Understanding Credit PowerPoint
- 2. What Is Credit?Credit: an arrangement that allows consumers to buy goods or services now and pay for them later.When you using a credit cardto charge purchases,you must usually paya finance charge.
- 3. Finance ChargesFinance Charge: the total amount a purchaser must pay for the use of credit (interest charges & fees)3 Factors Affect Your Finance Charge:Amount of credit used-The more you charge, the more interest you pay.Annual Percentage Rate (APR)-The higher the interest rate, the more finance charges you pay.Length of Repayment Time-The more time you take to repay, the more interest you pay.
- 4. Advantages Of Using Credit#1: The use of goods and services as you pay for them. Example: Driving a car as you pay for it#2: The opportunity to buy costly items that you might not be able to buy with cash. Example: Can you imagine paying cash for a brand new car?#3: A source of cash for emergency or unexpected expenses. Example: Medical, automotive, etc.#4: Convenience. Example: Don’t have to carry large amounts of cash.
- 5. Disadvantages Of Using Credit#1: The reduction of future income. Example: Spending future income now and living beyond your income#2: Expense. Example: Using credit usually costs money.#3: Temptation. Example: Easy to spend money you don’t/won’t have.#4: The risk of serious consequences if you misuse credit. Example: Failure to pay debts on time, bankruptcy, repossession, damaged credit score
- 6. Types of Consumer CreditSales Credit: when you buy goods and services with a credit card or a charge account.Example: Charge Accounts or Credit CardsCash Credit: when you borrow money.Example: Loans
- 7. Types Of Credit CardsTravel and Entertainment Cards: youmust pay entire bill each month except for travel-related expenses.No credit limit, minimum monthly payments at ≥18% APR on travel-related expensesExample: American ExpressCompany or Retail Store Cards: permit you to charge purchases only with the merchant issuing the card.Credit limit, minimum monthly payments, APR variesExample: Macy’s CardGeneral Purpose Cards: issued by banks and can be used at many places around the world.Credit limit, minimum monthly payments, APR/fees varyExamples: Visa and MasterCard
- 8. Establishing Credit4 Steps to building a sound financial reputation:1. Start with a job. -Show that you can hold a job and earn money2. Open a savings account and save regularly. -Saving show financial responsibility3. Open a checking account and manage is carefully. -Show you have experience with handling money4. Apply for a store or gas station credit card. -Make small purchases and pay your bill
- 9. Credit RatingCredit Rating: the creditor’s evaluation of a person’s willingness and ability to pay debts.Credit Report: a history or record of a person’s financial and credit practices.Credit Score: numerical expression of a person’s credit worthiness (based on credit report)Credit scores fall between 300 and 850< 620 = high risk borrowers620 – 699 = ok to good> 700 = excellent
- 10. The 3 C’s Of CreditA person’s credit rating is measured by… The 3 C’s of Credit1. Character: responsible financial history2. Capacity: earning power & employment history3. Capital: financial worth (home, car, savings…)
- 11. Maintaining A Good Credit RatingOnly use as much credit as you can comfortably repayPay bills on timeKeep accurate records of charges, statements, and paymentsContact credit card company immediately if you cannot pay your bill on timeResolve billing errors promptly