Credit Pros and Cons Unit 1 Lesson 4. Introduction Credit use carries an important responsibility....

Credit Pros and ConsCredit Pros and Cons

Unit 1 Lesson 4Unit 1 Lesson 4

IntroductionIntroduction

Credit use carries an important Credit use carries an important responsibility. responsibility.

When used responsibly, credit offers When used responsibly, credit offers several advantages: the freedom of several advantages: the freedom of not having to carry large amounts of not having to carry large amounts of cash, the opportunity to establish a cash, the opportunity to establish a good credit history, and the ability to good credit history, and the ability to track expenditures. track expenditures.


Credit can also be a helpful tool when Credit can also be a helpful tool when used wisely by smart money managers, used wisely by smart money managers, but it also has some serious but it also has some serious disadvantages. Students need to know disadvantages. Students need to know that credit is not additional income that that credit is not additional income that allows them to buy more. Credit is a allows them to buy more. Credit is a loan that allows people to make loan that allows people to make purchases while postponing payments, purchases while postponing payments, thereby enjoying benefits now and thereby enjoying benefits now and paying later.paying later.


Also, credit is not free. Extra charges Also, credit is not free. Extra charges for its use increase the cost of items for its use increase the cost of items that are purchased. Before making that are purchased. Before making decisions about the use of credit, decisions about the use of credit, students should become well students should become well informed about advantages and informed about advantages and disadvantages. disadvantages.

Using Credit – A Big Using Credit – A Big DecisionDecision

The decision to purchase an item using credit The decision to purchase an item using credit – borrowing rather than saving and paying – borrowing rather than saving and paying cash – is to be taken seriously. How badly do cash – is to be taken seriously. How badly do you need the desired item? Is it something you need the desired item? Is it something that you can live without, or is it a need you that you can live without, or is it a need you must satisfy immediately? Saving requires must satisfy immediately? Saving requires that you wait, while buying on credit allows that you wait, while buying on credit allows you to purchase goods and services now in you to purchase goods and services now in exchange for a promise to pay later? Cash? exchange for a promise to pay later? Cash? Credit? There are advantages and Credit? There are advantages and disadvantages to both methods of payment. disadvantages to both methods of payment. You need to consider them carefully.You need to consider them carefully.PAGE 17


Credit use has many benefits. Credit allows Credit use has many benefits. Credit allows you to buy major items, such as cars and you to buy major items, such as cars and houses, without having to save entire purchase houses, without having to save entire purchase amount. Even though you don’t have enough amount. Even though you don’t have enough money to spend, you can enjoy the item now. money to spend, you can enjoy the item now. Credit cards also are widely accepted at a Credit cards also are widely accepted at a variety of stores, allowing you to buy wherever variety of stores, allowing you to buy wherever you are. When using a credit card, you don’t you are. When using a credit card, you don’t have to carry much cash, which is great if you have to carry much cash, which is great if you are traveling. If you see something on sale at a are traveling. If you see something on sale at a great price but have no cash, you can buy it great price but have no cash, you can buy it anyway just by signing your name.anyway just by signing your name. PAGE 17


A credit card allows you to be a telephone or A credit card allows you to be a telephone or Internet shopper. Buying on credit also permits Internet shopper. Buying on credit also permits you to inspect your purchase before it is fully you to inspect your purchase before it is fully paid for. If something goes wrong with a paid for. If something goes wrong with a purchased item, it may be easier to return it purchased item, it may be easier to return it when paid for with a credit card. In an when paid for with a credit card. In an emergency, a credit card allows you to emergency, a credit card allows you to respond immediately, even if you have no respond immediately, even if you have no cash. Another advantage to credit is that it cash. Another advantage to credit is that it allows you to keep accurate records of your allows you to keep accurate records of your spending and combine multiple purchases into spending and combine multiple purchases into one lump payment.one lump payment. PAGE 17


There is also a downside to using credit. There is also a downside to using credit. There are varying fees associated with There are varying fees associated with credit, such as interest, finance charges, credit, such as interest, finance charges, and annual fees. All of these add to the and annual fees. All of these add to the real cost purchases. If you buy an item real cost purchases. If you buy an item on sale, you must remember that the on sale, you must remember that the interest and charges could amount to interest and charges could amount to more than the savings (especially if you more than the savings (especially if you don’t pay off the credit card bill each don’t pay off the credit card bill each month).month).

PAGE 17


Also remember that when charging, you are Also remember that when charging, you are spending future earnings now, which means spending future earnings now, which means you are giving up purchases you may want to you are giving up purchases you may want to make in the future. Perhaps the biggest make in the future. Perhaps the biggest disadvantage of credit buying, however, is that disadvantage of credit buying, however, is that it encourages impulse buying. If left it encourages impulse buying. If left unchecked, this impulse buying can lead to unchecked, this impulse buying can lead to disastrous problems, such as the repossession disastrous problems, such as the repossession of cars and homes when payments aren’t of cars and homes when payments aren’t made on time. A poor credit rating can ruin made on time. A poor credit rating can ruin your chances for a future home or a car loan. It your chances for a future home or a car loan. It can even affect your ability to get a job.can even affect your ability to get a job.PAGE 17


Credit can be a tool for successfully Credit can be a tool for successfully managing your money and improving managing your money and improving your lifestyle, or it can lead to your lifestyle, or it can lead to bankruptcy and financial ruin. Credit bankruptcy and financial ruin. Credit reporting agencies keep records on your reporting agencies keep records on your credit experience. If you are a credit experience. If you are a responsible borrower, you will have a responsible borrower, you will have a good credit rating. If not, you will have a good credit rating. If not, you will have a poor credit rating. Whether to use credit poor credit rating. Whether to use credit is an important decision. Consider all the is an important decision. Consider all the advantages and disadvantages to make advantages and disadvantages to make the best decision.the best decision. PAGE 17

A Big Decision A Big Decision Allows you to make a purchase Allows you to make a purchase

now instead of waiting.now instead of waiting. Allows you to buy major items, Allows you to buy major items,

such as cars and houses, such as cars and houses, without having to save the without having to save the entire purchase amount entire purchase amount beforehand.beforehand.

Can enjoy goods and services Can enjoy goods and services even though you don’t have the even though you don’t have the money in hand.money in hand.

Cards are accepted at a variety Cards are accepted at a variety of stores, allowing you to make of stores, allowing you to make purchases almost anywhere. purchases almost anywhere.

You don’t have to carry much You don’t have to carry much cash.cash.

Allows for shopping over the Allows for shopping over the telephone and Internet.telephone and Internet.

Allows for immediate response Allows for immediate response or solution in emergencies, or solution in emergencies, even if you have no cash.even if you have no cash.

Allows you to keep accurate Allows you to keep accurate records of your shopping.records of your shopping.

Fees, such as interest, finance Fees, such as interest, finance charges, and annual fees, add charges, and annual fees, add to the real cost of purchases.to the real cost of purchases.

By charging, you are spending By charging, you are spending future earnings, which means future earnings, which means giving up future purchases you giving up future purchases you may want to make in the may want to make in the future.future.

Encourages impulse buying, Encourages impulse buying, which if left unchecked can which if left unchecked can lead to disastrous problems, lead to disastrous problems, such as the repossession of such as the repossession of cars and houses, when cars and houses, when payments aren’t paid on time.payments aren’t paid on time.

Can cause poor credit rating if Can cause poor credit rating if bills aren’t paid on time. A bills aren’t paid on time. A poor credit can ruin your poor credit can ruin your chances for a future home or chances for a future home or car loan. It can even affect car loan. It can even affect your ability to get a new job.your ability to get a new job.

AdvantagesAdvantages DisadvantagesDisadvantages

Advantages and Disadvantages of CreditAdvantages and Disadvantages of Credit

Purchase Major Purchase Major ItemsItems

Varying FeesVarying Fees Credit ScoreCredit Score Spending Future Spending Future

EarningsEarnings Accurate Record – Accurate Record –

Keeping Keeping Impulse BuyingImpulse Buying

Widely Accepted At Widely Accepted At StoresStores

RepossessionRepossession Easy Returns on Easy Returns on

PurchasesPurchases OverspendingOverspending Immediate Immediate

Response To An Response To An EmergencyEmergency

Identity Theft Identity Theft

Advantages of CreditAdvantages of Credit

Purchase Major Purchase Major ItemsItems

Credit ScoreCredit Score Accurate Record – Accurate Record –

Keeping Keeping Widely Accepted At Widely Accepted At

StoresStores Easy Returns on Easy Returns on

PurchasesPurchases Immediate Response Immediate Response

To An EmergencyTo An Emergency

Varying FeesVarying Fees Spending Future Spending Future

EarningsEarnings Impulse BuyingImpulse Buying RepossessionRepossession OverspendingOverspending Identity Theft Identity Theft

Disadvantages of CreditDisadvantages of Credit

Credit ScenariosCredit Scenarios

With the person sitting at the same With the person sitting at the same table as you read through each table as you read through each scenarios. scenarios.

Circle the advantages.Circle the advantages. Underline the disadvantages.Underline the disadvantages.

Page 19

SummarySummary

1.) Why is more difficult to get out of debt than 1.) Why is more difficult to get out of debt than to get out of debt?to get out of debt?

2.) How can interest payments on debt work 2.) How can interest payments on debt work against you?against you?

3.) How can using credit cause you to 3.) How can using credit cause you to overspend?overspend?

BalancBalancee

Time Time to Pay to Pay OffOff

Interest Interest ChargedCharged

Total PaidTotal Paid

$1,000$1,000 12 12 yearsyears

$1,349.97$1,349.97 $2,349.97$2,349.97

$2,500$2,500 19 19 yearsyears

$5,915.53$5,915.53 $8,415.53$8,415.53

$5,000$5,000 24 24 yearsyears

$15,761.2$15,761.211

$20,761.2$20,761.211

Using the following Using the following credit information to credit information to answer the questions answer the questions below.below.

Interest Rate: 17%Interest Rate: 17%

Minimum Payment: 2.5% Minimum Payment: 2.5% of outstanding balance of outstanding balance or $10 per month.or $10 per month.

Credit Pros and Cons Unit 1 Lesson 4. Introduction Credit use carries an important responsibility....

Documents

Transcript of Credit Pros and Cons Unit 1 Lesson 4. Introduction Credit use carries an important responsibility....