DR. FILEMON C.
AGUILAR MEMORIAL COLLEGE
College of Business Administration
Golden Gate Subdivision, Talon 3, Las Piñas City
Course code and Title : FINE 2 / PERSONAL FINANCE
LESSON NUMBER : Module 7 & 8
Topic : Managing your Credit
Introduction:
Credit is part of your financial power. It helps you to get the things you need now,
like a loan for a car or a credit card, based on your promise to pay later. Working to
improve your credit helps ensure you'll qualify for loans when you need them.
People typically use credit as a way to pay for goods and services that cost more
than they can afford to take from their current income.
Learning Objectives :
After this lesson, the student should be able to :
1. Develop a plan to establish a strong credit history.
2. Distinguish among the different forms of open account credit.
3. Explain and interpret the concept of credit.
Pre-Assessment:
Instruction: Write your answer in ½ sheet of paper or in a document file.
[Link] Credit Good Or Bad? Why ?
Using credit is not a bad thing — it’s how you use credit that can be good or
bad. Credit is part of your financial power. It helps you to get the things you need now, like
a loan for a car or a credit card, based on your promise to pay later. Having good credit
means that you are making regular payments on time, on each of your accounts, until your
balance is paid in full. Alternately, bad credit means you have had a hard time holding up
your end of the bargain; you may not have paid the full minimum payments or not made
payments on time.
Lesson Presentation:
What is CREDIT?
- is a contractual agreement in which a borrower receives something
of value now and agree to repay the lender at some date in the future, generally with
interest.
Interest - is the amount you pay to use someone else’s money. The higher the interest
rate, the higher the total amount you pay to buy something on credit.
Why do business need credit ?
to finance purchase of assets ( e.g. stocks, machinery, computers )
to allow customers to take tie to pay their bills
to support the growth of the business ( e.g. new locations, extra staff )
Common Types of Credit
a.) Credit card
- can be used anywhere, some only at a specific place
- monthly minimum payments vary, based on the balance
b.) Installment loan
- typically used for large purchases ( car/ appliances )
- long term can vary from a few months to many years
- monthly payment amount are often set for the life of the loan
c.) Student Loan
- used for tuition and other college expenses
- depending on income level, some loans let you delay making
payments until you graduate
- usually lower interest rate than an installment loan
d.) Mortgage Loan
- used specifically for a loan to purchase a home
- usually repaid over 15-30 years
- monthly payments may set for the life of the loan
Advantages and Limitations of Credit
Advantages Limitations
safer than cash - purchases are more expensive
convenient when shopping - temptation to over spend
use for financial emergencies - possible loss of merchandizing
due to late or non-
payment
enjoy goods and services and pay later
Process of Obtaining Credit
[Link] Application
form on which person provide information needed by a lender to make a
decision about granting credit
provide the following information: salary, credit references, checking and saving
account
2. Documentations
creditor will collect and verify necessary documentation for the extension of credit
Ex: Bank statements, credit card statements\
3. Processing
evaluating created worthiness
building of loan file
The C’s of Credit Worthiness
The five C’s of credit is a system used by lenders to gauge the
creditworthiness of potential borrowers.
Capacity - person’s ability to pay
Character - reflected by the applicant’s credit history
Collateral - it gives the lender the assurance that if the borrower defaults on the
loan, the lender can get something back by repossessing the collateral
Capital - the amount of money an applicant has. Lenders also consider any
capital the borrower puts toward a potential investment.
Credit History - indicates the amount of debt person have and their payment
history. Information from these reports helps lenders evaluate the borrower’s
credit risk.
Why are these important?
Lenders use these criteria to decide whether a loan applicant is eligible for credit
and to deterring related interest rates and credit limits. They help determine the
riskiness of a borrower or the likelihood that the loans’ principal and interest will be
repaid in a full and timely manner.
Why Use Credit?
When you hear the word credit, the first thing that probably comes to mind is a
credit card. And, for good reason, credit card are a very popular form of revolving
credit.
There are 3 Types of credit accounts:
a.) Revolving credit - it allows you to borrow money against a line of credit and pay it
back over time with monthly payments which is often calculated as a percentage of
your balance. This revolving credit accounts usually come with assigned credit limits
and are subject to finance charges and fees. You may be able to avoid interest
charges by paying in full each month.
b.) Installment credit - comes in the form of a loan with a fixed loan amount, fixed
payments and an established repayment schedule. Unlike revolving credit, installment
credit, gives you an exact time frame to pay off what you borrow, generally over a
period of month to years.
c.) Open credit - also called a charge card
- is a pre-approved loan between a lender and a borrower. It allows the
borrower to make repeated withdrawals up to a certain limit and then make subsequent
repayments before the payments become due.
Borrowers prefer open credit because it gives them greater control over
the amount they can borrow and the repayment period.
Generalization:
When you use credit, it usually means using a credit card. It also might mean
that you get a loan. A loan is another way to use credit. Using credit means you borrow
money to buy something. To buy the thing you want and pay back that loan later with
interest.
An interest is what you pay for using someone else’s money. You repay money
to whoever gave you the credit card or loan.
Not all credit cards are the same. Make sure you explore all pros and cons of
credit cares when choosing the right one for you.
Evaluation :
1. Give 5 Reasons Why use Credit ?
Application:
Prepare and Develop Personal Finance Plan.
Reinforcement:
Instruction: Write in 1 whole sheet of yellow paper then upload your reinforcement
toyou’re your Google drive folder in word, pdf, or jpeg (picture ) format
Note: Upload using this file name format:
SURNAME_NAME_MO1_ EVAL
SURNAME_NAME_MO1_ REIN
Example : MERCADO_GRACE_M01_EVAL
1. Create a personal cash flow statement measures your cash inflow ( money you earn )
and your cash outflow ( money you spend ) to determine if you have a positive or
negative net cash flow for week 8.
Online resource:
[Link]
Personal Finance 2nd edition, Jeff Madura, 2017 Pearson Education
Investment Management with Personal Finance, 2014-2016 edition, Lawrence J. Gitman
[Link]
