Consumer Credit
Chapter 4
Live within your income,
even if you have to borrow
money to do so.
- Josh Billings
The use of credit cards:
• There are almost a billion MasterCard and Visa
credit and debit cards in the United States.
• In 2006, Visa cardholders made more than
$1,000,000,000,000 in purchases
• Today’s consumer owes money, on average, to
13 different lending institutions.
• More than half of the United States
population has at least 2 credit cards.
What do you need to know
before using credit?
2 ways to make a purchase:
1) Buy now, pay now
2) Buy now, pay later
 Anytime you purhcase something that you do not pay
for immediately, you are using credit.
 How is using electricity a form of credit?
 What other daily activities can be considered credit?
Buy now, pay later
 Any time you purchase something that you do not
pay for immediately
- Credit
 People who use credit
- Debtors
 Organizations or people that extend credit to
consumers
- Creditors
What are the advantages
and disadvantages of using
credit?
Why does using credit
tempt overspending?
Installment Plans
• The customer pays for the merchandise over a
period of time.
• The customer pays part of the selling price at the
time of purchase (down payment)
• The rest of the selling price is paid in monthly
installments.
• Customers are also charged interest, also known as
a finance charge
Heather wants to purchase an electric guitar.
The price of the guitar with tax is $2,240. If
she can save $90 per month, how long will it
take her to save up for the guitar?
Is Heather using credit?
Divide selling price by monthly savings
2,240

90
 24.9 → 25 months
Heather speaks to a salesperson who
suggests she buy the guitar on an installment
plan. It requires a 15% down payment. The
remainder, plus an additional finance charge,
is paid back on a monthly basis for the next
two years. The monthly payment is $88.75.
What is the finance charge?
Down payment of 15% of selling price
How do you find 15% of $2,240
= (0.15) x (2,240) = $336
Price = $2,240;
Down payment = $336
• Makes a monthly payment of $88.75 for 2 years
– (24 months) x (88.75) = $2,130
• How much did she pay for the guitar?
$2,130 + $336 = $2,466
• What was the finance charge?
$2,466 - $2,240 = $226
Class Work
• Page 178, 2-6
Consumer Credit
Chapter 4
He that goes a borrowing
goes a sorrowing.
Benjamin Franklin
What is:
• Credit?
• Finance Charge?
• Creditor?
• Debtor?
Carpet King is trying to increase sales, and it
has instituted an installment plan with no
interest, as long as the total is paid in full
within six months. There is a $20 minimum
monthly payment required. If you buy a carpet
for $2,134 and make only the minimum
payments for five months, how much will you
have to pay in the sixth month?
→ $20 a month for 5 months = $100
→ You will need to pay $2,034 in the sixth
month
2. Monique buys a $4,700 air conditioning
system using an installment plan that requires
15% down. How much is the down payment?
→ What is 15% of $4,700?
= (0.15) x (4,700)
= $705
How much will Monique have left to pay?
= 4,700 - 705
= $3,995
3. Craig wants to purchase a boat that costs
$1,420. He signs an installment agreement
requiring a 20% down payment. He currently
has $250 saved. Does he have enough?
→ What is 20% of $1,420?
= (0.20) x (1,420)
= $284
Does he have enough?
Nope
4. Jean bought a $1,980 snow thrower on the
installment plan. The agreement included a
10% down payment and 18 monthly payments
of $116 each.
a) How much is the down payment?
= (0.10) x (1,980) = $198
b) What is the total amount of the monthly
payments?
= ($116) x (18 months) = $2,088
c) How much did Jean pay for the snow thrower?
= $198 + $2,088 = $2,286
5. Linda bought a washer and dryer for y
dollars. She signed an installment agreement
requiring a 15% down payment and monthly
payment of x dollars for one year.
a) How much is the down payment?
= (0.15) (y) = 0.15y
b) How many monthly payments? 12
c) What is the total amount of monthly payments?
= (12) (x) = 12x
c) How much did Linda pay for the washer & dryer?
= 0.15y + 12x
5. How much is the finance charge?
= Amount paid – price of purchase
= 0.15y + 12x - y
6. Zeke bought a $2,300 bobsled on the
installment plan. He made a $450 down
payment, and he has to make monthly
payments of $93.50 for the next two years.
How much interest will he pay?
Down Payment: $450
Monthly payment amount:(93.50) (24) = $2,244
Total amount paid: $450 + $2,244 = $2,694
Interest: $2,694 - $2,300 = $394
The Whittendale family purchases a new
refrigerator on a no-interest-for-one-year plan.
The cost is $1,385. There is no down
payment. If they make a monthly payment of x
dollars until the last month, express their last
month’s payment algebraically.
Down Payment: $0
Monthly payment amount:(11) (x) = 11x
Total amount paid: 11x
Last Payment: $1,385 – 11x
Try this:
You purchase a guitar that costs “p” dollars.
You make a 20% down payment for a oneyear installment plan and pay “w” dollars per
month. Express your finance charge
algebraically.
Down Payment: 0.2p
Monthly payment amount:(12) (w) = 12w
Total amount paid: 0.2p + 12w
Finance Charge: 0.2p + 12w - p
Class Work
• Page 178, 7 – 11, skip part
e in number 11
7. Gary is buying a $1,250 computer on the
installment plan. He makes a down payment
of $150. He has to make monthly payments of
$48.25 for 2 ½ years. What is the finance
charge?
Down Payment: $150
Monthly payment amount:(48.25) (30) = $1,447.50
Total amount paid: $1,597.50
Last Payment: $1,597.50 - $1,250 = $347.50
8. Mazzeo’s Appliance Store requires a down
payment of 1/3 on all installment purchases.
Norton’s Depot requires a 30% down payment
on installment purchases. Which store’s down
payment rate is lower?
Mazzeo’s 1/3 down payment = 33.33%
Norton’s Depot = 30%
Norton’s Depot is lower
9. Ari purchased a microwave oven on the
installment plan for m dollars. He made a 20%
down payment and agreed to pay x dollars per
month for the two years. Find the finance
charge
down payment = 20% of m = 0.2m
Monthly payments: x dollars for 2 years = 24x
Finance Charge: Paying Prince – Selling price
= 24x + 0.2m - m
10. Adam bought a $1,670 video game
system for no-interest. He made $100 down
payment and agreed to pay off the entire
purchase in 1 ½ years. The minimum
payment is $10. If he pays the minimum up
until the last month, what will his last payment
be?
down payment = $100
Monthly payments: ($10) (17) = $170
Total Paid: $100 + $170 = $270
Last Payment: $1,670 - $270 = $1,400
11.Open the following spreadsheet:
4.1 homework problem 11
Consumer Credit
Credit Rating
Credit Rating:
• Remember that credit is a promise to repay
all the borrowed money
• This means that credit is based on honesty
• Your honesty is determined by your credit
rating
•Better rating → Lower finance charges
Credit Rating:
• Your credit rating is based on 3 things:
1) Total Assets
 Everything you own
2) Earning Power
 Your ability to make money now and in the
future
3) Credit History
 Your previous credit record
Credit Score:
• Most popular score is the FICO Score
- Credit score ranges from 300 to 850
- Higher the score, better the credit rating
- Better the credit rating, less risky it is to
lend you money
- Less risk → Lower interest rate
FICO Score:
• checked when you apply for:
•Mortgage
•Car Loan
•Credit Card
•Rental Apartment
•Even Prospective Employer
• 3 Major Credit Bureaus:
•Experian, Transunion, and Equifax
FICO History:
• Originally only contained negative
information
•Fair Credit Act of 1971
•Positive information is added
•You gain the right to see your credit score
•1989 – FICO score is adapted
FICO Significance:
• You are judged by a number
•300 – extremely risky borrower
•850 – Perfect borrower
•Low rating can determine whether you get a
loan, apartment, or even job
•Nobody can check your credit report without
your permission
FICO Effects:
• Credit rating of 650 and lower, you may still
get a loan, but much higher interest rate
- Can mean hundreds of dollars more
- May also need larger down payment
•Landlords also check credit rating before
renting
•Employers also check credit rating
- Want to know how disciplined you are
FICO Prevention/Solutions:
• To keep your credit rating high:
- Pay all your bills on time
- If you pay a bill late, pay it before it
reaches the 30 day mark.
- Limit the number of times you apply for
credit and credit cards
- Never let any bills go to collections
You can check your credit report for free once
a year from each of the 3 bureaus
Your grandfather is debt-free – he bought his
car and his house without taking out a loan.
He saved and paid cash. He wanted to take
out a loan to buy you a car for college
graduation. The bank turned him down when
he applied for credit. Why would this happen?
The following inequalities give information on
your credit score, with x being your score:
• If x > 700, your credit score is excellent
•If 680 < x < 700, your credit score is good
•If 620 < x < 680, your credit score should be
watched carefully
•If 580 < x < 620, your credit score is low
•If x < 580, your credit score is poor
If you have a low credit score, but receive 40
points for paying off some debt, is it possible
your credit moves to good?
Class Work
• Page 178, 12 - 16