Credit Unit. 4-1 Introduction to Credit 4-2 Loans 4-3 Loan Calculations & Regression 4-4 Credit Cards 4-5 Credit Card Statements

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1 Credit Unit 4-1 Introduction to Credit 4-2 Loans 4-3 Loan Calculations & Regression 4-4 Credit Cards 4-5 Credit Card Statements

2 4-1 The Basics Debtors purchasers who use credit Once you use credit, you now owe a debt, ie: credit cards, loans, electric bills (use then pay at end of time period) vs. insurance (pay at beginning of the time period) Creditors those who extend credit or give loan Any transaction involving credit is legally binding.

3 Basics continued Pros no large amount of cash needed immediately no waiting to fulfill need or want, ie: saving use item while still paying bill protection, easier to get a refund if there s a problem with an item emergency situations Cons pay interest tendency to overspend debt Identity theft

4 Basics continued Installment Plan Down Payment customer pays portion of items cost at time of purchase Installments payments scheduled, usually on a monthly basis, to finish paying for the rest of the item Interest or Finance Charge amount added to cost for privilege of using an installment plan Layaway similar to installment but creditor keeps merchandise until final payment is made

5 Basics continued Deferred payment plan similar to installment except monthly payments are low until end of agreement if not paid in full at end of time period then interest will be high ie: no payment for months & no down payment Rent-to-Own down payment, receive merchandise at time of purchase continue to make monthly payments for an agreed upon amount of time at time of last payment debtor may choose to return or purchase the item previous payment or % of payments will be applied towards final cost

6 Applying for credit Assests what you own; car, home, bank accounts, personal possessions Earning Power ability to earn now and in the future Credit Rating credit report card everytime you use credit it is reported to a credit agency On the sidescores will change as new data is available below 600 is considered a significant risk 700+ is considered a good rating 770+ is considered excellent 700 and above will qualify for the best interest ratings

7 Credit Reporting Agencies Compile record on all users of credit. The best way to start building credit is to open savings & checking accounts and pay all bills on-time. Based on criteria listed on previous slide: assets, earning power, credit report card FICO Fair, Isaac and Company Most popular rating, scores range from , summarizes the probability debtors will repay the debt, higher the score the better chance of obtaining credit Gender, race, religion, nationality, and marital status DO NOT affect credit scores

8 Credit Reporting Agencies continued A credit report includes information on where you live how you pay your bills whether you ve been sued or arrested filed for bankruptcy Nationwide consumer reporting companies sell the information in your report to creditors, insurers, employers, and other businesses that use it to evaluate your applications for credit, insurance, employment, or renting a home.

9 Credit Reporting Agencies continued Experian P.O. Box 9556 Allen, TX Equifax P.O. Box Atlanta, GA TransUnion Trans Union Consumer Relations P.O. Box 2000 Chester, PA

10 Is all credit bad? Samantha s grandfather is debt-free, he bought his car and his house without taking out a loan. He saved and paid cash. He wanted to take out a loan to buy Samantha a car for college graduation. The bank turned him down. Explain why.

11 Math Formulas - Basic Example #1 Guitar costs $2, 240 (including $90/mo. (if you pay $90 each month) 2240/90=24.9 Therefore, it will take 24.9 months or 25 months to pay off the guitar. Purchaser will have no use of the guitar if they wait to save the money needed. However, they would pay no interest on an installment plan or loan.

12 Example #2 Guitar costs $2, 240 (including tax) w/15% down (with 15% of the $2,240 paid up front) 24 months of $88.75 payments (take the last 85% + interest and divide into 24 equal payments) To find the finance charge: 2240 *.15 or 15% = $336 amount of down payment * 24 = $2,130 total monthly payments = $2,466 total cost = $226 finance charge Pay an extra $226 to have immediate access to the guitar and not have to wait two years.

13 Algebra Formula Determining Finance Charge w/down payment P = original price of item M = amount of monthly payment D = % of price charged for initial payment N = number of monthly payments (p * d) + (m * n) p = finance charge Price times the down payment percentage will give the total down payment. Amount of monthly payment times number of payments gives the total of payments. Add down payment and total amount of payments to get total paid. Subtract price from total amount paid to get the finance charge.

14 Example #3 Carpeting costs $2134 (including tax) No down payment No interest for 6 months Minimum $20/month How much will need to be paid in month 6? 5 * 20 = $100 total of monthly payments for first 5 months = $2,034 total due for month 6, if you do not want to pay any interest fees

15 Algebra Formula Determining Finance Charge w/o down payment or interest for a specified time period P = original price of item S = minimum $ amount of monthly payment N = number of monthly payments available with no finance charge p ((n-1) * s) = payment required if you do not want to have a finance charge Number of monthly payments available minus one times minimum amount. Price of item minus amount of minimum payments made to get payment needed in final month available with no finance charge.

16 Example #4 Mike s score is 720 = 5.2% interest rate Tyler s score is 560 = 8.2% interest rate Loan amount = $3,000 Time period = 3 years Mike s interest charge: 3000 *.052 * 3 = $468 Tyler s interest charge: 3000 *.082 * 3 = $ = $270 more for Tyler

17 Algebra Formula Simple Interest Rate I = interest charged P = original price of item R = interest rate T = time I=PRT Price times interest rate times number of years will give the total interest charged over the time of the loan. This is the simple formula and charges a blanket amount for the whole loan. This formula does not reduce the amount of interest charged as the balance owed is reduced.

18 Section 4-1 Assignment Do # s 2, 3, 4, 5, 6, 7, 10, 12, 13 17, and 20 from the handout