2. What is Credit?
• Credit means someone is willing to loan you money—
called principal—in exchange for your promise to repay
it, usually with interest.
• Interest is the amount you pay to use someone else’s
money.
• The higher the interest rate, the higher the total
amount you pay to buy something on credit.
• Main advantage of using credit is that it let’s you buy
something—like a car or college tuition—without having
to pay for it all at one time.
3. Common Types of Credit
Typesof Credit
• Credit Card
• Installment Loan
• Student Loan
• Mortgage
Institution
• Banks, credit unions,
stores, and gas stations
• Banks, credit unions, auto
dealers, and other
financial institutions
• Banks, credit unions, and
the federal government
• Banks and credit unions
4. Cost of Using Credit
• Using credit comes with a price.
• The biggest part of that price is the interest rate, so it
definitely pays to shop around.
• Read the fine print of a credit card or loan application,
then compare several options before making a final
choice.
• Key credit feature to compare among credit offers is the
annual percentage rate (APR), which tells you the cost of
the loan per year as a percentage of the amount
borrowed.
5. Cost of Using Credit
• A low introductory interest rate advertised on a credit
offer is a “teaser” rate that usually expires in a few
months, then increases—a lot.
• So what should you be looking for when you pull out
your magnifying glass:
• Annual Fee—a yearly charge you pay for the privilege
of using credit
• Credit Limit—the maximum amount of credit a lender
will extend to a customer
• Finance Charge—represents the actual dollar cost of
using credit to maintain a balance.
6. Cost of Using Credit
• So what should you be looking for when you pull out
your magnifying glass:
• Origination Fee—is a charge for setting up the loan
• Loan Term—is the length of time you have to pay off
the loan. The longer the loan, the lower your monthly
payment. But the cost of using the credit increases
because you’re paying interest over a longer period of
time.
• Grace Period—is the length of time you have before
you start accumulating interest. If you plan to pay off
your balance each month, make sure to get a credit
with a grace period of 25 or more days.
7. Cost of Using Credit
• Two more fees you should be aware of in case you do
not use your credit responsibly is:
• Over-the-limit-fee for spending more than your credit
limit
• Late fee is a penalty for making your payment after
the due date.
• A growing number of credit card companies are
including something called a universal default clause
in their agreements. This means they can hike up
your interest rate if you make just one late payment—
even if that late payment is to a different creditor like
for your phone bill.
8. Credit: The Good and the Bad
• On the rewards side:
• Convenience—easier and safer to have a credit card
than carry around a large amount of cash.
• Protection—buying items with a credit card can
make it easier to get a refund if there’s a problem with
an item you purchased.
• Emergencies—you always have a way to pay for
emergency expenses—like if your car breaks down.
• Opportunity to Build Credit—makes it easier to get
more credit when you need it later.
9. Credit: The Good and the Bad
• On the rewards side:
• Quicker Gratification—credit allows you to buy and
use an expensive item, such as a car or house, while
you’re paying for it instead of postponing your
purchase until you have enough saved.
• Special Offers—can take advantage of a reduced
interest rate for a limited time, or even deals to buy
now and make no payments until next year.
• Bonuses—offer bonus points such as frequent-flyer
miles or cash rebates for every dollar you spend.
10. Credit: The Good and the Bad
• On the potential risks side:
• Interest—automatically makes the item more
expensive than if you had just paid for it with cash.
• Overspending—use credit to live beyond your
means—buying items you simply can’t afford.
• Debt—the amounts you borrow add up to what you
owe to lenders. Lenders have legal claims against
your future income should you not be able to repay a
debt.
• Identify Theft—when someone uses your personal
information without your permission to commit fraud
or other crimes.
11. Are You Credit Worthy?
• Before you can apply for credit or loans, you need to
have several things on hand:
• Social Security Number
• Driver’s license number
• Date of birth
• Address and phone number
• Name of employer
• Monthly income amount
• Total monthly payments on other debts
• Amount of monthly rent or mortgage payment
12. 4 C’s of Credit
• Collateral—an asset of value that lenders can take from
you if you don’t repay the loan as promised.
• Capital—lenders will want to know if you have items
they can sell to repay the loan.
• Capacity—a pattern of rising income and steady
employment gives lenders more confidence in offering
you credit.
• Character—are you trustworthy? They measure that by
looking at your credit record—paying bills on time shows
them that you are responsible with your finances.
