Introduction to Business
Ch. 25: The Uses of Credit
Types of Charge Accounts
• Regular Account – Seller or provider expect
payment in full within a specified period of
time
– Billing period is usually 25-30 days
– Used for everyday needs and small purchases
• Ex – Doctors, plumber, or any type of service industry
Types of Charge Accounts
• Budget Account – Payment of a certain fixed
amount be made over several months
– Ex. – 90 day payment, in which you make 3 =
payments
– Utility companies
Types of Charge Accounts
• Revolving Account – Purchases can be
charged at any time but only part of the debt
must be paid each month
– Make a minimum month payment
– Finance charges will be added to total amount
owed not paid
• Varies from 0% for the first year up to 25%
– No finance charge if you make full payment within
25 days
Teenage Charge Accounts
• Under contract law, minors are not
responsible and cannot be held liable for their
personal debt.
• Businesses are not willing to open charge
accounts in a teenager’s name
– May get account with a co-signer (adult agreeing
to make payment on any balance due that the
teenagers does to make)
Credit Card Usage
• Bank Cards – Two most popular are: VISA and
MasterCard
– May be an annual fee
– Businesses are paid for the sales amount minus a
service fee (usually 4-6%)
– Why do customers like Bank Card
• They are accepted everywhere
• Receive one monthly bill rather than many bills from
the various businesses
Credit Card Usage
• Travel and Entertainment Card
– Example: Diner Club and American Express
– They do charge a higher yearly fee
– Expected to pay full amount each month
Credit Card Usage
• Oil Company Cards
– Not as common because it costs them to much
• Retail Store Cards
– Stores offer their own credit cards to customers
– Can only be used in the store offering the card
Installment Sales Credit
• This is different then using credit cards, you
have to complete an application for the large
item that you are purchasing
– Contract issued by the seller that requires periodic
payments to be made at times specified in the
agreement
– Payments are the same each month
– Finance charges are added to the cost of the item
purchased
Installment Sales Credit
• Special Features of installment sales
– Sign a written agreement (sales contract) that
shows the terms of the purchase, such as
payment periods and finance charges
– Receive and own the goods at the time of
purchase
• Seller has the right to repossess (take them back) them
if payments are not made according to the agreement
Installment Sales Credit
• Special Features of installment sales
– Make a down payment (payment of part of the
purchase price)
– Pay a finance charge on the amount owed
– Make regular payments at stated times, usually
monthly
Consumer Loans
• Installment Loan
– One in which you agree to make monthly
payments in specific amounts over time
– Amount borrowed plus finance charges
• Single-Payment Loan
– You do not pay anything until the end of the loan
period, usually 60 or 90 days.
• Repay full amount plus finance charges
Consumer Loans
• Process
– Sign a Promissory Note – Written promise to
repay based on a debtor’s excellent credit rating
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Payee – The one to whom the note is payable
Maker – The one who promises to make payment
Date of Maturity – Date on which note is due
Time – the days or months from the date of the note
until it should be repaid
• Principal – Face value of the note, the amount that is
promised to be paid
Consumer Loans
• Process
– Collateral – Property used to secure the loan.
• What you will give to the lender to sell to get back the
amount of the loan in the event you do not repay it.
• Secured Loan
– Cosigner – Person responsible for payment of the
note if you do not pay as promised
Credit Contracts
• Know what you are signing (KWYS)
– How much are the finance charges
• Must be clearly stated in your contract
– Does the contract include the cost of services you
may need, such as repairs, or is there a separate
contract.
– Does the contract have add-on features so that
you can later buy other items and have them
added to the balance that you owe
Credit Contracts
• Know what you are signing (KWYS)
– If you pay the contract in full before its ending
date, how much of the finance charge will you get
back?
– If you pay the contract within 60 or 90 days, will
there be any finance charge or will it be as if you
had paid cash
Credit Contracts
• Know what you are signing (KWYS)
– Is the contract you are asked to sign completely
filled in? Do not sign it if there are any blanks.
• It is proper to draw a line through blank spaces before
you sign the contract
– Under what conditions can the seller repossess
the merchandise if you do not pay on time