Chapter 16.1

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’
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
 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
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
If used wisely, other creditors view you as
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,
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
 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
Chapter 8.1
Borrowed money with an agreement to repay
it with interest within a certain amount of
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
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
 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
Figure 2
Summarizes the major sources of consumer
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.