Personal Finance Credit
Personal Finance Credit
Personal Finance Credit
Credit
756 816
700
655
600
610
525
400
What do you
know?
Can you define these terms?
•Credit
Answer this question in at
•Character
•Collateral
least 4 sentences:
•Capacity
•Interest
•Debt
•Asset
•Default
What should you use credit
to purchase?
By the end of this Essential Questions
lesson you •How do interest rates impact people’s saving and
spending choices?
should know…. •How should you personally use credit?
•How can you maintain a good credit rating?
Terms •What should you look for when evaluating a credit
Content Terms
•Credit offer?
•Character
•Collateral
•Capacity Georgia Performance Standard
•Simple interest SSEPF4 The student will evaluate the costs and benefits of using credit.
a. List factors that affect credit worthiness.
•Compound interest b. Compare interest rates on loans and credit cards from different institutions.
•Annual Percentage Rate c. Explain the difference between simple and compound interest rates.
•Credit Score
Academic Terms
•Asset
•Debt
Literacy Standards
RH.11-12.3 Analyze a complete set of ideas or sequence of events and explain
•Default how specific individuals, ideas, or events interact and develop over the course
of the text.
RH.11-12.7 Integrate and evaluate multiple sources of information presented
in different media or formats as well as in words in order to address a question
or solve a problem.
WH.11-12.1 Write arguments to support claims in an analysis of substantive
topics or text using valid reasoning and relevant and sufficient evidence.
What is Credit anyway?
• Credit is when you borrow money to Credit- borrowing
money to make a
make a purchase. When you pay back purchase
the money you borrowed (the loan) Interest-
you pay a fee called interest. payments made in
exchange for the
• How much interest you pay and ability to borrow
money
whether or not you can get a loan is
determined by several factors.
Factors that affect Credit
The 3 C’s
• Capacity- your capacity to pay is determined by
your job and other sources of income.
• Capacity to pay also takes into account how much
money you owe. A ratio of how much debt you
have versus how much money you make.
– They ask questions like: How much money do you make
annually or monthly? How long have you had your job?
What is your job history? How much money do you owe?
The 3 C’s of Credit cont..
• Character- Your character is
Debt- the amount
determined by your history of of money you owe
Could B. You
City Credit
Could B. You
Could B. You
•$1000 limit
Could B. You
•0% introductory rate for the first 7
months on qualifying purchases
•After 7 months APR is 13.00-22.99% Discount Credit Summary
variable rate •$500 limit
•APR reduction after a year of good •0% APR for the first 6 months
credit use •After 6 months APR is 12.00-18.99%
•$25 annual fee variable rate
•no annual fee
How long did it take you to pay off the loan? 12 months
How much did you pay in interest? $715.93
Between the 1st and 2nd month, how much of your payment went to the
principal? $51.00
Between the 10th and 11th? $119.27
So what did it cost you? (think opportunity cost)
What will Credit Cost me?
You get a bank loan to buy a new Principal=$15,000
car for $15,000.00 at 9.9%
interest . You pay off the loan at Loan Term=48 months
the end of 48 months or 4 years. Interest Rate=9.9%
Monthly Payments=$379.72
•Total amount paid=
$18,226.56
•Total Interest=$3,226.56
Sometimes using credit is
unavoidable, sometimes you would
rather pay the interest to have the
good or service now.
Brainstorm:
How can you reduce the amount you pay in
interest, even if you cannot find a better
credit offer?
Possible Answers
1. Make a down payment, or save part of the cost so you borrow less.
2. Make extra payments or add additional money to each month’s
payment.
Consider the TV Purchase. Look what happens Consider the Car Purchase. Look what happens when
when you add only an extra $10 a month. you add only an extra $20.28 a month.
Original payments $150mo for 12 months. Original Payments $379.72 for 48 months
Total interest= $715.93 Total Interest Paid=$3,226.50
Total cost=$1,716 Total Cost=$18,226.50
New payments $160mo for 11 months. New Payments $400.00 for 46 months
Total interest=$635.68 Total Interest Paid=$3,020.92
Total Cost=$1,636 Total Cost=$18,020.92
There are different types of
interest!
Simple interest- interest paid based Which type of interest would
on the amount of money you
you like if you are borrowing
borrowed.
money?
Compound Interest- interest paid
based on the amount of money your Which type of interest would
borrowed plus the amount of
interest you still owe or have earned.
you like if you are saving
money?
Would you use credit to…
• Buy gas and food?
• Buy household appliances?
• Pay for college?
• Buy an Xbox?
• Buy something because it is on sale?
• Pay for a vacation?
• Buy something that would take you 3
months to save for?
Discuss as a class
So what should you use credit for?
There is no hard and fast answer to this questions.
But here are some helpful tips:
•Buying Durable Goods ensures that your purchase outlasts
your payment plan
•Emergencies
•Things you need/want now that are difficult to save up for
•Large Purchases like a house or a car
•If you need something but do not have the cash to buy it
•Things that will help you make money
(suit for an interview, college costs, capital goods etc)
Sample
•Annual Percentage Rate
•Credit Score
Academic Terms
Questions
•Asset
•Debt
•Default
Try these Questions
1. Loans extended for longer periods
2. Eric received a $2,000 bonus from
of time often involve higher interest
his employer. He deposited the entire
rates in order to
amount in a one-year certificate of
A. compensate the lender for deposit with a simple interest rate of
greater risk 5%. When the CD matured, how much
B. compensate the buyer for interest had Eric earned?
using savings to make a A. $10
purchase
B. $20
C. encourage consumers to buy
C. $50
durable goods for extended
periods of time D. $100
D. encourage savings
Tom’s Credit Report
Tom makes all of his payments on time
Tom still owes $2, 500 on his car
Tom has 4 credit cards
All of Tom’s credit cards have large balances
Tom’s salary is $80,000 a year