Unit 7 – Credit and Personal
Finance
Chapter 3, 4, and 5
Chapter 3 – Your Role as
Consumer
Objective:
Types of income
• Disposable income – income that is remaining
for a person to spend or save
• Discretionary Income – money income a
person has left to spend on extras after
necessities have been bought.
Many factors influence our choices
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Income
Scarcity
Time
Opportunity Cost – what we are giving up
Take College for example
• It costs a lot of money to go
• Not everyone gets in and even if you do you
aren’t quaranteed to finish your degree or get
a job in your field.
• It takes a great deal of time and effort
• You have to give up lots of things you could
have been doing instead.
• AND FOR WHAT?????
College Graduates Make More Money!
Amount of Education
Males
Females
No high school diploma
19,802
10,613
High School Graduate
27,527
15,972
Some College
35,023
20,602
Bachelor’s Degree
55,188
34,292
Professional Degree
88,216
44, 748
Rational Choices
• Choosing the alternative that has the greatest
value from among comparable quality
products.
• The best choice for you given the options
• Generates the greatest value compared to
other options.
Advertising
• Competitive – attempts to persuade
consumers that a product is different from
and to superior to any other product
• Informative – benefits consumers by
providing useful information.
• Bait and Switch – ad that attracts consumers
by advertising a very low priced item but tries
to sell you a high priced item at the store,
saying the sale item is poor quality.
Comparison Shopping
Positives
• Lower prices
Negatives
• Takes a lot of time
– Can find lower prices
– Can ask for price matching to
get lower prices at local
stores
• Better Quality Products
What are some things that should be considered
when comparison shopping?
- the value of your time spend comparing should not be greater than the value
that you save comparing.
Which type of advertising is beneficial
to consumers
• A. Bait and Switch
• B. Competitive
• C. Informative
Chapter 4 – Going into Debt
Objective:
-Students will understand the role of credit
in their personal and financial lives.
-Students will be able to understand how to
use credit and find their credit scores.
What is Credit?
• Receiving funds to buy goods or services in
the present with the promise to pay for them
in the future.
Why do people use Credit?
• To make large purchased that they can’t save
enough money to pay for.
– A home
– A car
• To make purchases now, so that they don’t
have to wait to buy the good or service.
– Television
– Clothing
How do you decided if you should use
credit or not? Ask yourself.
• Do you really need the item? Can you wait to
purchase it until a later time?
• What would I have to give up to pay cash for this
item?
• Will the satisfaction that I get from the item be
greater or less than the interest I will pay on the
item?
• Have I compared enough credit options to make
the best credit decision, if I decide to use credit?
• Can I afford to use credit now?
I would use credit to purchase a?
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A. Playstation
B. Clothes
C. Car
D. Groceries
Price of using credit
• Principal – amount originally borrowed in
loan.
• Interest – amount the borrower must pay for
the use of someone else’s funds.
Installment vs Revolving Credit
• Make monthly payments for
a specified number of
months until the purchase is
paid in full.
– Home
– Car
– Some large ticket store items
• Continue adding interest to
the principle based on a
remaining balance each
month.
– Allows to you make additional
purchases on the account
before other items are paid
off.
– Department store cards
– Credit Cards
True or False
• Installment credit would be used to purchase
a few household items from sears.
When to use installment credit
• Durable goods – goods that last for longer
than 3 years. Usually have a higher value and
require the use of credit to make the
purchase.
• Mortgage – installment debt for the
ownership of a house or land.
Paying a Mortgage
• The average home owner pays more than
double for their home if they choose to pay
only the installment payment over a period of
a 30 year loan.
– My house, that I bought for 149,000.00 will end
up costing us over 300,000.00 if we pay just the
installment and live in it for 30 years.
– If you can afford to make even 1 extra house
payment per year, you will save yourself about
50,000.00 on interest.
When to use revolving credit
• Never… if you don’t need to or can’t afford to
pay if off quickly.
• When you need to make a purchase, but the
good or service should be paid off in a
relatively short amount of time.
• The longer it takes you to pay off your debt
the more money you will spend in interest.
True or False
• Revolving credit isn’t bad if you pay it off in
full each month.
Where can I get credit?
Commercial Banks
• Banks whose main function is to accept
deposits, lends funds, and transfer funds
between banks, individuals, and businesses.
Savings and Loan Associations
• Depository institutions that accept deposits
and loan funds.
– Mortgage loans
– Finance commercial auto companies
– Usually have a slightly lower interest rate than
commercial banks.
Savings Banks
• Depository institutions set up for small savers
who were overlooked by commercial banks.
– Mortgages
– Auto Loans
– Personal Loans
– Have some saving and checking accounts
Credit Unions
• Depository institutions owned and operated
by its members to provide savings accounts
and low interest loans.
– Offer auto and personal loans, but only large ones
offer mortgage loans.
– Typically have higher interest rates on savings
accounts and lower interest rates on loans.
Finance Companies
• Companies that take the contract for
installment debt from stores and adds a
collection fee for collecting the debt.
– Collection agencies
Consumer Finance Company
• A big financial NO NO!!
• Makes loans directly to consumers at
ridiculously high interest rates.
– PayDay Loans (Payroll advances) – people can get
small loans to cover expenses until they get paid,
the catch is that when they do get paid a large
percentage of the paycheck will go to pay the loan
fee (as much as 30%). This can cause people to
get trapped into taking our many loans to keep up
with the debt, and may end up paying whole
paychecks in fees.
The best place to get credit is…
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A. Credit Union
B. Consumer Finance Company
C. Local Store
D. Visa, Mastercard, Discover
What is a Payday Loan?
• Pay Day Loans (Payroll advances) – people can get
small loans to cover expenses until they get paid, the
catch is that when they do get paid a large
percentage of the paycheck will go to pay the loan
fee (as much as 30%). This can cause people to get
trapped into taking our many loans to keep up with
the debt, and may end up paying whole paychecks in
fees.
Credit Cards and Charge Accounts
Charge Account
• Credit extended to a customer allowing them
to purchase goods or services at that
particular company and to pay for them later.
– Sears, Kay Jewelers, Victoria’s Secret
Types of Charge Accounts
– Regular Charge Account – a purchase is made and
a bill is sent, at the end of the month. If the bill is
paid in full no interest is charged, if not paid if full
by the due date, interest will be charged on the
full bill!!
– Revolving Charge Account – allows you to make
additional purchases and carry a balance on the
bill.
Credit Cards
• Credit device that allows individuals to make
purchases at many kinds of stores,
restaurants, and other businesses on credit.
• How is a credit card different from a Debit
Card?
– Debit cards take money directly from a savings or
checking account at a bank, thus you are spending
money that you already have.
• When you use your debit card as credit you are still
taking money from your account, but you need to sign
the receipt rather than enter a pin number.
True or False
• Credit doesn’t cost me anything if I have good
credit.
The Cost of Credit
Finance Charges
• Cost of credit expressed in
monthly dollars and cents
– Based on the balance of the
bill at any given time of the
month
– This time difference may
affect how much your finance
charge will be.
• 4 different methods are used
for computing a finance
charge
Annual Percentage Rates
• Cost of using credit
expressed in a yearly
percentage amount.
– Easy way to detemine which
credit cards have the highest
interest rate.
• 13 %(card A) is lower than
17% (card B), so card A is
charging a lower interest
rate than card B
How can I get Credit?
• Credit Bureau – private business that
investigates a person to determine the risk
involved in lending to that person.
• Credit Check – Investigation of a person’s
income, current debts, personal life, and pat
history of borrowing and repaying debt.
• Credit Rating – rating of the risk involved in
lending to a specific person or business
FICO Score
• Score given to a person based on their credit
history. This score is what the three credit
rating companies give you to determine if you
are worthy of credit.
– Lenders use this score to help them determine if
they want to offer you credit, or how likely you
will be to pay back a loan.
What’s a good FICO score?
Credit Score
Credit Rating
700 - 830
Excellent
680 - 699
Good
620 - 679
Fair
580 - 619
Poor
Under 580
Very Poor
What can hurt my credit rating?
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Making late payments
High debt-to-income ratio
Having many open accounts
Previous Bankruptcy
Unemployment
Legal Trouble
How can I build my credit?
• Use credit to make small purchases and pay
them back right away.
• Make all credit payments on time.
• May more than the minimum balance.
• Don’t take out credit at too many locations.
What agency provides your credit
score?
What happens if I don’t pay?
• Lender may have to hire collections agencies
to retrieve the funds.
• Lender may have to take a loss on the item
– If this happens they make the money back by
increasing the prices of their products to
consumers
• You will get a negative mark on your credit
making it more difficult to use credit in the
future.
True or False
• Nothing happens when I don’t pay my bill, I
can just pay double next time.
Taking out a loan
• Secured Loan – loan that is backed up by
collateral
• Unsecured Loan – loan guaranteed only by a
promise to repay it.
• Cosigner – person who signs a loan contract
with the borrower, if the borrower doesn’t
have enough credit, and pays the loan back if
the borrower doesn’t.
How do I get out of credit debt?
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Pay your highest interest cards off first
Pay more than the minimum payment
Analyze your situation
Try to negotiate new terms with creditors
Use government resources to help you
Spend less money so that you can afford to
make larger payments and don’t add to the
debt you already have.
Best way to stay out of debt is to…
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A. Pay off high interest cards first
B. Not carry a balance on your credit
C. Use credit a lot
D. Never use credit for small purchases
How does the government regulate
credit?
Laws that protect consumers
• Truth in Lending Act – required creditors to
keep consumers informed about the costs and
conditions for borrowing.
• Equal Opportunity Act – can’t be denied
credit based on race, religion, marital status,
gender, sexual preference, ect.
• State Usury Laws – restrict the amount of
interest that can be charged
What is bankruptcy?
• Bankruptcy – being legally declared unable to
pay off debts that you owe (some debts and
taxes must still be paid).
– Remains on your credit score for 10 years.
• May be difficult to get credit during this time
– Creditors are never paid when customers declare
bankruptcy.
Answer this
• What regulation requires lenders to be
upfront about their terms?
Chapter 5 – Buying the
Necessities
Objective:
-Students will learn to make smart
purchases with their money.
- Students will learn to shop for the best
deal and purchase only what they can
afford.
Places to Shop
• Club Warehouse Stores
– Store that carries a
limited number of
brands and items in large
quantities.
– Less expensive than
grocery/department
stores
– More money is tied up in
food.
– Some food may spoil
before you eat it
• Convenience Stores
– Open 16-24 hours a day/
7 days a week
– Carry a limited selections
– Higher prices
What to look for when buying clothing
• Durability – ability of an item to last a long
time
– Service Flow – amount of use a person gets from
an item and the value they place on its use.
• Style
• Cost of Care
– Dry clean only…for example costs money to have
cleaned
What are some ways to save money on
clothing?
You living situation… Rent or Own?
• Americans spend 1/4 to 1/3 of their income
on their home.
• Most Americans wait to purchase a home until
they become more financially stable.
– It is more difficult to get out of a living situation if
you own the home.
Renting Vs. Owning
Renting a Home
• Short term agreement
• Slightly less monthly
payment
– Rent my increase at any time
• Don’t build equity
• Never go up in value
Owning a Home
• Long term agreement
• Higher monthly payment
– Same each month, except for
taxes (depending on loan
agreement)
• Builds equity- market value
minus mortgage still owed
• Houses appreciate – go up
in value
Renter need to knows!
• Lease – long-term agreement describing the
terms under which property is rented.
– Make sure to read carefully!!
• Security Deposit – funds a renter lets an owner
hold in case the rent is not paid or the apartment
is damaged.
– The landlord gets to keep this money if it costs them
money to get the apartment into renting condition
again.
• You must give several months notice in many
apartments before you move, especially if your
lease is not up!
Read before you sign
Avoid Clauses like this…
• Confession of judgment –
your landlord can plead
guilty for you without your
consent.
• Inability to sue – you give
up the right to sue the
landlord if you suffer from
their negligence.
• Arbitrary clause – owner
can cancel the least because
of dissatisfaction with you.
Add these Clauses…
• Ask for appliances(if not
provided)
• Access apartment
recreation facilities
• Painting or other promises
by the landlord
• The right to cancel your
lease if your job changes or
relocates you
– Might have to pay a fee
• Add new lighting and
fixtures, but keep them
when you leave
Things to consider when buying a
home
• Down Payment
• Mortgage Payments
• Closing Costs – fees involved in arranging for the
change in ownership of a home.
• Property Taxes
• Specials
• Points
• Homeowners Insurance
• Mortgage Insurance (it is cheaper to purchase a life
insurance plan that will be enough to pay off your mortgage in
the event of a death)
• Utilities and upkeep
Suggestions
• Use a Mortgage calculator to find out what the
monthly payments would be on a home in your
price range.
– If the payment is more than 30-35% of your
income…the home is too expensive for you to afford.
– Banks may lend you more than you can afford…if you
can’t pay they can forclose on you and you will loose
the home and all of the money you have already paid.
• Research lots of homes in your price range to see
if you are getting a good deal.
• Ask the seller to reduce the price by a few
thousand, and ask them to pay the closing
costs…many will.
Choosing a new/used Car
• New or Used?
– Depreciation – decline in value over time. New
cars depreciate very fast!
• Registration fees – licensing fee that is
annually paid to the state for the right to use
the car.
• Extended Warranty
– Do you need it? Can you afford it? Can it be
repaid if you sell the car before the warranty
expires?
Continued…
• Normal Maintenance or Repairs
– Gas type and amount
– Cost of parts and labor for this type of car
– Foreign or domestic
• Insurance for the car
– Liability or full coverage?
• Full Coverage – covers everything
• Liability – insurance that pays for bodily injury or
property damage (for the other drivers car)
Insurance rates are based on…
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Type of car you drive (make, model, color)
Where you are driving
What the car is being used for
Marital status
Driving record
Grades in school
Number of drivers
Number of cars on the policy
Defensive Driving
The End