CREDIT
INTRODUCTION TO BUSINESS & MARKETING
Objectives
 Compare the types of consumer credit
 Describe the advantages and disadvantages of
using credit
 Identify the elements of creditworthiness (3 C’s)
Credit: Key Terms
 Credit – an agreement to
obtain money, goods, or
services NOW in
exchange for a promise
to pay LATER
 Creditor – lends money
or provides credit
 Debtor – borrows money
or uses credit
Credit
 Credit is based on the
creditor’s confidence
that the debtor can
and will repay the debt
(creditworthiness).
 Interest – fee that
creditors charge a
debtor for using their
money
Types of Credit
Types of Consumer Credit
Charge Account
credit provided
by a store or
company for
customers to buy
its products
Types of Consumer Credit
 Credit Card – can be
used in many different
places
 Issued by banks (i.e.,
Bank of America Visa
card)
 Some have annual fees
ranging from $25 to $80
 Creditors earn money
from interest charges,
annual fees, and penalties
Types of Consumer Credit
 Installment Loans – loans
repaid in regular equal
payments over a period of
time
 Includes student, car, and
home improvement loans
 Debtor receives loan for a
certain about of time (i.e.,
60 month loan)
 Debtor makes equal
monthly payments that
cover loan plus interest
Types of Consumer Credit
 Mortgage Loan – a
form of installment
loan, only it is written
for a long period of
time (15 – 30 years)
 Home serves as
collateral, something
of value the bank can
take
Types of Loans
 Short-term: one year or less
 Medium-term: one to five years
 Long-term: more than five years
Pros & Cons of Using Credit
Advantages of Using Credit
 Convenient
 Shop and travel without carrying large amounts of cash
 Buy expensive items (like cars) now and use right away
 Good for emergencies (i.e., unexpected car repairs)
 Establish Credit Rating
 A credit rating is a measure of a person’s ability and
willingness to pay debts on time.
 Good ratings tell other lenders you are a responsible borrower
and a good credit risk.
 Contribute to the Growth of Economy
 Consumers are able to buy more goods and services
 Businesses can hire more workers to produce more
Disadvantages of Using Credit
 Easy to Misuse

Tempting to buy things you cannot afford or don’t need

Can be difficult to resist sales or offers for more credit
 Higher Cost

Things cost more when using credit instead of cash
because of the interest fees
 Committing Future Income

Debt must be repaid
Creditworthiness (3 C’s)
WHEN YOU APPLY FOR
CREDIT, CREDITORS WANT
TO MAKE SURE YOU ARE
WORTH THE RISK.
3 C’s: Capacity
 Capacity is the
consumer’s ability
to repay the loan.
 Creditors look for:
 Verified
employment
and income
Ratio – current
amount of debt
compared to income
 Debt
3 C’s: Character
 Character is the
consumer’s proven
trustworthiness in
repaying debts.
 Creditors will
check:
 Credit
references
 Credit
report
3 C’s: Capital
 Capital is the
amount of money
the applicant has
beyond their
current debts.
 Creditors will
check:
 Savings
 Investments
 Potential
collateral