Chapter 29 The Fundamentals of Credit

What is Credit? Credit – the privilege of using someone else’s money for a period of time. This privilege is based on the belief that the person receiving the credit will honor a promise to repay the amount owed at a future date. Debtor – anyone who buys on credit or receives a loan Creditor – the one who sells on credit or makes a loan. Trust – means that the creditor believes that the debtor will honor the promise to pay later for goods and services that have been received and used.

Types of Credit Loan Credit – Borrowing money to be used later for some special purpose. Usually involves a written contract. Sales Credit – Credit offered at the time of sale. Trade Credit – A business receives goods from a wholesaler and pays for them later at a specified date.  Often stated as follows; 2/10, n/30 Means that the business can take a 2 percent discount if the bill is paid within 10 days from the billing date; the full or net amount be paid within 30 days.

Using Credit Common uses of credit for an individual Expensive items – car, house, or major appliance Smaller purchases – meals, CDs, paying for medical care, vacations, taxes, and even paying off other debts

Using Credit Common uses of credit for businesses Long-term loans – to buy land and equipment and to construct buildings. Meet temporary needs for cash – borrow money for only a day or two, but usually 30 to 90 days.

Using Credit Common uses of credit for the governments- To buy items, such as cars, aircraft, and police uniforms. To build hospitals, highways, parks, and airports.

Granting of Credit Credit references – Businesses or individuals from whom have received credit in the past and/or who can help verify your credit record. Common questions asked by creditors – How much do you earn? How long have you worked for your present employer? What property do you own? Do you have any other debts?

The Three Cs of Credit Character - Refers to your honesty and willingness to pay a debt when it is due. Capacity – Refers to your ability to pay a debt when it is due. Capital – The value of the borrowers possessions.

Benefits of Credit Convenience – credit allows you to make purchases at your convenience. Immediate Possession – credit allows you to have immediate possession of the item that you want. Savings – credit allows you the opportunity to buy things when they are on sale. Credit Rating – a person’s reputation for paying debts on time. Useful in an Emergency – Access to credit can help you in an emergency.

Precautions for use of Credit Overbuying – buying the unnecessary because you can. Careless Buying – stop comparison shopping. Higher Prices – paying a higher price because you aren’t paying for it right now anyway. Overuse of Credit – adding up too much debt.