Introduction to Credit

1. Introduction to Credit Personal Finance Iverson

2. What is Credit? • Receiving cash, goods, or services now and paying for them later

3. Who Gives Credit • Creditors • Could be a • Bank • Credit union • Any business selling a product or service (i.e. auto loans) • The government (i.e. student loans) • Credit card companies (backed by a bank or credit union) (i.e. Visa, Mastercard, Capital One)

4. Types of Credit • Many people mistakenly believe that credit cards are the only way to get credit • However, there are a variety of ways which can be narrowed down into three main categories

5. #1 – Single Payment Credit • Also known as Service Credit– you receive services now and pay for them later with a single payment after a fixed period of time • Typically pay no interest • Examples • Cell phone use – use minutes each day, pay once a month • Electric use – use electricity each day, pay once a month • Cable use – use Cable each day, pay once a month

6. #2 - Installment Credit • Merchandise/services paid for in two or more regularly scheduled payments (installments) of a set amount • I.e. You take out a auto loan for $8,000 for 5 years at 5% interest • You pay $151 a month to pay off the balance (ends up costing you $9,060) • Others examples include student loans, home loans, business loans

7. #3 – Revolving Credit • Given a specific credit line you can not exceed • Interest accumulates on outstanding balance • I.e. You have a credit card, charge $400 and only pay $100, you will pay interest on the remaining $300. *high interest rates apply • Main way to use revolving credit is to have a credit card and NOT pay in full each month (this is a BAD idea—you pay a lot of interest and thus whatever you bought ends up costing you a lot more)

8. Advantages of Using Credit • Able to buy needed items now without cash and pay later • Don’t have to carry large amounts of cash (i.e. when traveling for example) • Creates a record of purchases (your statement) • More convenient than checks

9. Advantages of Credit • Consolidates bills into one payment • Can help build a credit history • Can pay bills online and shop online • Credit cards are great for emergencies

10. Disadvantages of Credit • Paying interest – it’s an extra costs beyond the original cost of the good or service • High interest rates on credit cards • May carry additional fees if you pay late • If not managed, may be over-used – you can accumulate a lot of debt quickly if you’re not careful

11. Disadvantages of Credit • If not managed, may increase impulse buying—easy to swipe a card or take out a loan for more than you can really afford • Can hurt credit history – too much debt, not paying on time, etc. will hurt your credit report and credit score (more on this later)

12. CONCLUSION • You will all use credit in your future • Some types, like Service credit, are easily managed and help you use services now and pay later • Some types, like Installment Credit, include loans, help you afford things now that you maybe couldn’t afford without borrowing (like student loans, auto loan, home loan) • Revolving Credit, like credit cards, can be convenient but also dangerous