Applying for CreditChapter 26.1

OBJECTIVES• Explain how you can develop a

credit history

• Examine factors to consider when

deciding which credit card to

secure

• Define three factors that creditors

consider when granting credit

THE MAIN IDEA• Developing a credit history is important

• The first step will be choosing a credit card

and applying for it

• Before deciding to issue credit to a

customer, a creditor looks at the applicant’s

oCapacity

oCharacter

oCapital

DEVELOPING A CREDIT HISTORY• Using credit responsibly

can make life easier

• Using credit in an

irresponsible way will

harm the ability of a

consumer to make

future purchases

DEVELOPING A CREDIT HISTORY

Apply for

Credit

Approved for Credit

Use Credit

Make Paymen

ts

SELECTING A CREDIT CARD• There are five main factors to consider

when selecting a credit card:

1. Interest rate

2. Extra fees

3. Whether the interest rate will change

4. Whether a cosigner is needed

5. Whether there is a grace period

SELECTING A CREDIT CARD• Questions you should ask before

selecting a credit card include:

1. What will the cost of credit be?

2. Who will accept the card?

3. What is the credit limit?

4. Will I be able to use the card to get

cash?

COST OF CREDIT• For all their conveniences,

credit cards come with

costs such as interest

rates and various fees

• To gauge the cost of

credit, first look at the

annual percentage rate

(APR)

Annual Percentage Rate (APR)the cost of credit on a yearly basis

COST OF CREDIT• A credit card might offer a low introductory

APR but change to a much higher rate after

a few months

• Credit card companies will usually charge a

fee for a cash advanceCash Advancea loan given in cash by a credit card company in anticipation of the borrower’s being able to repay it

COST OF CREDIT• Credit card companies

will usually charge a

fee for late or missed

payments

• Another fee is charged

if the card holder is

over their credit limit

OTHER CONSIDERATIONS

• You may need a cosigner

when you apply for

credit.

• You should consider

whether there is a grace

period for payments on

your credit card.

Grace Periodan amount of time allowed to repay a debt without having to pay interest charges

Cosignersomeone who agrees to be responsible for a debt if the main applicant does not repay it

APPLYING FOR CREDIT

• A credit card

application asks for

information about your

address, your job,

what other credit you

have, and details

about your income

and savings

CREDITWORTHINESS

• Before creditors give a

consumer a charge or

credit account, they

want to make sure the

consumer is worth the

risk

THE THREE Cs of CREDITWORTHINESS

The Three Cs of

Creditworthiness

C

C

C

Capacity: An applicant’s ability to pay.

Character: An applicant should be trustworthy.

Capital: The money an applicant has beyond debts.

CREDIT LIMITS• Creditors also consider

capacity, character, and

capital when determining a

card holder’s credit limit

• If a person pays his or her bills

on time, most creditors will

raise the person’s credit limitCredit Limitthe maximum amount a card holder can charge on a credit card

MAKING THE MINIMUM PAYMENT• Consumers who pay more than the

minimum amount each month will

pay less interest and pay off their

debt more quickly

• The credit card agreement is a

contract

• If a consumer does not make at least

the minimum payment, the

consumer is not meeting his or her

legal obligation

REVIEW QUESTIONS

1. How can a consumer develop a

credit history?

Apply for credit, be approved, use the

credit, and make payments to the creditor

REVIEW QUESTIONS

2. What is an annual percentage rate?

Why is it important?

The cost of credit on a yearly basis; it

determines the amount of interest that a

consumer will pay on a debt

REVIEW QUESTIONS

3. What are the three Cs of credit?

Capacity, Character, and Capital