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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
© 2010 South-Western, Cengage LearningSlide 11
WHAT’S AHEAD10.1 What Is Credit?10.2 How to Qualify for Credit10.3 Sources of Consumer Credit10.4 Credit Rights and Responsibilities10.5 Maintain a Good Credit Rating
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
LESSON 10.1
What Is Credit?GOALSGOALS►Identify reasons to borrow and the trade-
offs you make when you borrow.►Discuss how to plan when and how much
to borrow.
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
KEY TERMSKEY TERMS
credit equity
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Why Borrow?►For your goals►For a home
►A home as an investment►Equity►Taxes and homeownership
►For your education►For your health
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Plan Your Borrowing►When to borrow►How much to borrow
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Why is borrowing an important part of most people’s life-span financial plans?
Why should you be careful not to take on more debt than you can easily repay?
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Why is borrowing an important part of most people’s life-span financial plans?
• Many life-span goals require more financial support than most people are able to pay for through saving.
• Examples include homes, automobiles, and education.
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Why should you be careful not to take on more debt than you can easily repay?
• Credit can easily lead to out-of-control spending, and debt will increase as will the interest owed.
• Taking on more debt than you can easily repay can make life uncomfortable.
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
LESSON 10.2
How to Qualify for Credit
GOALSGOALS►Explain how lenders judge your
creditworthiness.►Describe the factors that determine
your credit rating.
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
KEY TERMSKEY TERMS
creditworthiness character credit history cosign capacity capital credit bureau credit rating
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Your Creditworthiness►Character►Capacity►Capital
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Your Credit Rating►Loan applications►Credit bureaus►Credit ratings
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Credit Rating Factors►Payment history►Current debt►Length of credit history►New accounts and inquiries►Types of credit used
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
How does a lender use the three C’s of credit?
What kinds of information is a credit bureau collecting about you?
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
How does a lender use the three C’s of credit?
A lender judges your creditworthiness using the three C’s of credit:• Character• Capacity• Capital
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
What kinds of information is a credit bureau collecting about you?
• Your past borrowing• Your repayment history
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10LESSON 10.3
Sources of Consumer CreditGOALSGOALS►Explain differences between a secured
and an unsecured loan.►Describe benefits and costs of using
credit cards.
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
KEY TERMSKEY TERMS
secured loan collateral installment loan unsecured loan
regular charge account
revolving charge account
grace period credit limit
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Types of Consumer Borrowing►Secured loan
►Collateral► Installment loan
►Unsecured loan
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Sources of Loans►Banking institutions►Other sources of consumer loans
►Finance companies►Payday loans►Life insurance companies►Credit card cash advances►Pawnbrokers►Rent-to-own companies
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Credit Cards►Regular charge accounts►Revolving charge accounts►Sources of credit cards►Credit card incentives
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Credit Card Costs►Annual fees►Interest►Limits and penalties
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Control Credit Card Costs►A loan as an alternative►The minimum payment trap►Choose the least expensive card
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
What is the difference between a secured and an unsecured loan?
What should you consider when choosing a credit card?
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
What is the difference between a secured and an unsecured loan?
• A secured loan is backed by a thing of value (collateral).
• Borrowers risk the loss of their pledged collateral if they are unable to repay the loan.
• An unsecured loan has no such collateral.• Unsecured loans generally carry high interest
rates because of the increased risk taken on by the lender.
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
What should you consider when choosing a credit card?
• The cost of the card (annual fees, interest rates)
• Limits and penalties associated with the card
• Whether the card offers incentives or supports organizations you consider valuable
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10LESSON 10.4
Credit Rights and Responsibilities
GOALSGOALS►Discuss ways that laws protect your
credit rights.►Describe how to take responsibility for
your own financial health.
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
KEY TERMSKEY TERMS
finance charge annual percentage
rate (APR)
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Consumer Credit Rights►Truth in lending►Equality in lending►Protect your credit history►Act if you are refused credit►Resolve billing and product quality
problems►Protection from abusive collection
practices
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Consumer Credit Responsibilities►Accept responsibility►Know your debt capacity►Credit and family►Self-control with credit
►Pay more than the minimum►Avoid too many credit cards►Pay cash►Keep accurate records
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
How do laws pertaining to consumer credit protect your rights and help you make good credit decisions?
Describe a common sense approach for determining whether you can responsibly handle more debt.
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
How do laws pertaining to consumer credit protect your rights and help you make good credit decisions?
• Truth in Lending Act (1968) ensures that all lenders calculate credit costs in the same way so that consumers can more easily compare rates.
• Fair Credit Reporting Act (1971)• Equal Credit Opportunity Act (1975) • Fair Debt Collections Practices Act (1977)• Consumer Credit Reporting Reform Act (1996)• Fair Credit Billing Act
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Take-
home
pay
–
Fixed expenses
(rent, utilities,
etc.)
–
Other expenses
(food, gas, clothes,
etc.)
–Saving
s 0
Describe a common sense approach for determining whether you can responsibly handle more debt.
• If nothing is left after this calculation, you can’t afford more debt:
• Credit cards require self-control because it is tempting and easy to buy too much or repay too little.
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10LESSON 10.5
Maintain a Good Credit RatingGOALSGOALS►Explain how to establish a positive credit
history.►Discuss how to avoid credit problems
and get help if you need it.
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
KEY TERMSKEY TERMS
acceleration clause balloon payment identity theft debt consolidation
loan bankruptcy
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Establish Your Credit History►Start small►Establish your own credit►Avoid common credit mistakes►Read what you sign►Be aware of identity theft
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
Help for Credit Problems►Debt consolidation loans
►Cost of a debt consolidation loan► It’s a bandage, not a cure
►Credit counseling services►Bankruptcy
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
What steps should you take to establish a positive credit history?
If you experience credit problems, what steps can you take to get out of debt?
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
What steps should you take to establish a positive credit history?
• Start small by opening a store credit account• Pay your bills on time• Save regularly• Charge small amounts and pay them off
immediately• Live in the same place• Don’t change jobs often
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ECONOMIC EDUCATION FOR CONSUMERS ○ Chapter 10
If you experience credit problems, what steps can you take to get out of debt?
• Obtain a debt consolidation loan • Get credit counseling• Use bankruptcy as a last resort
© 2010 South-Western, Cengage LearningSlide 4040