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Consumer Economics

Consumer Economics . Introduction to Credit. Warm Up: Why do people need to use credit to make purchases?. What is Credit?. The ability to borrow money in return for a promise of future repayment. Future repayment usually includes interest.

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Consumer Economics

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  1. Consumer Economics Introduction to Credit

  2. Warm Up: Why do people need to use credit to make purchases?

  3. What is Credit? The ability to borrow money in return for a promise of future repayment. Future repayment usually includes interest. • When using credit you are giving up the ability to spend in the future in order to spend now. Example (borrow) $100.00 (now) @ 15% Interest $100.00 + $15.00 = $115.00 (repayment later)

  4. Why Use Credit if it’s so costly? • To Purchase items you want or need earlier than you could get them by saving • Expensive Items: • Home • Car • College/Education • “Necessary” Items: • Unforeseen needs • Health/Medical

  5. Use Credit Responsibly Questions to Ask Before Borrowing: • Is it important that I buy the good or service I want now? • Do I have to borrow to buy the product? • Can I afford to make the payments on the loan? • Will I be able to buy other products I want more if I borrow to buy this product?

  6. How Much Can You Safely Borrow? The 20 – 10 Rule Rules of Thumb: • 20: Don’t borrow more than 20% of your yearly net income • 10: Monthly credit payments should be less than 10% of your monthly net income ** Mortgages (home loans) don’t count Examples: Annual Net Salary: $50,000 - No More Than $10,000 Total Borrowed Monthly Net Salary: $4,166 - No More Than $416.00 in Monthly Payments

  7. Will You Be Able To Get a Loan? The 3 C’s Character – Will you repay the debt? Credit use, credit report/history, honesty Capital – What if you don’t repay the debt? Collateral (Secured vs. Unsecured) Capacity – Can you repay the debt?Steady job, loans, living expenses, dependents

  8. Credit Reports • Record of your credit history - Sent by businesses, Lenders, etc. • Three credit bureaus: Experian, Trans Union, & Equifax • Can affect: purchase power, job, loan interest rates, and even insurance rates FICO Score Ranges: 300-850

  9. How Can I Build a Credit? • Establish a steady work record • Open a successful checking and savings account • Pay bills promptly (rent, utilities, etc) • Apply for small loans or credit cards (Co-signer?) • Avoid opening too many credit accounts

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