Unit Five Credit: Buy Now, Pay Later

1
Unit FiveCredit Buy Now, Pay Later
2
Questions to be answered

• What is credit?
• What does it cost to use credit?
• What are the advantages of using credit?
• Where can you get credit?
• What questions should you ask yourself before you
  use credit?
• What happens if you misuse credit?

3
Overview Credit 101

• CREDIT means someone is willing to loan you
  money called principal in exchange for your
  promise to pay it back, usually with interest.
• INTEREST the amount you pay to use someone
  elses money. The higher the interest rate, the
  greater the COSTS OF USING CREDIT.

4

• All interest rates are quoted as an ANNUAL
  PERCENTAGE RATE (APR). Which is the amount it
  cost you a year to use credit, expressed as a
  percentage rate. It includes the interest,
  transaction fees, and service charges.
• In addition to the APR, there may be other costs
  of using credit
• ANNUAL FEE most often used by credit card
  companies, an annual fee is a yearly charge for
  the privilege of using credit.
• FINANCE CHARGE the actual dollar cost of using
  credit which is calculated by a lender.
• ORGINATION FEE - usually associated with home
  loans, is a charge for setting up a loan.

5

• Another key piece of information for using credit
  wisely is the LOAN TERM how long the loan last.
  THE LONGER THE LOAN TERM THE GREATER THE COST
  OF USING CREDIT. The longer you keep a balance
  on a credit card the more money you have to pay
  in interest over that time.
• Example - 100,000 loan _at_ 10 for 30 years
• Total pay out 215,926.00

6
Benefits of Credit

• Access to cash in an emergency
• The ability to use it now.
• Safety and convenience.
• Earn bonus points or miles.

7
Sources of Credit

• CREDIT CARDS is synonymous with buy now, pay
  later. Unfortunately, ease of use often
  translates into big bills down the road. Unlike
  other forms of credit, there is no LOAN TERM with
  credit cards. You can pay the balance owed over
  a varied and extended time thats where many
  people get into trouble. The longer you take to
  pay the balance owed THE MORE IT COSTS YOU IN
  FINANCE CHARGES.

8
Using Credit Cards to your Advantage

• ANNUAL PERCENTAGE RATE (APR) Compare all costs
  on credit cards look for the lowest rates.
• ANNUAL FEE look for cards with no annual fees.
• GRACE PERIOD the number of days during which no
  interest of finance charges will apply. PAY OFF
  THE ENTIRE BALANCE OF YOUR CARD DURING THE GRACE
  PERIOD.
• MINIMUM PAYMENT 2 of purchases or minimum
  payment per month. PAY YOUR BALANCE IN FULL EACH
  MONTH CAN AVOID INTEREST CHARGES ALTOGETHER.
• CREDIT LIMIT is amount as to how much you can
  charge. Once you reach your limit your card is
  MAXED OUT. Higher credit limits sound good, but
  big purchases quickly compound into big interest
  payments with high APR!

9
Shop for best credit card

• Go on to the Internet and shop for three
  different credit cards. Compare
• APR
• ANNUAL FEE
• GRACE PERIOD
• MINIMUM PAYMENT
• CREDIT LIMIT
• OTHER FEES/NOTES

10
Other Sources of Credit

• INSTALLMENT LOANS require you to make payments
  on a regular basis usually monthly. Interest
  rates are generally lower than credit cards
  rates. You borrow a set amount with the loan term
  and payments are fixed for the life of the loan.
  Typically run from two to six years. One needs
  to check for prepayment penalties.

11
Credit Sources (cont)

• STUDENT LOANS banks, credit unions and federal
  government make loans available to pay for higher
  education. Usually carry low interest rates 4
  to 8
• MORTAGES much like an installment loan, except
  the length of the mortgage extends over a longer
  period of time usually 15 to 30 years the
  amount borrowed is usually much larger.

12
Setting Limits on Credit

• How much is to much? Two good rules of thumb
• Maximum of 20 of your net income should go
  toward all of your loan payments (excluding a
  mortgage). Credit Cards, Car Loans, any other
  Loans.
• 33 of net income is maximum about for mortgage
  loans.

13
Comparing Credit Offers

• Remember to check for
• The APR
• The loan term or length of the loan
• The maximum amount of the loan
• The minimum payment amount
• Any annual or up-front fees
• Any payment penalties
• Additional fees, such as those for exceeding your
  credit limit, making a late payment, or bouncing
  a check to the lender
• The amount of income to qualify for the credit

14
Credit Reports

• CREDIT REPORT is simply your credit history, a
  record of you personal financial transactions.
  It will be with you for a long time, so make it
  shine! Lenders review it to see how well you
  have managed credit in the past.
• It is your credit scoreboard, and it reflects
  your credit history for the past seven to 19
  years.

15
Three Major Credit Reporting Agencies

• Equifax
• Experian (formerly TRW)
• Trans Union

16
Building a good Credit History

• When using a checking account dont bounce
  checks.
• When using a savings account make additional
  deposits regardless of the size.
• Always pay your bills on time shows lenders you
  are responsible.

17
Credit Scoring

• Factors generally included
• CAPACITY lenders want to know if you have the
  ability to repay a loan. A pattern of rising
  income and/or steady employment.
• CHARACTER lenders want to know if you are
  trustworthy. One way to measure this is by
  looking at you credit record.
• CAPITAL - lenders take comfort in knowing you
  have personal items of value. In a worst-case
  scenario when you dont pay your bills at all, a
  lender might sell your personal possessions to
  repay your loans. Items of value include a car,
  investments account and your home.

18
Ask yourself before signing on the Dotted Line

• Do I really need this item right now or can I
  wait?
• Can I qualify for credit?
• What is the interest rate (APR)?
• Are there additional fees?
• How much is the monthly payment and when is it
  due?
• Can I afford to pay the monthly payments?
• What will happen if I dont make the payments on
  time?
• What will be the extra cost of using credit?
• What will I have to give up to pay for it?
  (Opportunity cost)
• All things considered, is using credit worth it?

19
Rights and Responsibilities

• DEBIT the entire amount of money you owe to
  lenders when you sign the application of a loan
  or a credit card. You are legally obligated to
  uphold whats written in the agreement. If you
  fail to keep your part of the bargain, lenders
  may take legal action against you to recover what
  they can.
• YOUR RIGHTS can cancel a credit agreement with
  a lender within three days assuming you return
  the money borrowed. Are responsible to pay only
  50 if someone uses your credit card without your
  permission.

20
Getting Out from Under Excessive Debt

• Spend less than you earn!!!
• Delay gratification today to clean up yesterdays
  mess.
• Apply your budget, if you consistently spend less
  than you earn, you can use the additional money
  to pay off your debt.
• If you have several loans, try to make the
  minimum required payments on all of them.
• Talk to your credits, let them know you are doing
  what you can to pay them back.
• If money left after youve made the minimum
  payments, use it to begin paying off one loan at
  a time. Start with the loan with the largest
  interest rate not with the largest balance.

21
Bankruptcy

• BANKRUPTCY - is a legal process that allows
  someone deeply in debt to create a plan to get
  out of it. Is very costly to everyone involved.
  Because of the growing incidence of bankruptcy
  abuse, Congress has made changes in the law.
• CHAPTER 7 BANKRUPTCY - allows you to effectively
  erase most of your debt. Typically must be
  unemployed or have a very low income, and must go
  through financial counseling.
• CHAPTER 13 BANKRUPTCY allows you to pay back
  some your debts, but with more time. A court
  typically oversees the repayment plan to ensure
  accountability.