Credit Fundamentals 18-1

Using credit Credit is the privilege of using someone else money for a period of time The person receiving the credit will promise to repay the money with interest in a certain period of time Person who buys on credit is the debtor

Using credit cont. Person who makes the loan is the creditor Without trust the credit system could not operate You will sign an agreement saying you will pay the money back.

Types of credit Trade credit Businesses may secure long term loans Used by businesses Receive goods from a supplier and pays for them later Businesses may secure long term loans For land, equipment and building. Consumers use of credit For items that will last a long time Sometimes for convince

Types of credit cont. Loan credit Sales credit Usually for a special purpose i.e. buying a home Usually involves signing a contract Repay in installments Sales credit IF you charge a purchase at the time you buy the good Most businesses offer sales credit Involves the use of charge accounts and credit cards by the consumer.

Charge accounts Regular accounts Budget accounts Requires the buyer to make full payment within 25-30 days May be a limit to the amount that can be charged People use this everyday for small purchases Doctors, dentists, lawyers, and plumbers commonly offer this type of credit. Budget accounts Usually offered by some stores and utility companies. Requires fixed payments over a certain amount of months Usually 90 days With utility companies the estimate your usage for months You avoid large payments during certain parts of the year.

Charge accounts cont. Revolving accts Features of revolving credit Most popular form of sales credit You may charge a purchase at any time You have to pay only part of the debt each month Features of revolving credit A maximum amount may be owed (credit limit) Payment is required at least once a month Financial charge is added if total amount is not paid Interest and charges. Convenient but easy to overspend.

Credit Cards Bank Cards Master card and Visa are the top 2 Sometimes there is an annual fee Banks and merchants make agreements to accept the credit cards. At the end of the day the store sends all of the credit receipts to the bank. The next day the bank pays the business the amount minus the sales fee. The fee covers the banks expense. The bank is doing work that the credit card company would do. Customers like them because they are accepted any where

Credit cards cont. Travel and entertainment cards Oil Company Cards Subscribers pay a yearly membership fee Usually higher than bank card Cardholders have no spending limit Must pay full balance each month Receive a detailed record which can be used for taxes American Express, Carte Blanche, Diners club are examples Oil Company Cards Some are issued by the oil company themselves Some are affiliated with a bank card company Retail store cards Will have the name of the store on them i.e. Best Buy, Home Depot, Lowes, Are only accepted at the issuing store

Installment credit Used for expensive purchases such as furniture and appliances It is a contract where the debtor must make periodic payments at specified times The seller adds finance charges to the cost of the item. Differs from using credit cards

Features of installment credit Signing a sales contract shows that shows the terms of the purchase Receiving the purchased item at the time of sale Seller can repossess if payments are not made Making a down payment at the time of purchase Paying a finance charge on the amount owed Making regular payments at stated times Usually weekly or monthly

Consumer Loans Installment Loan Single payment loan You agree to make monthly payments for specific amounts over a period of time. The total amount repaid is the amount borrowed plus the finance charges of your loan. Single payment loan You do not pay anything until the end of the loan period Usually 60-90 days At that time you will pay the full amount plus finance charges.

Consumer loans and lenders Lender needs some assurance that you are going to repay the loan You may sign a promissory note Written promise you will repay the loan with the finance charges in a specific amount of time. See. Page 454 Figure 18-1 Collateral You might have to put some property down as security. i.e. car, house Cosigner IF you do not have established credit or any property you will need a cosigner The person that cosigns is responsible for payment of the loan if you fail to pay.

Benefits of credit Convenience- Credit can make it easy for you to buy without carrying cash Immediate possession- Credit allows you to have an item now Savings- Sometimes credit allows you to buy an item on sale at a good price

Benefits of credit cont. Credit rating- is a persons reputation for paying bills onetime. If you buy on credit and pay your bills you will increase your credit rating It is valuable when you need to borrow money. Useful for emergencies- Access to credit can help in unexpected situations i.e. car repairs

Credit concerns Overbuying Carless Buying Sometimes you buy items that you really cannot afford. Attractive store displays and advertisements invite you to make the purchase. Carless Buying If you become lazy in your shopping you may not be shopping carefully. You may fail to make comparisons. Credit can tempt you to not wait for a better price.

Credit concerns cont. Higher prices Overuse of credit Stores that accept cash only may charge a lower price then those who offer credit. When you do not pay as agreed there are collection costs. Some businesses write this off as uncollectable debt Increases amounts for everyone. Overuse of credit Buying now and paying later sounds good. The amount can become a problem later on You may have high interest if you cannot pay off the bills.

Questions to Ask How will you benefit from this use of credit? Is this the best buy you can make or should you shop around? What will the total cost of your purchase including finance charges? What would you save if you paid cash? Will the payments be too high for your income.