Chapter 4: Going into Debt

1. Chapter 4: Going into Debt Section 1: Use of Credit

2. Use of Credit • Credit: Receiving money with the promise to pay in the future • Principal: The Original amount of the loan • Interest: Amount charged for use of someone else’s money

3. Types of Credit 1. Installment Credit • Monthly payment amounts are often set for the life of the loan. • Most common type of Debt • Typically used for large purchases such as a car.

4. Types of Credit • Credit Cards > No payoff deadline > Some types of cards can be used just about anywhere. > Monthly minimum payments vary > Usually the most expensive type of credit.

5. Types of Credit • Student Loans - Used for tuition and other college expenses - Loan term is usually up to 10 years - Monthly payment amounts are usually set annually, when interest rates are adjusted. - Usually has a lower interest rate than an installment loan. - May provide an income tax break

6. Types of Credit • Mortgage - Used specifically for a loan to purchase a house. - Usually repaid over 15-30 years. - Usually has a lower interest rate than an installment loan. - May provide income tax break.

7. Deciding When to Use Credit • The cost of using Credit is the INTEREST • Will your satisfaction be greater than the interest cost • Always shop around for the best interest rate • Make sure you can afford to borrow now • Ex. I lost my job, Should I buy a new TV

8. Why Use Credit • Convenience • Protection • Emergencies • Opportunity to build credit rating • Quicker Gratification • Special offers • Bonuses

9. Risks in Using Credit • Interest • Overspending • Debt • Identity Theft