Read the article, “Credit and Debit Cards: What you need to know”Answer the following questions: 1. Why can a credit card be more

beneficial than a debit card?2. How can a credit card hurt your

financial future?3. Does having credit mean you have

more money?

JOURNAL ENTRY

CHAPTER 6

Consumer Credit

CHAPTER 6 OBJECTIVES/ESSENTIAL

QUESTIONS1. Why is consumer credit important for me

to understand?

2. How do the 5 C’s of credit effect my ability to get a loan?

3. What is the importance of building “good credit”?

4. How can I protect myself from identity theft and fraud?

5. Is bankruptcy the best way out of debt?

WHAT IS CONSUMER CREDIT?

Credit: arrangement to receive cash, goods, or services now and pay for them in the future

Consumer Credit is your use of credit to meet personal needs

Credit cards can be issued by:

Financial Institution (Visa)

Retailer/Merchant (Best Buy)

Bank (issue loans for mortgages, cars, school)

The entity that lends you money is the creditor

CREDIT COMPAREDAdvantages of Credit

Lets you enjoy goods and services now

Credit Cards allow you to combine several purchases and make one monthly payment

Shopping online or through the phone usually requires a credit card (hotel reservations, renting a car)

Gives record of expenses

Don’t have to carry cash

If you use credit wisely, other lenders view you as a responsible person (GOOD CREDIT)

Disadvantages of Credit

Credit costs money; you pay the money back with interest if you don’t pay in full

Temptation to buy more than you can afford

Failing to repay the loan can result in “bad credit”

Having credit doesn’t mean you have more money

TYPES OF CREDIT

1. Close ended credit: one time loan you repay back over a specified period of time in payments of equal amounts (e.g. car loan, mortgage, furniture, large appliance)

TYPES OF CREDIT (CONT)

2. Open-end credit: credit as a loan with certain limit on the amount you can borrow for a variety of goods and services

Line of Credit: maximum amount of money a creditor will allow a credit user to borrow

Grace Period: time period in which no finance charges will be added to your account

Finance Charge: total dollar amount you pay to use credit

ACTIVITY INSTRUCTIONS

Save your notes (Chapter 6 notes)

Get out NEFE Book

Read pages 41-48

Complete Activities:

4B and Assignment 4-1 on page 45 (separate sheet)

4C on page 46

Applying for a Loan on page 48

Get a Chapter 6 Packet

Homework: Read Chapter 6 if you have not already done so

CHAPTER 6 NOTES (DAY 2)

Chapter 6 Quiz

TODAY

THE COST OF CREDIT

If you are thinking of taking out a loan or applying for a credit card, your first step should be to figure out:

How much the loan will cost you

Whether you can afford it

Two key factors in your decision will be:

The finance charge

The annual percentage rate (APR)

HOW DO YOU OBTAIN CREDIT?

Apply for a loan

If it is a credit card, you need to know your Debt-payments-to-income ratio

Debt should be no more than 20% of net income

If monthly Income=($1,000), debt should be no more than $200

Need to know APR

Cost of credit on a yearly basis, expressed as a percentage

Example: 18% APR means you pay $18 of every $100 you owe

This is your COST of credit

net incomethe income you receive (take-home pay, allowance, gifts, and interest)

•The most common method of calculating interest is the simple interest formula•Simple interest is based on three factors:

The principal (amount borrowed) The interest rate (rate at which you

borrow) The amount of time the principal is

borrowed (length of time till you pay off)

Principal x Interest Rate x Amount of Time = Simple Interest

$1,000 x 5% (.05) x 1 year = $50 in interest

CALCULATING THE COST OF CREDIT

THE COSTS AND METHODS OF OBTAINING CREDIT

The Minimum Monthly Payment Trap

Lenders often encourage you to make the minimum monthly payment because it will then take you longer to pay off the loan

If you pay only the minimum amount on your monthly statement, you need to:

Plan your budget more carefully

Understand that the longer it takes for you to pay off a bill, the more interest you pay

minimum monthly paymentthe smallest amount you can pay and remain a borrower in good standing

THE COSTS AND METHODS OF OBTAINING CREDIT

The Five C’s of Credit

When a lender extends credit to consumers, it expects that some people will be unable or unwilling to pay their debts.Most lenders use the “five C’s of credit” to determine who will receive credit. These C’s are:

Character-will you repay the loan?

Capacity-can you repay the loan?

Capital –what are your assets and net worth?

Collateral-what if you do not repay the loan…what assets can you secure (home, car)

Credit history-what is your credit history? Pay bills on time?

Have you ever filed for bankruptcy?

credit ratinga measure of a person’s ability and willingness to make credit payments on time

CREDIT REPORTS & BUREAUS

Credit reports contain detailed credit information such as name, age, SSN, employer, credit history, homeowner/renter status

Most information in your credit file/report may be reported for 7 years (except bankruptcies)

Equal Credit Opportunity Act: all credit applicants have same rights

Fair Credit Reporting Act: limits who can obtain your report

NOW…

Save notes—we have 1 more day of Chapter 6 notes, so save these!

Get “Paying Interest on Credit Cards” handout

When finished work on Chapter 6 packets

Movie, “Charge It”--

Read and answer: 1. Is it ethical for potential

employers to access your credit history?

2. Do you think that it is okay for employers to not hire you based on a poor credit score?

ARTICLE: “CREDIT REPORTS, NOT JUST FOR LENDERS ANYMORE!”

BUILDING AND PROTECTING YOUR CREDIT

To build and protect good credit:

Pay your bills and loans promptly

Manage your personal finances carefully

Correct mistakes related to your credit bills and credit reports

Dispute billing errors in writing and pay amounts that are not in question

BUILDING AND PROTECTING YOUR CREDIT

If your credit or identity is stolen:

Contact all your credit card companies

Close and open new bank accounts

Change all PINs

Notify law enforcement agencies and credit bureaus

CONSUMER CREDIT PROTECTION LAWS

Truth in Lending Law: protects a consumer from a creditor not giving credit info or giving inaccurate credit info

Equal Credit Opportunity Act: Fair practices for all

Fair Credit Opportunity Act: protects consumers when a creditor fails to correct billing errors

Fair Credit Reporting Act

Consumer Credit Reporting Act Reform

MANAGING YOUR DEBTS

Credit Counseling Service

Aiding families with serious debt problems

Helping people prevent indebtedness

Teaching them the importance of budget planning and other credit education

Declaring Personal Bankruptcy

As a last resort, an individual can declare bankruptcy

Declaring bankruptcy is a last resort because

It severely damages your credit rating.

BANKRUPTCY

The U.S. Bankruptcy Act of 1978

You have two choices in declaring personal bankruptcy:

Chapter 7 (a straight bankruptcy)

Chapter 13 (a wage-earner plan bankruptcy)

Both choices are undesirable, and neither should be considered an easy way to get out of debt.

ACTIVITIES

Print Notes---3 days and 2 journals!

NEFE read pages 49-57

Complete 4G on page 56 and 4H on page 57

Finish Chapter 6 Packets—due today

Start Movie “Maxed Out”