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Introduction to Credit

Credit is a promise to pay money in the future in exchange for the right to receive goods &/or services or even money (cash) right now. Credit is also known as an asset- one that has been loaned out in hopes that one will pay it back. Why do people use credit?

Why would people not want to use credit?

What has contributed to credit becoming so popular? People are more willing to take on debt than in the past. There are more funds available for borrowing. Example: the 1930s (Dirty 30s) there was no such thing and people wouldnt even dream of it. And, today people have the luxury to borrow money. People are better off today, meaning a higher ability to pay off debt. Borrowing (credit) is popular due to higher prices of things. Example: As prices of products and services rise so does the need to borrow * The higher price of gas may cause some people to have to borrow money just in order to drive their vehicle! People are more confident and knowledgeable which gives them belief in using credit. Today most households are dual-income allowing the ability to use more credit and pay it back more easily.

Lifestyle: People are living more for today, and not waiting for tomorrow! People think they need to live up to friends and families spending habits so they use credit. The saying Keeping up with the Jones applies here. Can you think of any others?

Before an individual can make the choice to use credit or not the following questions should be asked. 1. 2. 3. 4. 5. What goals do you hope to accomplish in making your decision? What are the alternatives? If any? What are the benefits of purchasing your item using credit? What are the costs associated purchasing your item using credit? And finally the students will make a decision based on their responses to the questions

Planning Your Credit Purchase Directions: For each situation listed below, complete questions on the Activity sheet, to help determine decisions that need to be made when planning to make a credit purchase. Each person named also is expected to pay all credit card balances and fees. Situation 1 Jennifer is a senior in high school. Her parents gave her a credit card and told her that she may use the card only in case of an emergency. As she was walking across the Mall, she saw the perfect dress for the senior prom in a store window display. The prom is two weeks away. The tag on the dress was $125.00. Also on the window was a sign: One day only, all items 25% off ticket price. Jennifers grandmother, a dressmaker, told her if she needed a special outfit, she would be willing to sew it for her. What should Jennifer do? Situation 2 Tony spends much of each day in his car commuting from home to school and work. His parents gave him a credit card to be used only for emergencies. Recently, the radio in his car went on the blink. He enjoys listening to music on his long drives. He went to the repair shop and was told it would cost $75.00 to diagnose the problem. To fix the problem, he would have to pay additional costs for labour and parts. The repairperson told Tony that his shop had a special sale on a portable CD player for $150.00. What should Tony do?

Situation 3

Sarah is a college student who had volunteered to drive three members of her debate team to the state debate championship in a city 75 miles away. As they were approaching a small town half way to their destination, they stopped at a fast food restaurant to get something to eat. When they got back into the car, the car would not start. The girls got out and pushed the car to the gas station next door. Sarah was told her battery was dead and a new one would cost $80. If the girls pooled all their money, they would have just enough money to purchase the battery. Sarah could have the car jump-started and hope that the battery will recharge itself during the rest of the trip. The service station attendant will accept her credit card. Sarah is responsible for paying all her auto repair bills. What should Sarah do? Situation 4 Jason is an honours pre-med student at the state university. He is on a very limited budget. Each semester, he charges his tuition and fees. He pays for his books with money in his savings account, which has only $30 left. One of his professors strongly recommended that he purchase books on an optional reading list that cost $250 to better prepare him for medical school entrance exams. A high score on the entrance exam may help Jason get a scholarship to attend medical school. What should Jason do?

Credit Questions Chart

What goals do you hope to accomplish in making your decision?

What are the alternatives?

What are the benefits of purchasing the item using credit?

What are the costs associated with purchasing your item using credit?

Make a decision Which alternative best matches your goal? What do you gain with each alternative? What do you give up with each alternative?

Key Terms Annual Fee A charge levied each year for use of a credit card. It's billed directly to your monthly statement. However, many credit cards come without an annual fee. Annual Interest Rate The annual interest rate charged on purchases that don't benefit from the interest-free period. There is no interest-free period for cash advances or balance transfers, and interest is charged from the day you withdraw the funds. Balance Transfer The transfer of an outstanding credit card balance from one card to another, usually between different institutions. The new card issuer usually charges interest from the day the amount is transferred to the new card -- there is no interest-free period. Cash Advance The withdrawal of funds from your credit card, up to the credit limit allowed. The amount you withdraw may be subject to daily limits. There is no interest-free period, so interest is charged from the day you withdraw the funds. Convenience Cheque A cheque provided by the credit card issuer and drawn on your credit card account. You can use a convenience cheque the same way you would a personal cheque. When you use a convenience cheque, the transaction is treated as a cash advance for the purposes of calculating interest charges - there is no interest-free period and you're charged interest until you pay back the amount of the cheque in full. Grace Period The grace period is the time between the statement date and the payment due date, and is determined by the credit card issuer. The grace period usually varies between 15 and 26 days and is part of the interest-free period. The grace period may not apply unless you meet certain conditions. Interest-Free Period The interest-free period on new purchases starts on the date you make a purchase and ends when the credit card issuer begins charging you interest on that purchase. The interest-free period includes the grace period determined by the credit card issuer. It may not apply unless certain conditions are met. Minimum Payment The minimum amount payable each month on your credit card balance. Penalty Interest Rate The rate at which penalty charges are calculated. It only applies to charge cards. Prime Rate The interest rate a financial institution charges on loans to its best customers. Reference Rate A base rate, such as the Prime Rate, used in the calculations of variable credit card interest rates.

Reward Program A program offered by credit card issuers that gives cardholders rewards for using their credit card. You collect reward points every time you charge a purchase to your card. You can usually redeem these points in merchandise, travel or cash, depending on the program. Security Deposit The amount you deposit with a credit card issuer as security to obtain a secured credit card. Glossary terms taken from: http://www.fcac-acfc.gc.ca/eng/publications/CreditCardsYou/glossary_e.asp?pm=1