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Taking charge of your finances
Taking charge of your finances
Today’s goal
The 5 C’s of credit.
Installment vs. non-installment credit.
Advantages and disadvantages of credit.
How to establish credit
Taking charge of your finances
• Credit
When goods, services or money is
received in exchange for a promise to pay
a definite amount of money at a future
Taking charge of your finances
• Lender
Is the person or organization that has the
resources to provide the individual the
The lender trust the borrower will repay
the loan.
Taking charge of your finances
• Borrower
Is the person or organization that is
receiving the money from the lender.
When the privilege of borrowing has been
extended, the borrower is usually
expected to pay interest, or some fees,
such as processing.
Taking charge of your finances
• Credit Worthiness:
When a lender is considering granting
credit to the borrower, he/she needs to
believe the prospective borrower has both
the willingness and ability to pay the
money back. When a person applies for
credit, there are 5 C’s of credit.
Taking charge of your finances
• When evaluating an individual’s credit
rating, lenders look at a person’s
• Character
• Capital
• Capacity
• Collateral
• Conditions
Taking Charge of your finances
• Character is a person’s honesty and reliability
determined by their history of repaying bills on
• Capital is an evaluation of a person’s net worth.
• Capacity is the income a person has available to
repay the loan determined by job longevity and
having few other loans.
Taking charge of your finances
• Collateral is property which can be seized if a
person does not repay the loan.
• Conditions refer to the general state of the
• If an individual has these qualities, he/she is
more likely to be perceived as having the
ability and willingness to pay back a loan and
will be granted one by a lender.
Taking charge of your finances
2 Types of Credit:
installment and non-installment credit.
• Installment credit (also known as closed-end
credit) is a one time loan which the borrower must
repay the amount in a specified number of equal
• Installment credit usually has an agreement
(contract) which must be signed outlining the
repayment terms.
Taking charge of your finances
• Generally, the contract specifies the number
of payments, the payment amount, and how
much the credit will cost (interest rate or
fees). Sometimes, installment credit requires
a down payment to be made.
• Examples of installment credit include
automobile loans, mortgages, and education
Taking charge of your finances
• Noninstallment credit
(also known as open-end credit) credit is
extended in advance so the borrower does
not have to apply for credit each time credit
is desired.
• Individuals can continue to borrow on the
credit as long as they do not exceed the line
of credit.
Taking charge of your finances
• Lenders require the borrower to pay interest,
a periodic charge for using the credit.
• The credit can be repaid in one single
payment or a series of equal or unequal
payments, usually monthly.
• Minimum amount a person much pay each
• Examples of non-installment credit include
Credit cards or department store cards
Taking charge your finances
• Advantages vs. Disadvantages of Credit:
The average college student has 4.25 credit
cards in 2001, up from 3 in 2000.
Americans spend over $1 trillion dollars in
credit annually.
Taking charge of your finances
• Credit should not always be considered a ‘bad’
thing. It is okay to use credit if it will assist a person
to make money.
• Such as, receiving a home loan is good if a person
can afford the monthly payments, tax benefits are
received, an asset is received, and the value of the
home increases. Therefore, the financial
advantages of a home loan greatly outweigh the
costs. If credit is used for convenience, it should
only be used if an individual can pay the monthly
balance in full.
Taking charge of your finances
Advantages of using credit include:
• Convenience
• Record of transactions in case there is ever a
• Buy now and pay later without finance charges.
• For emergencies
• Identification
• To enjoy the “good life”
Taking charge of your finances
Advantages of using credit include:
• Hotel/Airplane reservations
• Obtain an education – With the rising tuition
costs of higher education, many individuals
are being forced to have a student loan to
get through school. This is one of the only
recommended uses for credit because the
individual’s future earning power and
quality of life increase as a result.
Taking charge of your finances
The disadvantages of credit include:
• High interest rates and fees
• Add-on fees late payment penalties, annual
fees to have the credit, and/or transaction
fees each time the credit is used.
• Loss of privacy
• Loss of financial freedom
• Overspending
Taking charge of your finances
• Establishing credit
Have a checking and savings account.
Apply for a secured credit card.
Taking charge of your finances
• Advantages and Disadvantages of Credit
Scenario Activity