Understanding Credit PowerPoint


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Understanding Credit PowerPoint

  1. 1. Understanding Credit!<br />
  2. 2. What Is Credit?<br />Credit: an arrangement that allows consumers to buy goods or services now and pay for them later.<br />When you using a credit card<br />to charge purchases,<br />you must usually pay<br />a finance charge.<br />
  3. 3. Finance Charges<br />Finance Charge: the total amount a purchaser must pay for the use of credit (interest charges & fees)<br />3 Factors Affect Your Finance Charge:<br />Amount of credit used<br />-The more you charge, the more interest you pay.<br />Annual Percentage Rate (APR)<br />-The higher the interest rate, the more finance charges you pay.<br />Length of Repayment Time<br />-The more time you take to repay, the more interest you pay.<br />
  4. 4. Advantages Of Using Credit<br />#1: The use of goods and services as you pay for them.<br /> Example: Driving a car as you pay for it<br />#2: The opportunity to buy costly items that you might not be able to buy with cash.<br /> Example: Can you imagine paying cash for a brand new car?<br />#3: A source of cash for emergency or unexpected expenses.<br /> Example: Medical, automotive, etc.<br />#4: Convenience.<br /> Example: Don’t have to carry large amounts of cash.<br />
  5. 5. Disadvantages Of Using Credit<br />#1: The reduction of future income.<br /> Example: Spending future income now and living beyond your income<br />#2: Expense.<br /> Example: Using credit usually costs money.<br />#3: Temptation.<br /> Example: Easy to spend money you don’t/won’t have.<br />#4: The risk of serious consequences if you misuse credit.<br /> Example: Failure to pay debts on time, bankruptcy, repossession, damaged credit score<br />
  6. 6. Types of Consumer Credit<br />Sales Credit: when you buy goods and services with a credit card or a charge account.<br />Example: Charge Accounts or Credit Cards<br />Cash Credit: when you borrow money.<br />Example: Loans<br />
  7. 7. Types Of Credit Cards<br />Travel and Entertainment Cards: youmust pay entire bill each month except for travel-related expenses.<br />No credit limit, minimum monthly payments at ≥18% APR on travel-related expenses<br />Example: American Express<br />Company or Retail Store Cards: permit you to charge purchases only with the merchant issuing the card.<br />Credit limit, minimum monthly payments, APR varies<br />Example: Macy’s Card<br />General Purpose Cards: issued by banks and can be used at many places around the world.<br />Credit limit, minimum monthly payments, APR/fees vary<br />Examples: Visa and MasterCard<br />
  8. 8. Establishing Credit<br />4 Steps to building a sound financial reputation:<br />1. Start with a job.<br /> -Show that you can hold a job and earn money<br />2. Open a savings account and save regularly.<br /> -Saving show financial responsibility<br />3. Open a checking account and manage is carefully.<br /> -Show you have experience with handling money<br />4. Apply for a store or gas station credit card.<br /> -Make small purchases and pay your bill<br />
  9. 9. Credit Rating<br />Credit Rating: the creditor’s evaluation of a person’s willingness and ability to pay debts.<br />Credit Report: a history or record of a person’s financial and credit practices.<br />Credit Score: numerical expression of a person’s credit worthiness (based on credit report)<br />Credit scores fall between 300 and 850<br />< 620 = high risk borrowers<br />620 – 699 = ok to good<br />> 700 = excellent<br />
  10. 10. The 3 C’s Of Credit<br />A person’s credit rating is measured by…<br /> The 3 C’s of Credit<br />1. Character: responsible financial history<br />2. Capacity: earning power & employment history<br />3. Capital: financial worth (home, car, savings…)<br />
  11. 11. Maintaining A Good Credit Rating<br />Only use as much credit as you can comfortably repay<br />Pay bills on time<br />Keep accurate records of charges, statements, and payments<br />Contact credit card company immediately if you cannot pay your bill on time<br />Resolve billing errors promptly<br />