Credit Explained PDF

Credit How does credit work?  Plan for the day What is credit? Different types of credit Eligibility Co-signing  What is the difference between credit and debit? What is credit? Credit is a sum of money that a credit issuer makes available to a borrower who...

Credit How does credit work?  Plan for the day What is credit? Different types of credit Eligibility Co-signing  What is the difference between credit and debit? What is credit? Credit is a sum of money that a credit issuer makes available to a borrower who agrees to repay it Consumer credit is used by consumers to purchase goods and services while deferring the payment Why do we use credit? Convenience It is quick, fast, and simply Less of a hassle than carrying around money More secure Rewards points Business profits Different types of credit There are different types of credit that are fitted to different needs. These include: Credit cards Line of credit Mortgages Student loan Types of Credit Personal loan Pawnbroking loan Payday loan Buy now, pay later offer Car loan Types of credit and common annual interest rates Additionally: Student loans are on average between 2-4% in Canada Highest Interest rates Short term credit such as payday loan and pawnbroking loans generally have the highest amount of interests The lowest interest rate is usually on student loans, followed by mortgages Credit is almost never free If the balance is not paid before the due date, interest will be added to the unpaid balance According to a 2010 survey, 42% of credit card holders do not pay the entire balance on their account each month  You are usually given 21 days to pay the balance on your credit card before interest is charged. Calculating Credit Card Interest https://www.youtube.com/watch?v=z2SwT_GORTA  Payday Loans https://www.youtube.com/watch?v=Ogf1k9-0f-E https://www.youtube.com/watch?v=rm93rGYmv4Y https://www.youtube.com/watch?v=ySF6Q-D_dBA Eligibility for credit Before granting credit, a credit issuer analyzes the borrower’s financial profile to assess the risk the borrower represents and determine their eligibility. The elements that are analyzed are: Income Job stability Debt level Payment history  Liquid assets Age Credit score Assets (property and investments) The guaranty (guarantor) Voluntary commitment of an individual to repay another individual’s debt if the person fails to repay it. Credit issuers require a guaranty before granting credit to individuals who they see as a risk This includes borrowers with irregular income, a high level of debt, poor credit rating or a lack of credit history A guarantee may be necessary for a cell phone plan, applying for a credit card, renting an apartment or buying furniture with payments The guaranty can be terminated: Debt is repaid in full, credit issuer agrees to terminate the guaranty, or the guarantor dies Co borrowing vs guaranteeing Co-borrowing vs guaranteeing: the difference Co-borrowing Refers to contracting a loan with another individual who agrees to repay the debt if the borrower fails it. Unlike what happens if a guarantor dies, if a co-borrower dies, the repayment of the debt becomes the responsibility of their heirs Co-borrowing and guaranteeing at your own risk Difficulties with credit repayment can cause tension in the relationship between the borrower and the guarantor or co-borrower The credit appears on the borrower’s credit report but also on the credit report of the guarantor or co-borrower If the borrower fails to repay the debt, the credit issuer may require the guarantor or co-borrower to repay for it in a full single installment  What should this man have thought about before co-signing on the car?  Do you think it can be difficult to say no to co-signing? Why or why not? Alternatives to credit Identify the real need that lies behind a purchase, what are your wants vs needs Add a savings plan to the budget to allow for the purchase of a desired good or service Purchase a second hand item Take advantage of community resources that offer free or inexpensive goods and services Sell assets Next time: the risks of credit