Credit Fundamentals
18-1
Using credit
Credit is the privilege of using someone
else money for a period of time
 The person receiving the credit will
promise to repay the money with interest
in a certain period of time
 Person who buys on credit is the debtor
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Using credit cont.
Person who makes the loan is the
creditor
 Without trust the credit system could
not operate
 You will sign an agreement saying you will
pay the money back.
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Types of credit
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Trade credit
◦ Used by businesses
◦ Receive goods from a supplier and pays for
them later
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Businesses may secure long term loans
◦ For land, equipment and building.
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Consumers use of credit
◦ For items that will last a long time
◦ Sometimes for convince
Types of credit cont.
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Loan credit
◦ Usually for a special purpose i.e. buying a home
◦ Usually involves signing a contract
◦ Repay in installments
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Sales credit
◦ IF you charge a purchase at the time you buy the
good
◦ Most businesses offer sales credit
◦ Involves the use of charge accounts and credit
cards by the consumer.
Charge accounts
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Regular accounts
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Requires the buyer to make full payment within 25-30 days
May be a limit to the amount that can be charged
People use this everyday for small purchases
Doctors, dentists, lawyers, and plumbers commonly offer
this type of credit.
Budget accounts
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Usually offered by some stores and utility companies.
Requires fixed payments over a certain amount of months
Usually 90 days
With utility companies the estimate your usage for
months
 You avoid large payments during certain parts of the year.
Charge accounts cont.
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Revolving accts
◦ Most popular form of sales credit
◦ You may charge a purchase at any time
◦ You have to pay only part of the debt each month
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Features of revolving credit
◦ A maximum amount may be owed (credit limit)
◦ Payment is required at least once a month
◦ Financial charge is added if total amount is not paid
 Interest and charges.
 Convenient but easy to overspend.
Credit Cards
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Bank Cards
◦ Master card and Visa are the top 2
◦ Sometimes there is an annual fee
◦ Banks and merchants make agreements to accept the
credit cards.
◦ At the end of the day the store sends all of the credit
receipts to the bank.
◦ The next day the bank pays the business the amount minus
the sales fee.
◦ The fee covers the banks expense.
◦ The bank is doing work that the credit card company
would do.
◦ Customers like them because they are accepted any
where
Credit cards cont.
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Travel and entertainment cards
◦ Subscribers pay a yearly membership fee
 Usually higher than bank card
◦ Cardholders have no spending limit
◦ Must pay full balance each month
◦ Receive a detailed record which can be used for taxes
 American Express, Carte Blanche, Diners club are examples
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Oil Company Cards
◦ Some are issued by the oil company themselves
◦ Some are affiliated with a bank card company
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Retail store cards
◦ Will have the name of the store on them
 i.e. Best Buy, Home Depot, Lowes,
◦ Are only accepted at the issuing store
Installment credit
Used for expensive purchases such as
furniture and appliances
 It is a contract where the debtor must
make periodic payments at specified times
 The seller adds finance charges to the
cost of the item.
 Differs from using credit cards
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Features of installment credit
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Signing a sales contract shows that shows
the terms of the purchase
Receiving the purchased item at the time of
sale
◦ Seller can repossess if payments are not made
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Making a down payment at the time of
purchase
Paying a finance charge on the amount owed
Making regular payments at stated times
◦ Usually weekly or monthly
Consumer Loans

Installment Loan
◦ You agree to make monthly payments for specific
amounts over a period of time.
◦ The total amount repaid is the amount borrowed
plus the finance charges of your loan.
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Single payment loan
◦ You do not pay anything until the end of the loan
period
 Usually 60-90 days
◦ At that time you will pay the full amount plus
finance charges.
Consumer loans and lenders
Lender needs some assurance that you are going to
repay the loan
 You may sign a promissory note
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◦ Written promise you will repay the loan with the finance
charges in a specific amount of time. See. Page 454 Figure
18-1
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Collateral
◦ You might have to put some property down as security. i.e.
car, house
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Cosigner
◦ IF you do not have established credit or any property you
will need a cosigner
◦ The person that cosigns is responsible for payment of the
loan if you fail to pay.
Benefits of credit

Convenience- Credit can make it easy for
you to buy without carrying cash
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Immediate possession- Credit allows you
to have an item now
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Savings- Sometimes credit allows you to
buy an item on sale at a good price
Benefits of credit cont.
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Credit rating- is a persons reputation for
paying bills onetime.
◦ If you buy on credit and pay your bills you will
increase your credit rating
◦ It is valuable when you need to borrow
money.
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Useful for emergencies- Access to credit
can help in unexpected situations
◦ i.e. car repairs
Credit concerns
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Overbuying
◦ Sometimes you buy items that you really cannot
afford.
◦ Attractive store displays and advertisements
invite you to make the purchase.
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Carless Buying
◦ If you become lazy in your shopping you may not
be shopping carefully.
◦ You may fail to make comparisons.
◦ Credit can tempt you to not wait for a better
price.
Credit concerns cont.
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Higher prices
◦ Stores that accept cash only may charge a lower price
then those who offer credit.
◦ When you do not pay as agreed there are collection
costs.
◦ Some businesses write this off as uncollectable debt
 Increases amounts for everyone.
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Overuse of credit
◦ Buying now and paying later sounds good.
◦ The amount can become a problem later on
◦ You may have high interest if you cannot pay off the
bills.
Questions to Ask
How will you benefit from this use of
credit?
 Is this the best buy you can make or
should you shop around?
 What will the total cost of your purchase
including finance charges?
 What would you save if you paid cash?
 Will the payments be too high for your
income.
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