Slide 1

CREDIT SMARTS

Learning TargetsDefine credit and other basic terminology associated with credit.Identify the advantages and disadvantages of using credit.Identify and understand the common types of credit.Measure the cost of credit.Use the 20/10 Rule to determine your credit limits.Interpret a credit report.Understand methods of financing a college education. CreditBorrowing money with the promise to pay it back laterRead: In The Past and Credit today pg. 387-388Make a venn diagram or T-chart

CREDITPASTTODAYIn the beginning, we bartered or traded for what we wanted.When the U.S. started using currency, we began buying what we wanted or needed instead of making it ourselves. Family hardship caused businesses to start issuing credit. First credit account was at the general store.No interest was charged, they trusted each other to pay their account off.Made the economy stronger.Raised standard of living.

Its a way of life.Abuses caused banks to fail.Peoples homes went into foreclosure for not paying their mortgage.Credit is encouraged.#1 fraud is credit card fraud.Still raises the standard of living if you can get credit.It has crippled our economy.Did You Know?That people spend 10-20% more if they use a credit card or debit card?178.5 Billion dollars was charged on CC in 2010The number of 18-24 yr. olds filing for bankruptcy has increased 96%.40% of Americans live beyond their means.92% of college students use CC to pay for college expenses.University administrators say they lose more students to credit card debt than academic failure.

Credit Card StatsU.S. household consumer debt profile: Average credit card debt: $15,611 Average mortgage debt: $155,192 Average student loan debt: $32,264

In total, American consumers owe: $11.74 trillion in debt An increase of 3.3% from last year$882.6 billion in credit card debt $8.14 trillion in mortgages $1.13 trillion in student loans An increase of 8.% from last yearThe Vocabulary of CreditCreditor

Person/Co. that loans you money

CAPITALProperty you possess.

COLLATERALProperty pledged to ensure repayment of the loanPrincipalThe amount you borrow from the bank.Annual Percentage Rate (APR) Determines what credit will cost you in interest; shown as a %. EX: 21.9%, 4%Finance ChargeBank fees + interest on borrowed money.DEBT COLLECTORPerson/Co. hired by a creditor to collect a debt.

First Rule To Borrowing!Do you know what it is????Buy responsibly

Deferred GratificationDelaying the gratification for just a little while to give yourself time to think through your purchase.Advantages of CreditRaises your standard of living

Provides emergency funds

Convenient

Disadvantages of CreditCosts more than cash purchases. Why?Can lead to overspending and stress.

Types of CreditRevolving Credit card Allows you to carry a balance from month to month. EX: Visa, Mastercard, Discover

Interest rates will vary and can go up or down depending on how well you manage your account. You can make a minimum payment each month or pay it off in full at any time.Some credit cards offer cash back on purchases; 1-3% cash back when you use your card.Revolving Charge Accounts

Installment Loan

A loan secured with collateral.You pay the same amount each month for a set number of months until the debt is paid.Why is collateral needed for an installment loan, but not a credit card?Sources of Credit Service Credit = an agreement to pay for a service after it is completed. EX: doctors, lawyers, dry cleaners, etc.

Retail Credit Cards = accepted only at that store.

PawnbrokersOffers high interest loans on the value of personal property. Read ex: pg. 399

Getting Started with CreditCredit WorthinessA measure of your reliability to repay a loan

3 Cs of Credit

1) Character A measure of your sense of financial responsibility? ? ? ? ? ? ? ? ? ? ? ? ?How do lenders determine character?Credit History A complete record of your past borrowing and repaymentsCredit Report A written statement of your credit history. If you are denied credit, you can receive a free credit report. See Figure 17-2 pg. 415

2) Capacity A measure of your financial ability to repay a loan3) Capital The value of what you own.Credit BureauA company that collects & sells information to businesses about your credit history.

Credit RatingA measure of your credit worthiness. (a point system)

Credit Card Scores ImpactAuto insurance rates Car loansApartment rentalsMortgage interest ratesGetting a jobAny loan, either through a bank or a credit card company.Credit Card Costs

Annual FeesA $15 - $100 charge to use the card.InterestYou are charged interest for unpaid balances.% % % % % % % %Grace PeriodThe date your payment is due. If you dont pay before the due date, you will be charged interest on the account.Credit Limit The maximum amount you are allowed to charge.

Credit Laws pg. 417

Truth in Lending Act A law requiring all banks to calculate interest the same way and provide info. on finance charges & APRs.

Fair Credit Reporting Act This law gives you the right to know what is on your credit report and who has seen it. You may get a free copy if you are ever denied credit.

The Fair Credit Billing ActHelps consumers correct billing mistakesYou have 60 days to notify the credit card companyThe credit card company has 90 days to correct the problem.Equal Credit Opportunity Act Made it illegal to refuse credit on the basis of race, color, religion, gender, marital status or age.= = = = = = = = = = = = = = = = = = = = =

The Fair Debt Collections Practices Act

This law stops collection agencies from using abusive practices.

Using Credit ResponsiblyGarnishment A creditor could take you to court to have a portion of your paycheck taken out (garnished) to cover a past due debt.Bankruptcy Legal process where people who cant make their payments, must surrender most of their property to the bank.

CAUSESJob lossEmotional spendingFailure to budgetSerious injury/illnessBankruptcy CostsLose propertyPoor credit rating for 10 yrs.Co-signers must pay.Difficulty finding a place to liveDifficulty opening a checking accountDebt Consolidation Loans A bank loans you money to pay off your debts. You now make one payment a month until the debt is repaid.

1 vs. 4 payments per monthThe 20/10 RuleYour monthly credit payments should not exceed 10% of your monthly take-home pay.Read example pg. 450yearlymonthlyCredit Card Fraud Fraud costs businesses and consumers over $3 billion each year. You may never be the victim of credit card fraud, but you will pay for it. How?The Cost of ID Theft$4,607 - average amount stolen$631 - average consumer loss68 days - average time before detection33 hours - average time spent on resolutionOopsSony announced in April 2011 passwords of over 100 million gaming customers were obtained by hackers.June 2011 Citibank reported 360,000 customers credit card numbers were hacked.July 2011 Morgan Stanley alerted 34,000 customers that data on CD-ROMs went missing while en route to a state tax office.January 2014 Target and close to 110 Million people were victims to the Nations largest ever retail theft.

Illegal use of lost/stolen cards and c.c. info. intercepted online is the most common type of fraud

Read: Protection from fraud pg. 471Safeguarding Your Cards pg. 429Avoiding Unnecessary Credit Costs pg. 430 (gallery walk)Simple Interest Activity