Credit and Credit Cards
Costs and Benefits of Having a
Credit Card
©2012, TESCCC
Economics Unit 5, Lesson 2
Credit Cards
A card issued by a bank or other financial
intermediary giving the holder or owner an
option to borrow funds, usually when you
purchase items. Credit cards charge interest
and are primarily used for short-term
financing.
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Credit Cards
• Interest usually begins one month after a
purchase is made, and the amount you may
borrow is predetermined. The amount you may
borrow (or your credit limit) and your interest
rate will be determined by your credit rating.
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Benefits of a Credit Card
1. Ease of making purchases - Makes it
easier to buy items, especially if you do
not want to carry a lot of cash. Some
businesses require a credit card, such as
hotels and car rentals.
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Benefits of Credit Cards
2. Your purchase may be protected if it is
lost, broken, or stolen. It may make it
easier for you to return the item.
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Benefits of Credit Cards
3. Building your credit history - Having a
good credit history is often important, not
only when applying for credit cards, but
also when applying for things such as
loans, rental applications, or even some
jobs. Having a credit card and using it wisely
(making payments on time and in full each
month) will help you build a good credit
history.
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Benefits of Credit Cards
4. Emergencies - Credit cards can also be useful
in times of emergency. While you should avoid
spending outside your budget (or money you
don't have!), sometimes emergencies (such as
your car breaking down or a flood or fire) may
lead to a large purchase (like the need for a
rental car or a motel room for several nights).
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Benefits of Credit Cards
5. Safety - You can make purchases without
carrying around a lot of cash. Helps
prevent you being robbed and losing all
your money.
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Benefits of Credit Cards
6. Extra benefits - In addition to the benefits listed
above, some credit cards offer additional
incentives, such as discounts from particular
stores or companies; bonuses, such as free airline
miles or travel discounts; and special insurances
(like travel or life insurance). While most of these
benefits are meant to encourage you to charge more
money on your credit card (remember, credit card
companies start making their money when you can't
afford to pay off your charges!) the benefits are real
and can be helpful as long as you remember your
spending limits.
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Risks of Credit Cards
1. Overspending - Credit cards encourage
people to spend money they do not have.
Many people will not pay off the balance
each month and continue to charge,
blowing their budget.
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Risks of Credit Cards
2. Interest - If you do not pay off your credit
card each month, you will be charged
interest. The interest rate is usually very
high on credit cards, higher than you earn
on money saved.
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Risks of Credit Cards
3. Debt - When people do not pay off credit
cards each month, allow the balance to
increase with interest, and continue to
charge new purchases, they go into debt.
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Risks of Credit Cards
4. Credit card fraud - Credit cards can be
stolen or lost. People may also steal the
information off your credit card and make
fraudulent purchases. You must protect
your credit information.
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Risks of Credit Cards
5. Impulse buying - People will not wait until
they have the cash or for the item to go
on sale.
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Risks of Credit Cards
6. Sacrifice - You may have to sacrifice
things you need now because you must
pay off credit cards for things you have
already purchased. You may have to give
up some long-time goals or give up
saving.
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Credit Bureaus
A private, for profit company that collects
individual consumer information. Banks,
credit card companies, and mortgage
lenders buy this information to screen
applicants for loans and credit cards. This
can also affect your ability to get insurance,
rent an apartment, or even get a job.
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The 5 C’s of Credit
Creditors look for 5 C’s before granting credit to
an individual or business.
1. Character - Integrity
2. Capacity - Ability to repay the loan; job history
3. Collateral - Some loans require property to
secure a loan.
4. Capital - Net worth
5. Conditions - The purpose for the loan; local
economic conditions
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Establishing Credit
• Borrow from your bank against your savings.
• Establish an account with a gas company or
department store.
• Without prior credit history, you may need a co-
signer.
• Saving may be a better way to be prepared for
emergencies.
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What Impacts Your Credit Rating
1. Past credit history
2. Amount you owe
3. Length of having an established credit
history
4. Amount of new credit
5. Number of credit cards you have
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Credit Trouble Warning Signs
• Charging to limit and applying for many
new cards
• Using credit cards and cash advances to
pay for essentials like groceries.
• Use one credit card to make payment for
another credit card.
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Credit Trouble Warning Signs
• Borrowing from family members to pay
bills
• You are afraid to get the mail and open
your credit card statements.
• No savings or frequently dipping into
savings to pay on your accounts
©2012, TESCCC
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