Credit
Bell Ringer
1. Is a credit card good or bad?
2. What would be considered good credit?
3. On average how many credit cards does
the average household have?
4. How do credit cards make money?
Video
• Who are credit card companies best
and worst customers?
• Should people use credit cards as an
emergency fund? Why or why not.
• 0% interest
• Late fees
Chapter 4 - Credit
Credit and Installment Debt
Terms
• Credit - is receiving funds either directly or
indirectly to buy goods and services today
with the promise to pay for them in the
future
• Principal - The amount that was originally
borrowed
• Interest - the amount that the borrower must
pay for the use of someone else’s funds.
Credit and Installment Debt
Terms
• Installment Debt - One of the most common
types of debt, this loan requires equal
payments over time
• Period - the term used for the length of time
of the loan
• Durable Goods - goods that last longer than
3 years and are often purchased using credit
 What are some examples of durable goods?
Consumer Installment Debt
in U.S.
•
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Consumer Installment Debt
in U.S
Types of Credit
Characteristics
Close-end Credit
Open-end credit
(revolving credit)
Definition
A one-time loan
Credit is extended in
advance
Purpose of the loan
Specified in
application
May be used for a
variety of purposes
Payments
Specified number of
equal payments
Vary depending upon
amount charged
Loan amount
Agreed upon during
May be increased for
the application process responsible consumers
Examples
Mortgage, Automobile Credit Card
Loan
Mortgages
• Mortgage - installment
debt on real property
such as houses,
buildings or land.
 Largest form of
installment debt in the
country
Pay Now or Pay Later!
$1,000 Installment Loan at 9% Interest
Term of Loan
24 Month
36 Months
Monthly Payments
$45.69
$31.80
Total Interest
$96.56
$144.80
$1096.56
$1,144.80
Total Payments
Why People Use Credit Advantages
• “Buy now, pay later”
 Using credit allows the
borrower to enjoy
consumption now
rather than later
 Items that are too
expensive would often
take too long to save
for
• Builds/establishes your
credit history & credit
score
• Convenient
• Useful for emergencies
• Often required to hold a
reservation
• Easy form of debt
consolidation
• Protection against rip-offs
and fraud
Credit - Disadvantages
• Missed payments hurt
your score
• Opening too many
cards hurts your score
• Late Fees, Finance
charges
• Going over credit limit
• Interest is costly
• Tempting to
overspend
• Privacy is an
increasing concern
• Personally responsible
for lost/stolen cards
• Identity theft easier
• Can lose financial
freedom from
overspending
Checklist for Buying on
Credit
• The following questions should help you in
determining whether to use credit or not.
 Do I really require this item? Can I postpone
purchasing this item until later?
 If I pay cash, what will I be giving up that I could buy
with these funds?
 If I borrow or use credit, will the satisfaction I get from
the item I buy be greater than the interest I must pay?
 Have I done comparison shopping for credit?
 Can I afford to use credit now?
Credit scores
• A FICO (Fair Isaac Company) score is an evaluation of a
person’s ability to repay debt
 It is a number between 300 and 850
• A higher number is a better credit score
 Indicator of a person’s ability to pay back a loan
• A lower score may increase the interest rates a consumer
pays or they may not receive credit
 The creditor has a greater risk that the individual may
not pay back the money they loaned
Credit Scores
• Credit cards may influence each component of how
an individual’s credit score is calculated
Credit Mix
Pursuit of N ew Credit
Credit H istory & Length
Outstanding Debt
Payment H istory
35%
10%
10%
15%
30%
Credit scores
• Low credit scores will cost individuals more money
long-term.
 This table is based upon a thirty-year fixed mortgage rate
on a $300,000 loan.
FICO Score
Interest Rate
Monthly
Payment
30 Year Amount
760
650
590
5.9%
7.2%
9.3%
$1,787
$2,047
$2,500
$643,320
$736,920
$900,000
Credit Scores, cont.
• Check your credit score & credit report
once a year – but not more than once in 12
months!
• If your credit is checked more than once
every 12 mos, each inquiry after that starts
to hurt your score
• 3 credit reporting agencies are: Equifax,
Experian, and TransUnion