What is credit?
VOCAB TO KNOW!
Credit: trust given to another person for future payment of a loan, credit card balance, etc
Creditor: A person or company to whom a debt is owed
Debtor: A person or company that owes a debt (has a liability)
Debt (payments)-to-equity ratio: calculated by dividing total liabilities (or monthly debt
payments) by net worth

Helps creditors/lenders determine an individual’s ability to manage monthly payment and repay debts
Sources of Credit
Who approves/gives credit?

Banks

Credit Unions

Retail Stores

Finance companies*--your typical source; can
charge high interest rates for those with low
credit scores

Credit card cash advances

Savings & Loans

Internet stores

Mortgage brokers/lenders
AVOID these sources!

“Payday” loan/check cashing companies—
use your next paycheck as collateral for the
loan; creates “vicious cycle” of borrowing

Predatory lenders (“sharks”)

Pawnshops (if you don’t pay your balance on
loan)

Collateral-based

Balance owed + all added fees -- before the
deadline, which is usually one to four months
after the initial transaction

If you don’t pay or return for your item, the
pawnshop keeps and can sell your item
Types of Credit

I.O.U. (personal loans)

Revolving Credit (credit cards)

Installment Loans

Student loans (subsidized and
unsubsidized)

Real estate loans (mortgages)

Cash loans

Car loans
AVOID ABUSIVE LENDING!
Have you shopped around for the
best deal?
2. Do you feel the lender pressured you
to take the loan?
3. Do you understand the terms of the
loan?
1.
If the answer is not in your favor, don’t be
afraid to ask and research—make an
INFORMED decision!
Maintaining good credit

Always pay your bills on time.

Have checking and savings accounts that
are current.
BE YOUR OWN BEST FRIEND!
1.

Avoid late fees.
2.

Get a copy of your credit report every year.
Check to make sure it is
3.

accurate, and report any problems with it
immediately.



Do not live off credit or be tempted to use
credit to spend beyond your means.
Use credit card numbers only when you are
sure the transaction is secure.
4.
5.
6.
7.
8.
9.
What is the annual fee?
What is the annual percentage rate (APR)?
When are payments due?
What is the minimum payment required each
month?
Is there a grace period?
Are there other fees associated with the credit,
such as minimum finance charges?
What is the credit limit?
What are the penalties for late or missed
payments?
What are the terms and conditions of the
credit? What else is included in the fine print?
Costs of Credit
When should I use credit?



In times of emergencies, family
crisis, unexpected illness, etc.
As convenient way to manage
income by keeping track of
spending—if bills are paid in full
each month
Benefit of having large items such
as a home, car, and appliances
while still paying for them
When shouldn’t I use credit?



If you cannot control spending
beyond one’s means

Creates fees, compounding interest

Think about wants vs. needs!

Think about lender reliability and
security
When credit takes away your
needed income, just to pay off
your loan(s)
When there is concern that the
credit cards/numbers may be
stolen
Keep in mind!



The shorter the loan period, the lower the
price of the product purchased on
credit (and vice versa)

Less interest is being paid!

Try to avoid paying only the minimum
amount due

ALWAYS compare interest rates and
fees before taking out a loan or
applying/using a credit card

Check whether your interest rate is
fixed or variable; the total cost is the
amount borrowed plus the interest
paid over time

Check if/what type of collateral is
needed for certain loans
Prepayment on a loan can reduce the
time and cost of the loan

Making larger payments than required

Check to make sure there aren’t any fees
to do this
Your lender can deny loans based on
your credit history, credit score,
inadequate income, or lack of assets

Assets, co-signers…

What happens if you default?