Consumer Credit Chapter 15, Section 1

Objectives Explain the meaning of consumer credit Differentiate between closed-end credit and open-end credit

Definitions Credit - The arrangement by which businesses or individuals can purchase a good or service now and pay for it later. Using credit increases the amount of money you can spend now, but the cost of credit decreases the amount of money you will have in the future. Creditor – An entity that lends money

Sources of Credit Commercial Banks Savings and Loan Associations Credit Unions Sales Finance Companies Businesses

Types of Credit Closed-End Credit Open-End Credit A one time loan that you will pay back over a specific period of time in payments of equal amounts Open-End Credit A loan with a certain limit on the amount of money you can borrow for a variety of goods and services

Closed-End Credit Types Installment Sales Credit A loan that allows you to receive merchandise Ex: Home Mortgage, Car Loan Installment Cash Credit Direct loan for money Ex: Payday loan Single Lump-sum Credit A loan that must be repaid in total on a specific day Ex: Furniture or appliance loans – “Don’t Pay for 90 Days”

Open-End Credit Line of Credit Credit Card Revolving credit Amounts The Maximum amount of money that a creditor will allow a credit user to borrow. Credit Card A card that a credit user can use to purchase items and the credit user pays the balance to the creditor monthly Normally, the user does not have to pay the full balance monthly because the credit company offers a grace period, although a finance charge may be incurred. Revolving credit Amounts A prearranged loan for a specific amount that you can use by writing a special check

Other types of Spending Cards Debit Card – A card similar to a credit card but does not use credit. Instead the purchase amount is deducted from the users personal bank account. Cobranding – The linkage of a credit card with a business rewards system where the customer gets “reward points” for using the card. Smart Card – A card with a computer chip that stores useful information for a user’s personal account with a company. Stored Value Card – Also known as a gift card- a prepaid card that is used similar to a credit or debit card. Travel and Entertainment Card – Similar to a credit card, but the balance must be paid in full each month.