Bellwork 1-1
What is your definition of credit?
List 3 forms of credit of which you
know.
How can credit be misused?
Protecting Personal Credit
Unit 8
Objective 7.02
What is Credit?
Obtaining goods and services with a
promise to pay for them from future
income
A temporary money substitute since it
allows a person to buy today and pay
tomorrow
Credit involves two parties, a lender and a
borrower
Can be a valuable resource when used
wisely
Types of Consumer Credit
Sales credit-credit to purchase
goods and services from retailers
– 3 Types:
Regular charge account
– Borrower promises to pay in full within 20-30
days
– If not paid in time, there is a finance charge
– Example: Accounts with utility companies
Types of Consumer Credit
Sales Credit
– 3 Types (Cont):
Installment account
– Borrowers agree to schedule of payments of equal
dollar amounts, including interest
– Creditors hold the title or “own” the merchandise
until payments are complete.
– Borrowers typically asked to sign a written
contract
– A small down payment may be required
– Examples: Accounts used to purchase appliances
and furniture
Types of Consumer Credit
Sales Credit
– 3 Types (Cont):
Revolving credit account
– Borrowers may choose to pay in full each month
or spread payments over time
– A minimum payment (a percentage of unpaid
balance) must be made each month
– Unpaid balance may be carried over
– A finance charge is applied to the unpaid balance.
– The lender sets a credit limit for the borrower
– Examples: Retail stores (Target, Sears); credit
card issuers (Visa, MasterCard)
Types of Consumer Credit
Cash credit-money granted to use for a variety
of purposes; may be secured or unsecured; may
be installment, single-payment, or credit
card/check credit loans
– Unsecured loans
Require borrower’s signature as evidence of agreement
with terms of the loan
No collateral required
Generally available for borrowers with a good credit history
– Secured loans
Require some form of collateral (property) to secure the
loan
Collateral reduces lender’s risk; can take property if the
borrower does not repay
A cosigner can sign the loan if a borrower has neither
collateral nor good credit
Cosigner typically has good credit and agrees to pay if
borrower fails to repay
Types of Consumer Credit
Cash Credit
– 3 Types
Installment loans
– Provide a specific amount of money with promise
of repayment with interest according to a
schedule of monthly payments in a set amount
Single-payment loans
– With collateral, provide a specific amount of
money with the promise of repayment with
interest in a single payment at a specified time.
Types of Consumer Credit
Cash Credit
– 3 Types (Cont):
Credit card/check credit loans
– Allow borrowers to use their credit cards to obtain
money or write a check connected to the card
account knowing the bank will cover up to a given
maximum amount; borrowers repay with interest
– 3 Types of Credit Cards:
Company or retail store credit card loan (ex.
Sears)
Travel and entertainment credit card loan (ex.
Motel 6)
General-purpose credit card loan (ex. Credit
Union)
Credit Types Assignment
You are to find 3 examples of each of the
following types of credit:
– Regular Charge Account (ex. Light Bill)
– Installment Account/Loan (ex. Car Loan)
– Revolving Accounts:
Retail Credit Card (ex. Lowe’s Hardware)
Travel/Entertainment Credit Card (ex. American
Airlines/Motel 6/Exxon)
General Purpose Credit Card (ex. VISA, MasterCard)
– Single Payment Account (ex. Repay a neighbor for home
repair)
For each example answer the following:
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Name of Financial Institution
What is the Interest Rate? Is it Fixed or Variable?
Term (how long is the loan?)
Is it Secured or Unsecured?
If Secured, what it the Collateral?
Complete in PowerPoint and submit to Edmodo
by end of class.
Bellwork 1-2
Which purchase is most suitable for installment
credit?
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A. Fast food meal
B. Pair of movie tickets
C. Refrigerator
D. Gas for the car
Which is MOST suitable use of revolving credit?
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A. Buying a new automobile
B. Buying new furniture for a bedroom
C. Paying for electrical power for the past month
D. Shopping for clothes in a retail department store
Credit applications usually request income
information as evidence of a borrower's:
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A. capacity.
B. capital.
C. character.
D. credit.
Advantages and Disadvantages
of using Credit
Advantages
– Can be used to purchase a
variety of goods and
services
– Frees consumers from
having to carry cash to
make purchases
– Enables consumers to
make purchases online
and over the telephone
– Initially expands
borrower’s income
Disadvantages
– Typically pay more for
goods and services
because of finance
charges (interest and
fees)
– Retailers increase prices to
cover costs associated
with accepting credit and
paying bad debts
– Limits current buying
power as income is
required to repay old
debts
– Must protect credit cards
from unauthorized use
Advantages and Disadvantages
of using Credit
Advantages
– Makes recordkeeping of
purchases simpler
– Usually makes returning
items easier
– When used responsibly,
helps establish good
credit
– Having the means to
pay for emergencies
provides a sense of
comfort
Disadvantages
– May lead to impulse
purchases
– May lead to
overspending
– May lose track of how
much is actually being
spent
– If debts not repaid,
merchandise may be
repossessed by
creditors
Advantages and Disadvantages
of using Credit
Advantages
– Allows use of goods and
services before or while
paying for them
– Allows consumers to
purchase expensive
items they would not
otherwise be able to
purchase with cash
– Good credit indicates
that a consumer is
responsible financially
– Convenient to use
Disadvantages
– If debts not repaid,
credit may be damaged
– If credit rating becomes
poor, could impact their
ability to get credit in
the future
– Bad credit indicates that
consumers are
irresponsible and
untrustworthy when it
comes to finances
– Credit not always
available because some
retailers don’t accept
credit
Establishing Credit
Creditors only lend to people who can be
expected to pay them back
Creditors look at credit-related information
to determine if one is a good risk
A creditor’s evaluation of one’s ability and
willingness to repay debts is a credit
rating
Credit ratings are based on 3 Cs
– Character---a person’s reputation for being
honest and their financial history
– Capacity---a person’s employment history and
ability to earn money
– Capital---a person’s financial worth
Establishing Credit
Ways to establish credit
– Open/manage checking/saving accounts
– Pay utility bills in your name
– Obtain a credit card from a local store
– Get help from a cosigner
– Obtain a secured credit card
Establishing Credit Assignment
Go to:
http://www.practicalmoneyskills.com/personalfinance/creditdebt/histor
y/
On the “Credit History” Section answer:
– What is Credit History?
– Who can see your Credit Report?
– Who are the 3 Credit Bureaus?
On the “Credit Scores” Section answer:
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What score
What score
What score
What score
List 3 ways
range is considered “Poor”?
range is considered “Fair”?
range is considered “Good”?
range is considered “Excellent”?
to keep your credit score strong.
On the “Your Credit Report” Section answer:
– How often can you request a free credit report?
– List and describe the 5 parts to a credit report.
On the “Three C’s of Credit” Section answer:
– How do lenders judge character?
– How do lenders determine your capacity?
Based on your notes, what method/s would you choose to establish
your credit? Write a 50 word essay explaining your reasons.
Put in PowerPoint and submit to Edmodo by end of class.
Bellwork 1-3
An ADVANTAGE of using credit is the:
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A. increase of debt resulting from credit use.
B. payment of interest on the amount borrowed.
C. potential to misuse credit and spend too much.
D. use of goods and services while making payments.
A DISADVANTAGE of using credit is:
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A. buying items at a low price on sale.
B. having a source of cash for emergencies.
C. the convenience of paying on the Internet.
D. the payment of interest on the amount borrowed.
Jose is nineteen and is trying to establish credit.
What should he do?
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A. Borrow a friend's credit card
B. Fill out a college application
C. Get a loan from his parents
D. Get a secured credit card from a financial institution
Loan Sources
Preferred lenders
– Most reliable lenders
– Examples: banks, credit unions, savings and
loan associations, consumer finance
companies, insurance policy loans, credit card
companies, private loans
Non-preferred lenders
– May take advantage of people with poor credit;
typically charge high interest rates
– AKA “Sub-Prime Lenders” or “Predatory
Lenders”
– Examples: “payday” lenders, pawnbrokers,
loan sharks, auto title loan lenders, tax refund
loan
Considerations When Shopping for
Loans
Conditions of loans
– Annual fees
– Annual percentage rate (APR)---the amount
and whether it changes
– Method used to calculate interest
– Minimum payment
– Grace period
– Minimum finance charge and other fees
– Credit limit
– Special features and services
Considerations When Shopping for
Loans
Cautions when seeking loans
– Always “read the fine print” and know the terms of loans
before signing
– Consider if this would be wise or unwise use of credit
– Remember that, once signed, borrowers are bound by
the terms of the agreement
– Consumers can apply for loans in person, online, over
the telephone or in writing
– Typically, provide information about income,
employment history, residence, credit history
– The lender will likely run a credit check.
– If approved, borrowers may have right to rescission
(cancel) within three days if they choose; a provision of
the Truth in Lending Act
Maintaining Good Credit
Evaluate the need to borrow. Can the purchase
be avoided, delayed or bought on lay-away?
Identify and use the right type of credit for the
intended purchase and shop for the best terms
Know how you will pay it back before you borrow
Only use the amount of credit that you can afford
to repay
Meet all the terms of credit contracts and
agreements
Keep accurate records of charges, statements,
and payments
Consult creditors immediately if you cannot pay
on time
Resolve billing errors promptly
Credit Reports
A credit report is like a report card reflecting how
well a person has used credit resources
Credit reporting agencies maintain records on
how people manage their credit accounts
Equifax, Experian, and TransUnion are three
national credit-reporting agencies
Contains information about employment history,
credit accounts, balances, payment patterns
Consumers should check each of the three credit
reports annually to verify accuracy
The Fair Credit Reporting Act---can get a free
copy of credit reports every 12 months
The FTC site http://www.ftc.gov/freereports
explains how to obtain the free reports
Lender Types Assignment
Go to: http://relistr.com/real-estate/prime-loan-vs-subprimeloan.html
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What
What
What
What
is a “Prime Loan”?
is “Subprime Lending”?
are “Subprime Borrowers”?
are “Subprime Lenders”?
Go to: http://relistr.com/real-estate/avoid-being-a-victim-ofpredatory-lenders.html
– What is “Predatory Lending”?
– List and describe the 8 ways to “Avoid Predatory Lenders”.
Go to: http://www.forbes.com/2007/02/02/credit-score-ficopf-ie-in_cc_0202creditscore_inl.html
– Write a 50 word summary of this article
Go to: http://www.forbes.com/2007/02/02/credit-score-ficopf-iein_cc_0202creditscore_inl_slide_2.html?thisSpeed=15000
– Make sure you pause the videos
– List and describe the “10 ways to improve your credit”
Complete in PowerPoint and submit to Edmodo by end of class.
Bellwork 1-4
Which is an example of a prime or preferred lender?
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A. Gregory obtained a payday loan but the interest rate was very high.
B. Haley went to a loan shark when no one else would give her a loan.
C. Judy obtained a personal loan from the credit union.
D. Katie took jewelry to a pawnbroker to get some cash.
Which is an example of a sub-prime or non-preferred lender?
– A. Carla went to a pawnbroker to get money in exchange for her mother's
pearl ring.
– B. Dean borrowed money from the value of his life insurance policy.
– C. The Coleys obtained a home mortgage from the bank to buy their new
home.
– D. The Dells obtained a loan from a consumer finance company.
As Larry walked across airport terminal, he was stopped by a
representative of a credit card company recruiting people to become
cardholders in exchange for the free gift of two large soft drinks. What
should he do?
– A. Avoid accepting the offer without thoroughly checking terms, including
fine print
– B. Find his friends so they can all benefit from the free drinks
– C. Leave his personal information so the representatives can contact him
later
– D. Walk the other way to avoid talking to the representatives
Signs of a Debt Problem
Consumers find themselves stressed and
constantly worrying over their finances
Having no savings
Having reached the credit limit on most of their
credit cards
Skipping payments on some bills in order to pay
others
Using cash advances on one credit card to pay
another
Relying on credit cards to purchase day-to-day
items like groceries and fast food
Relying on credit cards to pay monthly bills
Opening new credit card accounts in response to
reaching the credit limit on others
Regularly receiving contacts from
creditors/collection agencies trying to collect
unpaid debts
Strategies for Getting out of Debt
Actively deal with the problem; ignoring it
will only make it worse
Stop using credit; focus on repaying the
debt owed
Get help from trained people---a credit
counselor or credit counseling service
Develop a spending plan that includes
living expenses and debt repayment
funds.
Contact creditors immediately, let them
know your situation, ask to have credit
terms adjusted
Bankruptcy (A Last Resort)
Legal relief or forgiveness from repaying certain
debt
Try to deal with debts using all means available
before filing for bankruptcy
Bankruptcy carries serious, long-term
consequences---part of one’s credit report for ten
years
Chapter 7---must sell certain personal
belongings, use proceeds to repay debts
Chapter 13---can retain most personal property,
but must propose a repayment plan, go to credit
counseling, receive financial management
education, and be employed
Bankruptcy Assignment
Find 3 Celebrities/Athletes who have
filed for bankruptcy:
– For each describe how they became
bankrupt
– For each describe the end result of the
bankruptcy