CREDIT BASICS
Advanced Level
2.6.2.G1
TODAY
Take 10 minutes to review
Unit 3 test
Advantages and Disadvantages of
Credit
Three types of Credit
Next class….
© Take Charge Today – August 2013– Credit Basics – Slide 2
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
WHAT DO WE KNOW
What kind of credit do we use in the
Budget Challenge?
Which payments are the same every
month?
Which one is different?
© Take Charge Today – August 2013– Credit Basics – Slide 3
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
ADVANTAGES AND
DISADVANTAGES OF CREDIT
Advantages:
Able to buy needed items now
Don’t have to carry cash
Creates a record of purchases
More convenient than writing checks
Consolidates bills into one payment
© Take Charge Today – August 2013– Credit Basics – Slide 4
teens –
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
lesson 7 - slide 7-A
2.6.2.G1
YOUR PRESENT SELF IMPACTS
YOUR FUTURE SELF
You receive goods
or services today
With the promise to pay back
the determined amount of
money (usually in small
increments plus interest) in the
future
Credit availability depends on if lenders trust you
will pay back the loan as agreed.
© Take Charge Today – August 2013– Credit Basics – Slide 5
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
THE THREE CS
character—will you repay the debt?
From your credit history, does it look like you possess
the honesty and reliability to pay credit debts?
capital—what if you don’t repay the debt?
Do you have any valuable assets such as real estate,
savings, or investments that could be used to repay
credit debts if income is unavailable?
capacity—can you repay the debt?
Have you been working regularly in an occupation that is
likely to provide enough income to support your credit
use? How many other loan payments do you have?
© Take Charge Today – August 2013– Credit Basics – Slide 6
teens –
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
lesson 7 - slide 7-B
2.6.2.G1
CREDIT SOURCES
Credit card
companies
Private
mortgage
companies
Insurance
agents
Depository
institutions
There are
many sources
of credit
including…
Pawn shops
Automobile
dealerships
Government
What credit sources provide the most favorable terms?
© Take Charge Today – August 2013– Credit Basics – Slide 7
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
AMOUNT YOU BORROW
Amount you borrow
Total amount
should be less than
20% of annual net
income
Monthly payment
should be less than
10% of monthly
net income
Housing payments are not included as a part of the monthly 10%
Why should individuals limit their debt?
© Take Charge Today – August 2013– Credit Basics – Slide 8
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
TYPES OF CREDIT
3 Types
Closed-end Credit
Open-end Credit
Alternative Credit
What is collateral?
An asset used to secure the loan in the event
that borrower cannot repay the loan
© Take Charge Today – August 2013– Credit Basics – Slide 9
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
CLOSED-END CREDIT
(INSTALLMENT)
What it is…
Loan which the
borrower must
repay the amount
in a specified
number of equal
payments
Features…
Contract outlining
repayment terms
Examples…
Mortgage
Automobile loan
Personal loan
Student loan
© Take Charge Today – August 2013– Credit Basics – Slide 10
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
EXAMPLE
CLOSED-END OR INSTALLMENT CREDIT
Toby applied for a $10,000 automobile loan at 8%. He signs a
contract with the lender to pay $313.36 per month for 36 months
to repay the loan.
$313.36
$313.36
$313.36
$313.36
$313.36
$313.36
Toby could pay more than $313.36 per month to pay off the
loan earlier, but he must pay at least $313.36 per month.
© Take Charge Today – August 2013– Credit Basics – Slide 11
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
OPEN-END CREDIT
( R EVO LV ING)
What it is…
Extended line of
credit established
in advance
Features…
Example…
Loan may be paid
(usually monthly) Credit card
in a single payment
or series of
unequal payments
© Take Charge Today – August 2013– Credit Basics – Slide 12
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
EXAMPLE
OPEN-END OR REVOLVING CREDIT
Whitney charged $200 to her credit card with a 13% interest rate.
She receives her credit card bill with a $20 minimum payment.
Whitney has many options for paying back the $200 as long as
she makes the minimum payment.
$200
$0
$0
$34.61
$34.61
$34.61
$0
$0
$20
$34.61
$34.61
$0
$34.61
$20
$30
$50
$40
© Take Charge Today – August 2013– Credit Basics – Slide 13
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
$30
2.6.2.G1
ALTERNATIVE CREDIT
May combine
elements of closed
and open-end
credit
Usually has higher
interest rates
Usually has higher
fees
© Take Charge Today – August 2013– Credit Basics – Slide 14
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
TYPES OF ALTERNATIVE CREDIT
PAY DAY LOA N
Short-term loan that provides immediate cash by securing a
borrower’s written check or automatic withdrawal form
The loan…
• Total loan: $350
• Lender fees: $60
• Amount the
borrower
receives: $290
On the agreed
upon date
(usually
payday)…
• Lender seeks their
fees
• By depositing the
check or
withdrawing the
money
If the borrower
does not have
money in their
account…
•Accumulate fees and
possible legal action
•Or, pay $60 fee again to
keep the existing loan
outstanding or take out a
new loan
© Take Charge Today – August 2013– Credit Basics – Slide 15
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
http://www.youtube.com/watch?v=3r
OVmUnUM7A
© Take Charge Today – August 2013– Credit Basics – Slide 16
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
TYPES OF ALTERNATIVE CREDIT
R EN T - TO-OWN
Borrower leases tangible items with the condition that the item will
be owned by the renter if the term of rent is completed
Purchase a
50” LCD TV
valued at
$1,890
Pay$39.99
per week
for 104
weeks
Total paid:
$4,158.96
What are alternative options?
Interest
rate paid:
92%
© Take Charge Today – August 2013– Credit Basics – Slide 17
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
TYPES OF ALTERNATIVE CREDIT
T I T L E A N D PAWN LOA N
The loan…
Borrower gives the
lender their
automobile title or
personal property in
exchange for cash
(based on value of
item)
To get their item back, the borrower must…
If credit terms are not
met…
Pay the lender back
cash and fees/interest
within a specified time The lender keeps
the item
period
What are alternative options?
© Take Charge Today – August 2013– Credit Basics – Slide 18
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
TYPES OF ALTERNATIVE CREDIT
R EF U ND A N T I CI PATION LOA N
Lender gives
borrower a
loan based
upon their
anticipated
tax refund
Lender
charges the
borrower a
fee for this
service
Borrower
authorizes
the Internal
Revenue
Service to
deposit
money
directly into
the lenders
account
If the
borrowers
refund was
less than the
loan
amount,
they owe the
lender the
difference
© Take Charge Today – August 2013– Credit Basics – Slide 19
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
HOW TO OBTAIN CREDIT
Credit application
Exact process
depends on
the type of
credit and
lender
A form
requesting
information
about a
credit
applicant
Typical questions
Personal
information
Credit
requested
Credit history
check
Evaluate your
credit report
and score
The trade-off
to no credit
history check
is often
higher
interest rates
and fees
Information
about your
ability to
repay the
credit
What type of loans typically advertise no credit check?
© Take Charge Today – August 2013– Credit Basics – Slide 20
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
YOUR RESPONSIBILITIES
 Borrow only what you can repay.
 Read and understand the credit contract.
 Pay debts promptly.
 Notify creditor if you cannot meet payments.
 Report lost or stolen credit cards promptly.
 Never give your card number over the phone
unless you initiated the call or are certain of the
caller’s identity.
© Take Charge Today – August 2013– Credit Basics – Slide 21
teens –
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
lesson 7 - slide 7-C
2.6.2.G1
YOUR RIGHTS
Truth in Lending Act (1968)
Ensures consumers are fully informed about cost
and conditions of borrowing.
 Requires disclosure!
State Usury Laws
 Limits maximum interest to be charged on
some loans!
© Take Charge Today – August 2013– Credit Basics – Slide 22
teens –
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
lesson 7 - slide 7-D
2.6.2.G1
SHOPPING FOR CREDIT
Shop around with different lenders!
Terms of
credit are
outlined in
the
contract
Read the
contract
carefully!
Ask
questions!
© Take Charge Today – August 2013– Credit Basics – Slide 23
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
SHOPPING FOR CREDIT
EVALUATE THE CONTRACT CAREFULLY!
What is the
annual interest
rate?
Are there fees?
What happens if
the loan is not
paid back in full?
What are the
consequences of
a missed or late
payment?
Do you trust and
feel comfortable
with the lender?
© Take Charge Today – August 2013– Credit Basics – Slide 24
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
IN CONCLUSION
Complete the activity
Be prepared to share your answers
when you are done!
Next Class = Credit Cards and Credit
Scores
© Take Charge Today – August 2013– Credit Basics – Slide 25
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona
2.6.2.G1
IDENTITY THEFT CLIP
http://abcnews.go.com/Nightline/video/n
ightline-secrets-identity-thief-26417147
http://abcnews.go.com/WNT/video/unde
rcover-investigation-credit-card-fraudidentity-theft-rise-24080640
http://abcnews.go.com/GMA/video/cyber
theft-rise-24563829
© Take Charge Today – August 2013– Credit Basics – Slide 26
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at the University of Arizona