if you do not repay the loan?5. Credit History: what is your history with using
credit? Credit Rating – is a measure of a person’s ability
and willingness to make credit payments on time. Credit Bureaus – an agency that collects information
on how businesses and people pay their bills. Experian, Trans Union, Equifax
Applying for Credit“The 5 C’s of Credit”
Making only the minimum payment each month Having trouble making the minimum payment Miss loan payments or pay late Use your savings for necessities such as food
and utilities You borrow money to pay off old debts You exceed credit limits on your credit cards Been denied credit because of a bad credit
report
Managing DebtThe Warning Signs
Consumer Credit Counseling Service Counseling Services through banks, military,
credit unions Counseling through state and federal housing
authorities Bankruptcy
What are your options?
A legal process in which some or all of the
assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts
It may also include a plan for the debtor to repay creditors
LAST RESORT!!!
Bankruptcy
Chapter 7
A.k.a. “straight bankruptcy” Most of the debtors assets are sold of to pay the
debt owed Certain assets are protected – Social Security,
unemployment, net value of home or car, tools used for employment
Chapter 13 A debtor with regular income can work with the
court to devise a payment plan Not all assets are lost
Types of Bankruptcy
Credit can be very difficult to obtain You are forced to pay very high interest rates
on loans May not be able to get a credit card Bad credit can keep you from
Getting a job Renting or buying a residence Buying a car
Effects of Bankruptcy
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