Credit

Credit

• Credit is the ability to borrow money based on an individuals economic status.

• The advantage of credit is that you can enjoy new purchases today that you don’t have to pay for until tomorrow.

• They charge you for this service in the form of interest.

• A lending company assumes risk because not all individuals are able to pay back.

Credit

• All credit cards charge interest and are required to tell you their annual interest rate.– Rates can range from under 9% on some low-interest

cards to almost 30% on some department store cards.– You may use a credit card to your advantage by borrowing

the money and paying it back by months end, however if you do not pay your balance in full every month, you are charged interest for every purchase from the date you make the purchases.

Credit

• When to use credit– When you are going to acquire something that will

go up in value (appreciate)– When what you are acquiring will help you earn

income• When not to use credit– When the item you are purchasing is going to go

down in value (depreciate)– This item will incur extra expenses• You will be paying off expenses rather than interest

Advantages & Disadvantages of Using a Credit Card

• Advantages– Instant Money– Allows you to purchase

items you would have to save for a very long time to afford

– Security – Widely Accepted

• Disadvantages– False Sense of Cash– High Interest Rates– Misuse of the Credit

Applying for Credit

• Acquired from Banks, Private retailers• They will look at your credit rating– Your reputation for paying back money you owe

• Your credit card will have a limit– The total amount of money you are allowed to

charge to the credit card– Student Credit Cards – usually start at $500– Can get as high as $10 000 if you have good credit

rating

Credit Rating

• Your credit rating is a measure of your credit-worthiness, or in other words, your reputation when it comes to paying back money.

• How Do You Build a Good Credit Rating?– Pay your bills promptly, especially credit cards. – Borrow only what you need and what you can

afford. – Try to pay off loans on time and as quickly as

possible. Not only does it help your credit rating, you also save valuable interest costs.

Credit Card No No’s• Defaulting on payment– After a few reminders financial institutions will send

collection agencies after you– Annoying and embarrassing phone calls, letters, visits,

etc.– Repossession – if the credit was used for a specific

item – they may take it back (house, car)• Ruining Credit Rating– Giveaways for signing up for credit cards– Not making scheduled payments

• Purchasing items you can’t afford

Common Uses of Credit

• Personal Loan– Banks may give you a loan for anything from a

computer to renovations to a vacation• Car Loan– Lower interest rate and put directly towards paying

off a car• Personal Line of Credit– Bank will allow you use of a set amount of funds to

use as if it was your bank account– Often have automatic monthly payments

Payday Loans

Payday Loans

• Small, short-term loans made by check cashers

• Typically, the borrower gets an “advance” on their pay cheque and is charged a fee to receive their cheque early– Cash in Hand today– Write cheque today (cash + fee)– Cheque is cashed when you are paid

Payday Loans

• The interest rate charged is astronomical– Often 100-900%– Example: Pay $17 extra to receive on $100 today,

rather than next week

• Often results in– Defaulting on payment– Killing credit rating– Constant Loans

While I’m ranting....

Finish Banking Assignment

• Today – you are going to finish your Banking Assignment from Tuesday

• Now that you know a little bit about credit, be sure to address the subject in your 1-2 paragraph response