TYPES OF CREDIT

Credit Cards and Loans

Types of Credit

There are many different sources of credit These sources have loans of varying lengths.Banks loose up to $1.5 million dollars a year

in credit card fraud alone. This is why having good credit is so important

The better credit rating you have the less interest you will be pay. This saves you money in the long run

Charge Accounts

An account offered by dealers or stores. Usually a short-term or medium-term loan

Regular Charge Accounts: requires you pay the full amount within a certain amount of time.

Revolving Charge Accounts: allows you to borrow money and pay back a part of the total or the entire balance for each month.

Budget Charge Accounts: let you buy large ticket items and spread out the payments over time

Credit Cards

Come from many different sources, it’s important to shop around for the best card for you

Many cards have annual fees ranging from $25-$100

There are three basic types of credit cards: Single-Purpose Multipurpose Travel and Entertainment

Single Purpose Card

This cards can only be used to buy goods or services at the particular business that issued that card.

You receive statements monthly stating your charges.

You can choose to pay the entire amount or make a payment (usually better to pay entire amount of single purpose if able)

There is no annual fee for single purpose cards

Multipurpose Cards

Also known as bank credit cards.Usually issued by banks, but can be owned by

major credit card companiesMastercard, and Visa are examples of

multipurpose cardsYou can use these cards for many different

reasons and all over the world.Some may have annual fees, others may not.

You need to shop around

Travel and Entertainment

These work like regular charge accountsYou must pay the full amount due every

monthAmerican Express and Diners Club are

examples of these types of cards.Accepted worldwide for many different

purposes.Often have an annual fee, which can be much

higher than a multipurpose card

Loans

Banks and other financial institutions offer many different types of loans

They usually have the best interest rates, but have more demands

Three major types of loans: Single Payment Loan Installment Loan Mortgage Loan

Single Payment Loan

Debtor pays back the loan in one paymentThe total paid in the end will be the amount

loaned plus however much interest was earned in the time period that the loan was taken.

Farmers use this type of loan frequently.

Installment Loans

Probably the most common type of loanStudent loans, personal loans and home

improvement loans are examplesRepaid in regular payments over time.Payments include a set amount from the

amount owed plus the interest accumulated for that particular month

Mortgage Loan

A form of installment loan, however it’s for a long period of time

The most common loan terms for a mortgage is 15 years and 30 years.

The debtor makes regular (usually monthly) payments.

Some loans require collateral if payments aren’t made regularly.

What Happens If You Run Out of Money?

If you have trouble making it from paycheck to paycheck there are some options for short-term payroll advance loans Pawnshop Loan “Borrow Until Payday” Loan

These can be very expensive since they are such a high risk

Pawnshop Loans

It’s based on the value of something you own. If you pawn your tv you will get an amount of

money that is less than what the tv is worth.You get a certain period of time to either

redeem or buy back your tvThere are service charges for the pawn shop

to hold your merchandise for you.If you don’t redeem the tv in the time period,

the shop has the right to sell it. The cost of this loan is VERY high

Borrow Until Payday Loan

Some businesses provide very short loansThe cost is EXTREMELY high…up to 1,000

percent on an annual basisNot permitted in some states and limited in

other states by a max fee or loan amountMade without a credit checkStrongly recommend NOT using this type of

loan

Comparing Credit

Research at least of each type of credit card Look at interest rates Credit lines Annual Rates Repayment terms Application Process

Compare and contrast all the cardsPrepare to present the information on the cards

and explain which card you would choose and why.What are some interesting things you noticed

about these cards or the application process?

Homework

Obtain a credit card application from at least two different retail stores or companies.

Also for the next week save all advertisements and junk mail that come in the mail that try to persuade you and your family to become a user of their credit card or credit accounts. Log all the promotional offers that are advertised. Bring them to class so we can discuss them Conduct a mini survey. Ask family and friends and

find out whether or not they would choose to sign up for those cards based on the advertising material. Why or why not?