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Section 10.1: What is Credit?
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Credit for Education
Education is expensive.
4 costs associated with it:
1. Tuition
2. Room and board
3. Books
4. Miscellaneous fees
Cost for a 4 year, public college.
Was $16,000, now $22,826.
Cost for a 4 year, private college.
Was $32,000, now $44,750.
Equity
Difference between what you owe on a home and the homes value.
After 7 years, you paid off $80,000 AND the homes value went up to $275,000.
If you were to sell the house, you would have $105,000 (equity).
Buying a home is an investment
Homes values typically rise
a) Not the case for most other consumer goods.
Credit for a Home
Example:
a) Renting; $700/ month for 7 years = $58,000.
You leave with nothing to show for it.
b) Home; $250,000 mortgage ($1,000/month).
When and How Much?
1. Is it important that you have the good now?
2. Do you HAVE to borrow to buy the good?
3. Can I afford the payments?
4. Will I be able to afford other goods I want if I use credit to get this product?
Rule of Thumb – no more than 20-25% of your TAKE HOME PAY.
Credit for a Home
What is the average cost of an American home? $272,900
Without credit, it would be nearly impossible to buy.
Although interest payments may be high, owning a home makes sense.
Ownership gives you equity.
Credit
Credit for Your Health
Hospital bills and medicine costs are increasing.
Partially covered by insurance.
What about missed work?
Insurance typically does not pay rent or mortgage…or any other bills.
Many people have to borrow to maintain their living situation.
Credit – the ability to borrow money in return for a promise of future payment.
Future payment includes interest.
Difference between saving and credit:
a) Credit = item now, pay later.
b) Saving = money now, item later.
What is a good interest rate on a credit card?
under 12.99%
What are the 4 ways in which it is a good decision to use credit?