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    Unit 4 Credit Overview 1

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    Credit allows individuals to borrow money, goods, or services and pay it back later. There are different types of credit: installment credit involves fixed payments over time for loans like mortgages; revolving credit allows repeated borrowing up to a limit, like credit cards; and open credit requires full payment each cycle, like utilities. A credit score between 670-739 is generally considered good and factors like payment history, amounts owed, credit length and mix determine this score. Maintaining a good score provides better access to loans and lower interest rates.

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    Unit 4 Credit Overview 1

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    api-576244922
    29 views15 pages
    Credit allows individuals to borrow money, goods, or services and pay it back later. There are different types of credit: installment credit involves fixed payments over time for loans like mortgages; revolving credit allows repeated borrowing up to a limit, like credit cards; and open credit requires full payment each cycle, like utilities. A credit score between 670-739 is generally considered good and factors like payment history, amounts owed, credit length and mix determine this score. Maintaining a good score provides better access to loans and lower interest rates.

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    Credit allows individuals to borrow money, goods, or services and pay it back later. There are different types of credit: installment credit involves fixed payments over time for loans like mortgages; revolving credit allows repeated borrowing up to a limit, like credit cards; and open credit requires full payment each cycle, like utilities. A credit score between 670-739 is generally considered good and factors like payment history, amounts owed, credit length and mix determine this score. Maintaining a good score provides better access to loans and lower interest rates.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    29 views15 pages

    Unit 4 Credit Overview 1

    Uploaded by

    api-576244922
    Credit allows individuals to borrow money, goods, or services and pay it back later. There are different types of credit: installment credit involves fixed payments over time for loans like mortgages; revolving credit allows repeated borrowing up to a limit, like credit cards; and open credit requires full payment each cycle, like utilities. A credit score between 670-739 is generally considered good and factors like payment history, amounts owed, credit length and mix determine this score. Maintaining a good score provides better access to loans and lower interest rates.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 15

    Credit

    By Roman Novy-Marx
    Lesson Overview
    ❖ What is credit?
    ❖ How does credit work?
    ❖ Credit score
    ❖ Different types of credit
    What is credit?
    A. Credit = a general term for the ability to borrow money, goods, or services with the
    understanding that you’ll pay back later
    1. By using credit, you take on debt
    a. Debt = the amount of money you owe someone else

    2. Common examples of credit: credit cards, utility bills, loans, and mortgages
    Important Terms
    1. Borrower (Debtor) = anyone who uses credit or takes on debt

    2. Creditor = anyone who grants credit to a borrower


    a. Real creditors: financial institutions such as banks or credit card companies
    b. Personal creditors: friends or family who can lend you money
    How does credit work?
    1. Credit is founded on a creditor’s confidence that they will get their money back

    2. To determine if they will be repaid, real creditors will take a measure of your
    “creditworthiness”
    a. based on your financial reliability in the past
    i. e.g.) credit score

    3. Personal creditors will judge your creditworthiness based on reputation alone


    Credit Activity
    Write down the following…
    1. 5 people in your life to whom you would feel comfortable lending
    something important

    2. 3 traits you want to see in someone before you lend them something
    important
    Credit Score
    = a score ranging from 300-850 that tells how likely you are to pay back debt on time; primary judge of
    “creditworthiness”

    1. How is it calculated?
    a. Payment history
    - Do you pay your bills on time?
    b. Amounts owed
    - How much debt do you already have?
    c. Length of credit history
    - How long is your record?
    d. Credit mix
    - Do you have experience with multiple types of credit?
    Credit Score—Continued
    ❖ Credit score is important because it determines your ability to get a loan or credit card and the
    interest rate you pay

    ❖ So, what is a good credit score?


    ➢ 0-579 = poor
    ➢ 580-669 = fair
    ➢ 670-739 = good
    ➢ 740-850 = very good
    Different Types of Credit
    1. Installment credit = a type of loan in which you borrow a set amount and repay it with
    interest over a specified period of time with regular fixed payments

    a. Once the installment credit loan is paid off, the account is


    considered closed

    b. Examples of installment credit:


    - mortgages, auto loans, personal loans,
    and student loans
    Types of Credit Part II
    2. Revolving credit
    a. = a credit account that allows you to repeatedly borrow and repay amounts up to a maximum
    limit
    i. You control how much you borrow and must repay

    ii. Interest is charged on any unpaid balance after each statement’s due date
    1. Never pay interest if you pay your balance in full each month

    iii. The account will remain open indefinitely until you choose to close it
    Revolving Credit—Continued
    iv. Examples of revolving credit:
    1. Credit cards—by far the most common
    a. When choosing a credit card it is important to consider the interest rate
    you will be charged on unpaid balances
    b. Must be 18+ to qualify for credit cards

    2. HELOC (home equity line of credit)

    a. Allows you to use revolving credit by


    borrowing against the value of your home
    Types of Credit Part III
    3. Open credit = a line of credit in which balances are due in full at the end of each billing cycle and
    monthly payments vary

    i. The amount owed depends on how much you used that month

    ii. You’re expected to pay the entire bill within a certain time frame after receiving it

    iii. Examples of open credit:


    1. Utility bills
    a. gas, electricity, and water bills

    2. Open cable and cell service plans


    Open Credit—Continued
    BE CAREFUL:
    iv. Relatively new apps such as Cash App are a dangerous form of open credit
    1. Cash App will front users money they don’t have and charge very high interest
    rates on the borrowed amount

    2. Cash App is marketed to youth on social media - be aware


    Recap Activity
    Do your best to write down the following…

    1. What is one example of each type of credit we discussed?


    a. Installment, Revolving, & Open Credit

    2. What general range is a “good” credit score?

    3. What factors contribute to a good credit score?


    Thank You

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