Credit and Credit Cards

Costs and Benefits of Having a

Credit Card

©2012, TESCCC

Economics Unit 5, Lesson 2

Credit Cards

A card issued by a bank or other financial

intermediary giving the holder or owner an

option to borrow funds, usually when you

purchase items. Credit cards charge interest

and are primarily used for short-term

financing.

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Credit Cards

• Interest usually begins one month after a

purchase is made, and the amount you may

borrow is predetermined. The amount you may

borrow (or your credit limit) and your interest

rate will be determined by your credit rating.

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Benefits of a Credit Card

1. Ease of making purchases - Makes it

easier to buy items, especially if you do

not want to carry a lot of cash. Some

businesses require a credit card, such as

hotels and car rentals.

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Benefits of Credit Cards

2. Your purchase may be protected if it is

lost, broken, or stolen. It may make it

easier for you to return the item.

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Benefits of Credit Cards

3. Building your credit history - Having a

good credit history is often important, not

only when applying for credit cards, but

also when applying for things such as

loans, rental applications, or even some

jobs. Having a credit card and using it wisely

(making payments on time and in full each

month) will help you build a good credit

history.

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Benefits of Credit Cards

4. Emergencies - Credit cards can also be useful

in times of emergency. While you should avoid

spending outside your budget (or money you

don't have!), sometimes emergencies (such as

your car breaking down or a flood or fire) may

lead to a large purchase (like the need for a

rental car or a motel room for several nights).

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Benefits of Credit Cards

5. Safety - You can make purchases without

carrying around a lot of cash. Helps

prevent you being robbed and losing all

your money.

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Benefits of Credit Cards

6. Extra benefits - In addition to the benefits listed

above, some credit cards offer additional

incentives, such as discounts from particular

stores or companies; bonuses, such as free airline

miles or travel discounts; and special insurances

(like travel or life insurance). While most of these

benefits are meant to encourage you to charge more

money on your credit card (remember, credit card

companies start making their money when you can't

afford to pay off your charges!) the benefits are real

and can be helpful as long as you remember your

spending limits.

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Risks of Credit Cards

1. Overspending - Credit cards encourage

people to spend money they do not have.

Many people will not pay off the balance

each month and continue to charge,

blowing their budget.

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Risks of Credit Cards

2. Interest - If you do not pay off your credit

card each month, you will be charged

interest. The interest rate is usually very

high on credit cards, higher than you earn

on money saved.

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Risks of Credit Cards

3. Debt - When people do not pay off credit

cards each month, allow the balance to

increase with interest, and continue to

charge new purchases, they go into debt.

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Risks of Credit Cards

4. Credit card fraud - Credit cards can be

stolen or lost. People may also steal the

information off your credit card and make

fraudulent purchases. You must protect

your credit information.

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Risks of Credit Cards

5. Impulse buying - People will not wait until

they have the cash or for the item to go

on sale.

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Risks of Credit Cards

6. Sacrifice - You may have to sacrifice

things you need now because you must

pay off credit cards for things you have

already purchased. You may have to give

up some long-time goals or give up

saving.

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Credit Bureaus

A private, for profit company that collects

individual consumer information. Banks,

credit card companies, and mortgage

lenders buy this information to screen

applicants for loans and credit cards. This

can also affect your ability to get insurance,

rent an apartment, or even get a job.

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The 5 C’s of Credit

Creditors look for 5 C’s before granting credit to

an individual or business.

1. Character - Integrity

2. Capacity - Ability to repay the loan; job history

3. Collateral - Some loans require property to

secure a loan.

4. Capital - Net worth

5. Conditions - The purpose for the loan; local

economic conditions

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Establishing Credit

• Borrow from your bank against your savings.

• Establish an account with a gas company or

department store.

• Without prior credit history, you may need a co-

signer.

• Saving may be a better way to be prepared for

emergencies.

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What Impacts Your Credit Rating

1. Past credit history

2. Amount you owe

3. Length of having an established credit

history

4. Amount of new credit

5. Number of credit cards you have

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Credit Trouble Warning Signs

• Charging to limit and applying for many

new cards

• Using credit cards and cash advances to

pay for essentials like groceries.

• Use one credit card to make payment for

another credit card.

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Credit Trouble Warning Signs

• Borrowing from family members to pay

bills

• You are afraid to get the mail and open

your credit card statements.

• No savings or frequently dipping into

savings to pay on your accounts

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