Credit and Its Use Section 3 Work Essentials

Objectives Name and describe the two basic types of credit. Calculate the cost of credit.

Types of Credit Credit, refers to receipt of money, good, or services in exchange for a promise to pay. People may get credit in the form of loans. Loan Credit involves money borrowed in order to buy something. Buyers generally pay back loan credit in equal installments over a fixed time period.

There are three main types of sales credit: open charge accounts, revolving charge accounts, revolving charge accounts, and installment accounts. The revolving charge is probably the most common form of consumer sales credit. Most revolving charge accounts are credit cards.

The Cost of Credit The Cost of credit varies from lender to lender. The finance charge is the total dollar amount you pay for using credit. To actually compare credit costs, you must take into account the APR and length of the loan. The annual percentage rate (APR) is the percentage cost of credit on a yearly basis.

All lenders, such as banks, stores, and credit card companies, must state the cost of their credit in terms of both the finance charge and the APR. The Law requires lenders to tell you in writing before you sign an agreement how much the charges will be

23.3 Checkpoint Name and briefly explain the two basic types of credit? What are the three main types of sales credit? What does the finance charge include? What is the practical purpose of the APR? Lets say you bought a new car, paying $2,000 down and $178.60 a month for three years. What was the total cost of the car?