CREDIT BASICS
Advanced Level
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 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
CREDIT SOURCES
Credit card
companies
Private
mortgage
companies
Insurance
agents
There are
many sources
of credit
including…(Cr
editor)
Depository
institutions
Pawn shops
Automobile
dealerships
Government
© 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
WHEN YOU BORROW YOU ARE
SPENDING FUTURE INCOME
Interest is typically paid for the convenience of using credit
Toby’s
Automobile
Loan
8% annual
interest
rate
$10,000
loan
Monthly
payments
for 3 years
$1,280.96
paid in
interest
© Take Charge Today – August 2013– Credit Basics – Slide 4
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
CREDIT CAN BE…
An effective tool if
managed
responsibly
Create financial
stress and
negatively impact
quality of life and
financial well-being
if not managed
responsibly
© 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
MANAGING CREDIT RESPONSIBLY
EVALUATE THE PURPOSE
Ask Yourself
Does the loan/credit provide long-term benefits?
Is the item a want or a need?
Investing in your
human capital with
an education loan
Purchasing a vehicle Having a credit card
to get to and from
to securely make
work with an
online purchases
automobile loan
and for emergencies
Even if the loan provides long-term benefits, the credit terms
should still be favorable
© Take Charge Today – August 2013– Credit Basics – Slide 6
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
MANAGING CREDIT RESPONSIBLY
CONSIDER YOUR OPTIONS
Ask Yourself
Ask Yourself
• Is using money you already
have in a saving or
investment account a
better option?
• Can you wait to purchase
the item until you have
enough money saved?
Benefits:
No contract
No interest or
fees
You are not
spending
future income
© 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
MANAGING CREDIT RESPONSIBLY
EVALUATE THE CONTRACT
A contract outlines how and when you will pay the money back
Are the terms (such as interest rate) favorable?
Is the loan feasible both in the present and in the
future?
Are the terms consistent for the life of the loan?
© 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
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 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
Did Toby have closed-end or open-end credit?
© 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
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 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
LOANS
 Inexpensive loans
 Parents or other family members are often the source of the
least expensive loans. (Low interest)
 Medium Priced Loans
 Commercial banks, savings and loan associations, and credit
unions. (Moderate Interest)
 Expensive Loans
 Easy to obtain. (High interest)
 Home Equity Loan
 a loan based on your home equity or the difference between
the current market value of your home and the amount you
still owe on the mortgage.
© 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
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 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
PAY DAY LOAN CENTERS
5 Practices that snowball consumers
 Lack of underwriting for affordability
 Payday lending business model depends on borrower’s
inability to afford their loan and their subsequent need to
borrow
 High Fees
 Payday lenders typically charge the maximum possible rate
allowed in a stat. As a result the annual percentage rate
(APR) on their loans is often 40% or up to 5,000%.
 Short-Term due date
 Forcing borrowers to repay their principal with in twoweek period.
© 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
PAY DAY LOAN…
Single balloon payment
The entire payday loan balance typically is
due in one lump sum.
Collateral in the form of a post dated
check or access to a bank account
The consequence of not repaying a payday
loan is that the check used as collateral will
be deposited or automatic withdrawal, put
the creditor first inline of being paid.
© 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
PAY DAY LOAN…
Payday loan “Churn”
when borrowers either directly renew
loans or pay back a loan but take out
another shortly thereafter
Half of repeat loans were opened at the
borrower’s first opportunity, 87% within two
weeks, and 94% within one month of the
previous loan.
© 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
PRO’S & CON’S
Pro’s
CONS
Convenient
Expensive (APR ranging from 200% - 675%)
Available to People with Poor Credit
Not a long-term financial solution
A Trap
Can Promote financial irresponsibility
© Take Charge Today – August 2013– Credit Basics – Slide 21
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
CREDIT CARDS
Open-Ended Credit
With a bill occurring on average every 25
days.
Cardholders who pay off their balances in
full each month are often known as
convenience users.
Cardholders who do not pay off their
balances every month are known as
borrowers.
© Take Charge Today – August 2013– Credit Basics – Slide 22
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
5 C’S OF CREDIT
WHAT THEY LOOK AT
 Character
 Will you repay the loan
 Capacity
 You income and debts you already have will affect your ability to
pay addition debt.
 Capital
 Is the amount of your assets that exceeds your liabilities, or the
debts you owe.
 Balance Sheet (Net Worth)
 Collateral
 If you don’t pay off your loan creditors want their money back.
 Credit History
 The review of your past and how responsible you have been with
credit.
 https://www.youtube.com/watch?v= xdflQV9QKXQ
© 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
CREDIT CARDS…
Grace Period
A time period during which no finance charges will
be added to your account
Finance Charge
is the total dollar amount you pay to use credit.
If you pay your total generally you are free
and clear of finance charges.
Borrowers carry balances beyond the grace
period and pay finance charges
© 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
CREDIT CARDS DON’TS
Avoid the Minimum Balance Trap
Causes you to take extra measures in
budgeting to make sure you do not cause
your finances issues.
Pay the interest or other finance charges.
Some charge a annual fee usually about
$20
© 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
CREDIT CARD DON’TS
Paying Late
Charging Near Your Credit limit
Using Your credit Card to take out cash
Ignoring fine print
Don’t take the first card option you see
Consider the actions of closing an older
credit card.
© 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
2.6.2.G1
CHOOSING A CREDIT CARD
The type that fits your needs
Gas, Shopping, Travel, or store tied
Fees and minimums
Low APR
Be hesitant of easy credit
Realize that debit cards are not credit
cards
© Take Charge Today – August 2013– Credit Basics – Slide 27
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 28
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 29
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
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 30
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 31
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
EVALUATE A CONTRACT
Circle items that are potential red
flags
Underline the terms of credit
Annual interest rate
Fees
Consequences of late/missed payments
Other things to consider
Is this a contract you would sign?
© Take Charge Today – August 2013– Credit Basics – Slide 32
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
YOU ARE RESPONSIBLE FOR YOUR
PRESENT SELF AND FUTURE SELF!
Understand
your
responsibilities
as a borrower
Consider
future
implications to
paying back
the amount
borrowed
Shop around
for the best
terms
What types of credit will you need in the next five years?
Where will you go to get it?
© Take Charge Today – August 2013– Credit Basics – Slide 33
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