Credit Pros and Cons

1
Credit Pros and Cons

• Unit 1 Lesson 4

2
Introduction

• Credit use carries an important responsibility.
• When used responsibly, credit offers several
  advantages the freedom of not having to carry
  large amounts of cash, the opportunity to
  establish a good credit history, and the ability
  to track expenditures.

3
Introduction

• Credit can also be a helpful tool when used
  wisely by smart money managers, but it also has
  some serious disadvantages. Students need to know
  that credit is not additional income that allows
  them to buy more. Credit is a loan that allows
  people to make purchases while postponing
  payments, thereby enjoying benefits now and
  paying later.

4
Introduction

• Also, credit is not free. Extra charges for its
  use increase the cost of items that are
  purchased. Before making decisions about the use
  of credit, students should become well informed
  about advantages and disadvantages.

5
Using Credit A Big Decision

• The decision to purchase an item using credit
  borrowing rather than saving and paying cash is
  to be taken seriously. How badly do you need the
  desired item? Is it something that you can live
  without, or is it a need you must satisfy
  immediately? Saving requires that you wait, while
  buying on credit allows you to purchase goods and
  services now in exchange for a promise to pay
  later? Cash? Credit? There are advantages and
  disadvantages to both methods of payment. You
  need to consider them carefully.

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6
Using Credit A Big Decision

• Credit use has many benefits. Credit allows you
  to buy major items, such as cars and houses,
  without having to save entire purchase amount.
  Even though you dont have enough money to spend,
  you can enjoy the item now. Credit cards also are
  widely accepted at a variety of stores, allowing
  you to buy wherever you are. When using a credit
  card, you dont have to carry much cash, which is
  great if you are traveling. If you see something
  on sale at a great price but have no cash, you
  can buy it anyway just by signing your name.

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7
Using Credit A Big Decision

• A credit card allows you to be a telephone or
  Internet shopper. Buying on credit also permits
  you to inspect your purchase before it is fully
  paid for. If something goes wrong with a
  purchased item, it may be easier to return it
  when paid for with a credit card. In an
  emergency, a credit card allows you to respond
  immediately, even if you have no cash. Another
  advantage to credit is that it allows you to keep
  accurate records of your spending and combine
  multiple purchases into one lump payment.

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8
Using Credit A Big Decision

• There is also a downside to using credit. There
  are varying fees associated with credit, such as
  interest, finance charges, and annual fees. All
  of these add to the real cost purchases. If you
  buy an item on sale, you must remember that the
  interest and charges could amount to more than
  the savings (especially if you dont pay off the
  credit card bill each month).

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9
Using Credit A Big Decision

• Also remember that when charging, you are
  spending future earnings now, which means you are
  giving up purchases you may want to make in the
  future. Perhaps the biggest disadvantage of
  credit buying, however, is that it encourages
  impulse buying. If left unchecked, this impulse
  buying can lead to disastrous problems, such as
  the repossession of cars and homes when payments
  arent made on time. A poor credit rating can
  ruin your chances for a future home or a car
  loan. It can even affect your ability to get a
  job.

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10
Using Credit A Big Decision

• Credit can be a tool for successfully managing
  your money and improving your lifestyle, or it
  can lead to bankruptcy and financial ruin. Credit
  reporting agencies keep records on your credit
  experience. If you are a responsible borrower,
  you will have a good credit rating. If not, you
  will have a poor credit rating. Whether to use
  credit is an important decision. Consider all the
  advantages and disadvantages to make the best
  decision.

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A Big Decision
Advantages
Disadvantages

• Allows you to make a purchase now instead of
  waiting.
• Allows you to buy major items, such as cars and
  houses, without having to save the entire
  purchase amount beforehand.
• Can enjoy goods and services even though you
  dont have the money in hand.
• Cards are accepted at a variety of stores,
  allowing you to make purchases almost anywhere.
• You dont have to carry much cash.
• Allows for shopping over the telephone and
  Internet.
• Allows for immediate response or solution in
  emergencies, even if you have no cash.
• Allows you to keep accurate records of your
  shopping.

• Fees, such as interest, finance charges, and
  annual fees, add to the real cost of purchases.
• By charging, you are spending future earnings,
  which means giving up future purchases you may
  want to make in the future.
• Encourages impulse buying, which if left
  unchecked can lead to disastrous problems, such
  as the repossession of cars and houses, when
  payments arent paid on time.
• Can cause poor credit rating if bills arent paid
  on time. A poor credit can ruin your chances for
  a future home or car loan. It can even affect
  your ability to get a new job.

12
Advantages and Disadvantages of Credit

• Purchase Major Items
• Varying Fees
• Credit Score
• Spending Future Earnings
• Accurate Record Keeping
• Impulse Buying

• Widely Accepted At Stores
• Repossession
• Easy Returns on Purchases
• Overspending
• Immediate Response To An Emergency
• Identity Theft

13
Advantages of Credit
Disadvantages of Credit

• Purchase Major Items
• Credit Score
• Accurate Record Keeping
• Widely Accepted At Stores
• Easy Returns on Purchases
• Immediate Response To An Emergency

• Varying Fees
• Spending Future Earnings
• Impulse Buying
• Repossession
• Overspending
• Identity Theft

14
Credit Scenarios

• With the person sitting at the same table as you
  read through each scenarios.
• Circle the advantages.
• Underline the disadvantages.

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15
Summary
Balance Time to Pay Off Interest Charged Total Paid
1,000 12 years 1,349.97 2,349.97
2,500 19 years 5,915.53 8,415.53
5,000 24 years 15,761.21 20,761.21
Using the following credit information to answer
the questions below. Interest Rate 17 Minimum
Payment 2.5 of outstanding balance or 10 per
month.

• 1.) Why is more difficult to get out of debt than
  to get out of debt?
• 2.) How can interest payments on debt work
  against you?
• 3.) How can using credit cause you to overspend?