CREDIT ESSENTIALS Introduction 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

WHOS 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 rate 2. The length of the loan 3. 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 persons 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)