Credit

Buy Now, Pay Later

What actually IS credit?

Credit is defined as a consumer's ability to obtain goods or services before paying with the trust that the consumer will successfully complete payment in the future.


Types of credit include:


  • Unsecured Loans: giving a promise that you will successfully complete payments (Credit Cards, Student Loans, Personal loans (loans for personal needs like expenses and projects)
  • Secured Loans: guaranteed payment by putting a lien on an asset (Car loans, mortgages)


The Two Sides to Credit


Pros:


  • Immediate access: don't need the money at the time of purchase, making credit good for emergencies and unexpected expenses
  • Security: If a cash is lost, it is gone. If a card is gone, it can be cancelled and companies can fight to recover money lost if stolen
  • Organization: Easier to keep record of than cash
  • Convenience: Quick and easy transactions
  • Rewards: Companies provide rewards depending on the specific card, like earning free flights or gift certificates



Cons:


  • Carelessness: consumers find it easier to spend money from a card than actually handing over cash, causing extra spending
  • Fees: Credit cards may have annual fees, high interest rates, late fees, and cash advance fees
  • Responsibility: maintaining a good credit score is important and with too many credit cards or inability to pay bills will result in lower scores and higher rates
  • Debt: it becomes easier to get into debt because all credit is borrowed money, just with a promise of paying it back
  • Fraud: may become a target for credit fraud
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Obtaining Credit and Credit Scores

You can get credit based on your Credit Worthiness (your reliability to pay back a loan) determined by 3 qualities:



The Three C's

Character: Sense of financial responsibility, dependability, and credit history

Capacity: Financial ability to repay a loan, income level, amount of debt

Capital: Value of what you own (savings, investments, property)




A Credit Bureau collects a consumer's credit information such as records of:


  • Bounced checks
  • Late payments
  • lawsuits
  • bankruptcy


And compiles the information into a Credit Score, reflecting a consumers creditworthiness.


What is a Credit Score?


  • Number between 300 and 850, higher numbers meaning a better score
  • Tells lenders how likely you are to repay a loan
  • Typically, those with a higher score receive better rates.
  • Effects on the score include amount of late payments, amount of debt, credit history, amount of credit cards


Lenders will request a Credit Report from a Credit Bureau with credit history and credit score enclosed to determine a consumer's likelihood of paying back a loan.

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Why does It matter?

A consumer's creditworthiness determines whether or not a lender, such as a credit card company or bank, will provide them with a loan. It also determines the APR (amount of interest on the total loan amount that a consumer will pay annually).


The higher the credit score, the better the credit worthiness, meaning better chance of receiving a loan or Credit Card (card allowing consumers to purchase on credit) with a low interest rate.

Vocabulary

Credit Cards

Credit cards are pieces of plastic that identify an account.


Two types of credit card accounts:

Regular Charge Accounts: Must pay the balance in full per billing period (ex: American Express)

Revolving Charge Accounts: Carry balance from month to month (ex: Visa)


Credit cards are accepted in many businesses including stores, restaurants, online, and by service providers


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Benefits and Costs of Credit Cards

Benefits:

  • Freedom: Ability to make purchases without having the money on hand
  • Convenience: No need to look for ATM's or exact change
  • Circulation: Allows consumers to purchase more goods, providing jobs and therefore money to purchase goods


Costs:

  • Overuse: Digging a debt hole
  • Extreme debt: Unable to purchase goods because of outstanding debt.
  • Convenience: Easy to spend beyond means
  • High interest rates: paying back more than you originally charged
  • Fees: Credit companies charge late and annual fees

Credit Card Vocabulary

Annual fee: Yearly fee to use the credit card account

Credit Limit: The maximum amount the cardholder is able to spend at a time on a card

Interest Rate (APR): Amount of interest on a total loan amount that will be charged annually

Penalty fee: A fee charged to cardholders who are late on their credit card bill

Over the limit fee: A fee charged to cardholders whose purchases exceed the credit limit

Use Credit Wisely

Borrow Cheaply:

Do your research and find cards with the best rates, rewards, and the least fees.


Gain rewards:

Find a card that will benefit your lifestyle (ex: flight rewards cards).


Shop Carefully:

Don't charge for daily purchases and don't go over what you know you can handle.


Make a budget:

Be aware of what you can afford to spend so you don't drown in debt.


Use cards for good reasons:

Don't use your card to buy the $400 designer handbag you know you can't afford. Use it for emergencies and unexpected expenses.

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Sources

  • Creditcards.com
  • Ms. G's Credit Powerpoints and Notes
  • Investopedia
  • Citicards.com
  • Forbes
  • 360Financialliteracy.com
  • USbank.com