What is Credit?

Credit is an arrangement to receive cash,
goods, or services now and pay for them in
the future.
 Borrowing money or using a credit card is ‘using’
credit.

Consumer credit is the use of credit for
personal needs.
 Most common form = credit card account
 Consumer spending and demand indicator

An entity that lends you your money is a
creditor.
 Examples: financial institution, merchant, or individual

Good credit is valuable!!

What are some reasons for using credit?

When might it be inappropriate to use credit?

Record answers in your notes


Giving or receiving money is the act of
finance.
Before using credit, consider:




Do you want to use your savings instead of credit?
Can you afford the item?
Could you put off buying the item for a while?
What are the costs of using credit?

You are also agreeing to pay the fee that the
creditor adds on to your purchase.
 Example: If you do not pay your credit card bill in full
every month, you are charged interest on the amount
you have not paid.

Enjoy goods and services now and pay for
them later

Combine several purchases, making one
monthly payment

Record of expenses and safe than carrying
cash

If used wisely, other creditors view you as
responsible

Temptation to buy more than you can afford

Risk of losing your good credit reputation.


Risk of losing income and property to repay
your debts
If your income doesn’t increase, may have
difficulty paying bills
1. Closed-end credit
2. Open-end credit

One-time loan, paid back over a specified
period of time in payments of equal amounts.
 Involves an agreement, or contract.
 Examples: Vehicle loans (title), large appliances,
furniture

Three most common types:
 Installment sales credit – high priced merchandise
(large appliances, furniture, etc), usually a down
payment is required
 Installment cash credit – direct loan for personal
money (home improvements, vacation, etc.), no down
payment
 Single lump-sum credit – must be repaid in full on a
specified day, usually 30 to 90 days.

Credit as a loan with a limit on the amount of
money you can borrow for a variety of goods
and services
 Line of credit = maximum amount of money allowed
 Examples: Visa, MasterCard, Department Stores


Billed for at least a partial payment of the
total amount you owe
May have to pay interest or other finance
charges

STOP
Chapter 8.1


Borrowed money with an agreement to repay
it with interest within a certain amount of
time.
Inexpensive Loans:
 Low interest
 Family or parents

Medium-Priced Loans:
 Moderate interest
 Savings and Loan Associations, Commercial Banks,
Credit Unions

Expensive Loans:
 High interest
 Finance companies, retail stores

Home Equity Loans:
 Based on your home equity
 Difference between the current market value of your
home and amount your still owe on the mortgage
 Interest is tax-deductible
 Missing payments = possible loss of home



Average cardholder has more than nine credit
cards.
Grace period – time period during which no
finance charges will be added
A finance charge is the dollar amount you pay
to use credit.
 Pay in full and on time = no finance charge
 Includes late payment fees, interest, and annual fee.

Debit Cards:
 Electronically subtracts money from your savings or
checking account to pay for goods/services.
 Some can be used as credit and delays automatically
subtracting from your account

Cobranding:
 Linking a credit card with a business trade name
offering “points” or “premiums”
 Increasingly popular
 Offers cash rebates on specified products/services

Smart Cards:
 Contains a computer chip and stores 500 times as
much data as a normal credit card.
 Example: Purchase a plane ticket, store it digitally, and
track frequent flyer miles


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Figure 2
Summarizes the major sources of consumer
credit.
Which credit source would you use for the
following loans and why:
 Mortgage
 Vehicle Loan
 Your first credit card

Record answers in your notes

Page 233

#1-4, 6 (one or two sentences)
◦ Turn in when complete


Mini-QUIZ TOMORROW on Ch.8.1
Homework: Research two colleges of interest to
you and locate the tuition for the Fall 2013
Semester. Include on a piece of paper your name,
each college, and the tuition.
◦ DUE FRIDAY