Credit
What Is Credit?
Why it is Important
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You’ll probably use credit some day. When
you do, it will be helpful to know what credit
is and the types of credit you can use.
Credit
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Buying an item now and paying for it later
can be an easy and convenient way to make a
purchase
Consumers use credit to buy everything from
a tank of gasoline to a new car.
How does buying on credit work?
Credit: The Promise to Pay
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Credit is an agreement to get money, goods,
or services now in exchange for a promise to
pay in the future.
When buying on credit, you are delaying
payment for the item
The one who lends money or provides credit
is called the creditor.
Credit: The Promise to Pay
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The one who borrows money or uses credit is
called the debtor.
Credit is based on the creditor’s confidence
that the debtor can and will make the
payments
Credit is a matter of trust.
Credit: The Promise to Pay
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Creditors charge a fee for using their money, which
is called interest.
The amount of interest is based on three factors:
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Interest rate
Length of the loan
Amount of the loan
It’s important to shop around for credit because
creditors may charge different rates.
Who Uses Credit
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The type of credit used by people for personal
reasons is called consumer credit.
Examples of consumer credit would be
buying:
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House
Car
Boat
Student Loans
Who Uses Credit
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Business often use credit for the same reasons
that consumers do.
They might need to borrow money to buy
goods or pay salaries.
Credit used by business is called commercial
credit.
Who Uses Credit
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When businesses borrow money, they often
pass along the cost of interest to consumers by
charging higher prices on their products.
The federal government uses credit to pay for
many of the services and programs it provides
to its citizens.
During WWII the federal government uses
credit to finance military spending.
Who Uses Credit
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State and local governments use credit to pay
for such things as highways, public housing,
stadiums, and water systems.
Everyone Uses Credit
Advantages of Credit
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The main advantage of credit is that it’s
convenient.
You can shop and travel without carrying
large amounts of cash
Instead of saving for an expensive, like a car
you can get it and use it right away.
Advantages of Credit
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Without credit, there are some things you
can’t buy.
To order airline tickets over the phone or
shop on the internet, you need a credit card
Buying on credit enables you to establish a
credit rating
A credit rating is a measure of a person's
ability and willingness to pay debts on time.
Advantages of Credit
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A good credit rating tells other lenders that
you are a responsible borrower and a good
credit risk.
Finally credit contributes to the growth of our
economy.
When consumers make credit purchases,
businesses must hire more workers and
produce more goods to keep up
Disadvantages of Credit
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Since credit is so convenient to use, it can also be
easy to misuse.
With credit, it’s tempting to buy things you can’t
afford, buy too much, or buy things you don’t need.
Items also cost more when you use credit instead of
cash b/c of the interest
The more items you charge the longer it will take
you to pay off
Disadvantages of Credit
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Example:
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Credit Card Balance = $3,000
Interest Rate = 19.8%
Minimum Payment = 2% or $60
Time to pay off = 32 years
Interest you would pay = $9,483
Disadvantages of Credit
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As the credit card bills pile up, you might
have problems paying them.
You may reach your credit limit, the point
where you can’t charge anymore
Late or missed payments lower your credit
rating, which will make it difficult for you to
get credit in the future.
Disadvantages of Credit
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According to a recent report, half of the
people with credit problems are b/w the ages
of 18 and 32.
Remember to use credit wisely
You will have to pay the money back
Types of Credit
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Short-term loans last for one year or less.
Medium-term loans last for one to five years.
Long-term loans last longer than five years.
Charge Accounts
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One of the most common types of short-term
and medium-term credit is the charge
account.
Dealers or stores generally offer these types
Customers will charge items at the store and
will pay some of the total when the bill
arrives.
There are 3 main types of charge accounts
Regular Charge Accounts
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These accounts require that you pay for
purchases in full within a certain period of
time, usually 25 or 30 days
If the bill is paid on time, you don’t have to
pay interest.
If you don’t pay the entire bill, interest is
charged on the amount that hasn’t been paid.
Revolving Charge Accounts
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A revolving account allows you to borrow or
charge up to a certain amount of money and
pay back a part of the total each month.
Interest will be paid on the unpaid amount.
Budget Charge Accounts
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Budget charge accounts let you pay for costly
items in equal payments spread out over a
period of time.
Each payment includes part of the total due on
the item plus interest.
Large home appliances, cars, and furniture are
bought this way
Credit Cards
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Credit cards are like charge accounts but some
can be used in many different places.
Some credit cards have annual fees, which
might range from $25 to $80.
Credit card companies earn money from the
interest they charge. Interest rates vary a lot.
There are 3 basic types of credit cards
Single Purpose Cards
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Single-purpose cards can only be used to buy
goods or services at the business that issued
the card.
Single-purpose cards operate like revolving
charge accounts
Each month you receive a statement listing all
the purchases you made in the past 30 days
Single Purpose Cards
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You can pay part or the entire amount you
owe
Credit cards issued by oil companies, best
buy, kohl's are example of single-purpose
credit cards
There is no annual fee for single-purpose
cards
Multipurpose Cards
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Multipurpose cards are also called bank credit
cards because banks issue them.
Multipurpose cards work like a revolving
charge account.
These cards may be used at many different
stores, restaurants , and other businesses all
over the world
MasterCard and Vise are examples
Travel and Entertainment Cards
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Travel and entertainment cards usually work like
regular charge accounts.
You must pay the full amount due each month.
Cards such as American Express, and Diners Club
are examples
They are accepted worldwide for purchases
connected with travel, business, or entertainment
Banks and Other Financial Institutions
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Financial institutions, such as banks, savings
and loans, and credit unions offer many types
of loans.
Financial institutions usually have the lowest
rates on their loans, but they place more
demands on the borrower.
For example, they’ll only lend money to
people with good credit ratings.
Single Payment Loans
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The debtor pays back this type of loan in one
payment, including interest (at the end of the
loan period).
Many farmers secure single payment loans in
the spring to pay for their seed and fertilizer
They will then pay it back in the fall after they
harvest their crops
Installment Loans
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Installment loans are loans repaid in regular
payments over a period of time.
The debtor makes equal monthly payments,
which cover the amount of the loan and the
interest.
Examples would include student loans,
personal loans, and car loans
Mortgage Loan
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A mortgage loan is a form of an installment
loan only it is written for a long period, such
as 15 to 30 years.
Self-Provided Credit
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Many stores provide credit for their
customers.
Clothing, Furniture, appliance, boat, and car
dealers are among those who offer credit for
customers
Generally, seller-provided credit is extended
for less than one year up to five years
Self-Provided Credit
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One of the reasons they provide such credit is
to make it easier for consumers to buy their
products, and discourage them from going
elsewhere.
They offer higher interest rates
Consumer Finance Companies
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Consumer finance companies specialize in
loans to people who might not be able to get
credit elsewhere.
The cost of a loan from a consumer finance
company is higher than the cost of a loan from
other sources since this loan involves a
greater risk.
Consumer Finance Companies
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The interest rate a consumer finance company
charges varies from state to state and can be
more than 20 percent.
Before getting a loan from one of these
companies, check to see if you can secure a
comparable loan from a bank, savings and
loan, or a credit union
Payroll Advance Services
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Many people have difficulty making their
paychecks stretch from one payday to the
next.
If you don’t have any savings and an
unexpected expense occurs, you might look
for a short-term loan until payday
Pawnshop Loan
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A pawnshop loan is based on the value of
something you own.
For example you could pawn your bicycle for
an amount of money that is less than the bike
is worth.
You receive a ticket for the item and can
redeem, or buy back, your bike w/n a certain
period of time for the loan amount plus a
service charge
Pawnshop Loan
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The service charge is like interest that other
loans would charge
If you don’t redeem it, the pawnshop sells
your bike
Generally the cost of this type of loan is very
high
Borrow Until Payday Loan
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Some businesses provide very short-term loans,
usually for 5 to 14 days.
The cost of this kind of loan is especially high.
Percentages could range from 400%-1,000% when
calculating it on a annual basis
A payday loan is made without a credit check, but
you must have proof of a checking account and
employment.
Borrow Until Payday Loan
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It is strongly recommended that you don’t use
this source of credit
People with poor credit ratings are most likely
to use this service because they can’t get a
loan anywhere else.