CREDIT ESSENTIALSIntroduction to Business and Marketing – Ch 25.1

OBJECTIVES Define credit Indicate three factors that

affect interest paid Identify different groups who

use credit Identify advantages and

disadvantages of using credit

THE MAIN IDEA

Credit allows borrowers to purchase items that they otherwise could not afford.

Consumers, businesses, and governments all borrow money.

CREDIT: The Promise to Pay Consumers use credit to

buy goods and services now and pay for it later

Makes buying more convenient

Allows customers to buy things they might not otherwise be able to afford

CREDIT: an agreement to obtain money, goods, or services now in exchange for a promise to pay in the future

WHO’S INVOLVED…

A creditor charges a fee to a debtor for using their money, which is called interest.

INTEREST: a fee for borrowing money

DEBTOR: someone who borrows money or uses credit

CREDITOR: someone who lends money or provides credit

INTEREST

The amount of interest to be paid is based on three factors:1. The interest rate2. The length of the

loan3. The amount of the

loan

WHO USES CREDIT? Many people use credit To a great extent, credit has

replaced money as a means of making purchases.

Consumer Credit – credit used for personal reasons Home purchase (Mortgage) Car purchase Shopping Entertainment

WHO USES CREDIT Commercial Credit – credit

used by businesses Business use credit for similar

reasons as consumers Buy raw materials and machinery Buy factories or trucks

When businesses borrow money they often pass the cost on to consumers

WHO USES CREDIT The federal government uses

credit to pay for many of the services and programs it provides to its citizens.

State and local governments use credit to pay for Highways Public housing Water systems

ADVANTAGES OF USING CREDIT

Credit is convenient. You can shop and travel without carrying cash. You can buy items right away without saving. Credit is useful in an emergency. Credit can help you keep track of spending. Credit contributes to economic growth.

ADVANTAGES OF USING CREDIT Buying on credit

enables people to establish a credit rating

A good credit rating tells other lenders that you are a responsible borrower and a good credit risk

CREDIT RATING: a measure of a person’s ability and willingness to pay debts on time

DISADVANTAGES OF USING CREDIT

Credit can be easy to misuse Items cost more when you use credit Using credit means you have committed some

of your future income to your debt You cannot use credit after you reach your

credit limit Late or missed payments lower your credit

rating

FACTORS TO CONSIDER

Do you have the cash you need for the down payment?

Do you want to use your savings instead of credit?

Can you afford the item? Could you use the credit in some better way? Could you put off buying the item for a while? What are the costs of using credit?

FUN FACTS The average American

household carries a balance of $7,500 - $8,000

Women are more likely than men to carry a credit card balance

In 2010 American consumers paid an estimated$72 Billion more than they spent (interest)