What is Credit?

Chapter 25

• Credit

• is an agreement to get money, goods, or

services now in exchange for a promise to

pay in the future.

• Buy now and pay later

• Creditor –

• the one who lends money or provides credit

• Debtor –

• the one who borrows money or uses credit

• Credit is a matter of trust

• Based on the creditor’s confidence that the debtor will pay back

• Interest –• A fee charged for borrowing money

Three Factors That Affect Interest

The interest rate percent (ex: 3.5%)

Loan length The longer the loan – the more interest that is paid

Loan amount The larger the amount – the more interest that is paid

Types of Credit

• Consumer credit –

• used by people for personal reasons.

• Commercial credit –

• used by businesses.

When businesses borrow money, they often pass along the cost of interest to consumers by charging higher prices on their products.

Advantages of Credit

Convenient

Get a product immediately

Emergency

Internet shopping

Allows you to obtain a credit rating

Person’s ability to pay debts on time

Credit contributes to the growth of our

economy

How?

Disadvantages of Credit

Easy to misuse

How?

May get charged interest

Damage your credit rating

Missing payments or making late payments

Half of all people with credit

problems are between the ages of 18

& 32

Type of Credit

• Credit breakdown:

• Short-term (1 year or less)

• Medium-term (1-5 years)

• Long-Term (greater than 5 years)

• Charge Account

• One of the most common types of short-

term and medium-term credit

• Offered by stores to allow consumers to

buy now, but pay later

Types of Charge Accounts

Regular Charge Accounts

Pay in full within 25-30 days

If paid in full there is no interest charged

Interest paid on any unpaid amount

Example:

Electric bill

Water bill

Types of Charge Accounts

Revolving Charge Accounts

Borrow up to a certain amount and pay part of

it back

Can pay entire amount back if you’d like

Charged interest on any unpaid amount

Example:

Credit cards are types of revolving charge

accounts

Types of Charge Accounts

Budget Charge Accounts

Pay for costly items over a long period of time

Make equal payments

Many are medium-term loans up to 5 years

Examples:

Refrigerators

Furniture

Cars

Credit Cards

Similar to charge accounts

may be used in multiple stores

Single-Purpose Cards

Multipurpose Cards

Travel and Entertainment Cards

Single-Purpose Cards

Only be used to buy goods at the store that

issued the card

Usually no annual fee to use the card

Best Buy

Kohl’s

Target

Credit Cards

Multipurpose Cards

Usually bank issued credit cards

Use the card anywhere that accepts it

Citibank Visa

Earthmover Credit Union Visa

Credit Card Statement

Credit Cards

Travel and Entertainment Cards

Usually work like regular charge accounts

(must be paid in full when due)

Usually have an annual fee

Fee is usually higher than multi-purpose card

fees

Examples

American Express

Diner’s Club

Credit Cards

Banks and Other Financial

Institutions

Financial institutions, such as banks,

savings and loans, and credit unions

offer many types of loans.

They only want to lend money to people

with good credit ratings.

Usually get a car or home loan from

your own bank

Loan Types

Single Payment Loan

Installment Loan

Mortgage Loan

Single Payment Loan

Loans is paid back in one payment,

including interest.

Used by farmers

Borrow money in the spring to buy seed

and fertilizer

Pay back the loan in the fall after they have

harvested their crops

Installment Loan

Loans repaid in equal payments over a

period of time

Student loans

Personal loans

Car loans

Example – car payment of $250 per month for

60 months.

Mortgage Loan

Type of installment loan written for a

long period of time

Written over a long period of time

15 to 30 years

Home is used as collateral

Make equal payments every month

Other Forms of Borrowing

Money

Seller-Provided Credit

Stores provide the credit to customers

Usually furniture stores

Allows you to purchase expensive furniture on

credit

Monthly payments are made to the store

Consumer Finance Companies

Loan money to individuals with bad credit

Interest rates are higher

Other Forms of Borrowing

Money

Payroll Advance Services

Pawnshop Loan

Based on the value of something you own

The cost of this type of loan is very high

“Pawn Stars” TV show

“Borrow Until Payday” Loan

Short-term loan for 5 to 14 days

Must have proof of employment, and a

checking account

Is NOT a good source of credit

Very high interest rates