Credit and the 5 C*s of Credit

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Credit and the 5 C’s of Credit
What is credit?
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.
When to use credit
WHEN TO USE CREDIT
 Can you describe a situation when it is a good time
to use credit and when it is NOT a good time to use
credit?
Questions to ask before using credit
1. Do I need it or do I want it?
2. How much am I actually going to pay for the
item? (time payments incur interest)
3. Where am I getting the $$ to pay for it?
4. What reward can I receive by using card?
(airline miles, etc. )
Questions to ask when applying for
credit?
1. What is the annual percentage rate (APR)?
2. What is the annual fee?
3. When are payments due?
4. What is the minimum payment required each
month?
5. Is there a grace period?
6. What is the credit limit?
THE FIVE Cs OF CREDIT
C = Capital
C = Collateral
C = Conditions
C = Character
C = Capacity
Capital
 Banks want to see that you have a financial
commitment; that you have put yourself at risk.
Have you paid off debts? (ie. Car loans)
Collateral
How much cash/wealth/ property do you
have that could cover debts if you fail to pay?
Most collateral is in the form of real estate, your
bank accounts, and parents promise to provide
support.
Conditions
 What is your current economic condition?
Are you sensitive to economic downturns. The bank
wants to know that you are good at managing
expenses.
Character
 Banks want to put their money with clients who have
the best credentials and references. The way you
take responsibility, your timeliness in
fulfilling obligations - that's character.
Capacity
 What is your borrowing history and track
record of repayment. How much debt can you
handle? Will you be able to honor the obligation
and repay the debt?
Measure of Credit Worthiness: Debt to Income
Ratio
 DTI is the percentage of a consumer's monthly
gross income that goes toward paying debts.
 In order to qualify for a mortgage for which the
lender requires a debt-to-income ratio of 28/36:
 Yearly Gross Income = $45,000 / Divided by 12 =
$3,750 per month income.


$3,750 Monthly Income x .28 = $1,050 allowed for housing
expense.
$3,750 Monthly Income x .36 = $1,350 allowed for housing
expense plus recurring debt.
COSTS OF CREDIT
How much can credit cost? If you make only the minimum
payment for an item, here are some examples of what you
might actually pay and how long it will take you to pay it.
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Slide 4 – Costs of Credit
Lesson Reference: Credit, Activity 5 – Handout 2