Introduction to Business Ch. 25: The Uses of Credit

Types of Charge Accounts Regular Account – Seller or provider expect payment in full within a specified period of time – Billing period is usually days – Used for everyday needs and small purchases Ex – Doctors, plumber, or any type of service industry

Types of Charge Accounts Budget Account – Payment of a certain fixed amount be made over several months – Ex. – 90 day payment, in which you make 3 = payments – Utility companies

Types of Charge Accounts Revolving Account – Purchases can be charged at any time but only part of the debt must be paid each month – Make a minimum month payment – Finance charges will be added to total amount owed not paid Varies from 0% for the first year up to 25% – No finance charge if you make full payment within 25 days

Teenage Charge Accounts Under contract law, minors are not responsible and cannot be held liable for their personal debt. Businesses are not willing to open charge accounts in a teenager’s name – May get account with a co-signer (adult agreeing to make payment on any balance due that the teenagers does to make)

Credit Card Usage Bank Cards – Two most popular are: VISA and MasterCard – May be an annual fee – Businesses are paid for the sales amount minus a service fee (usually 4-6%) – Why do customers like Bank Card They are accepted everywhere Receive one monthly bill rather than many bills from the various businesses

Credit Card Usage Travel and Entertainment Card – Example: Diner Club and American Express – They do charge a higher yearly fee – Expected to pay full amount each month

Credit Card Usage Oil Company Cards – Not as common because it costs them to much Retail Store Cards – Stores offer their own credit cards to customers – Can only be used in the store offering the card

Installment Sales Credit This is different then using credit cards, you have to complete an application for the large item that you are purchasing – Contract issued by the seller that requires periodic payments to be made at times specified in the agreement – Payments are the same each month – Finance charges are added to the cost of the item purchased

Installment Sales Credit Special Features of installment sales – Sign a written agreement (sales contract) that shows the terms of the purchase, such as payment periods and finance charges – Receive and own the goods at the time of purchase Seller has the right to repossess (take them back) them if payments are not made according to the agreement

Installment Sales Credit Special Features of installment sales – Make a down payment (payment of part of the purchase price) – Pay a finance charge on the amount owed – Make regular payments at stated times, usually monthly

Consumer Loans Installment Loan – One in which you agree to make monthly payments in specific amounts over time – Amount borrowed plus finance charges Single-Payment Loan – You do not pay anything until the end of the loan period, usually 60 or 90 days. Repay full amount plus finance charges

Consumer Loans Process – Sign a Promissory Note – Written promise to repay based on a debtor’s excellent credit rating Payee – The one to whom the note is payable Maker – The one who promises to make payment Date of Maturity – Date on which note is due Time – the days or months from the date of the note until it should be repaid Principal – Face value of the note, the amount that is promised to be paid

Consumer Loans Process – Collateral – Property used to secure the loan. What you will give to the lender to sell to get back the amount of the loan in the event you do not repay it. Secured Loan – Cosigner – Person responsible for payment of the note if you do not pay as promised

Credit Contracts Know what you are signing (KWYS) – How much are the finance charges Must be clearly stated in your contract – Does the contract include the cost of services you may need, such as repairs, or is there a separate contract. – Does the contract have add-on features so that you can later buy other items and have them added to the balance that you owe

Credit Contracts Know what you are signing (KWYS) – If you pay the contract in full before its ending date, how much of the finance charge will you get back? – If you pay the contract within 60 or 90 days, will there be any finance charge or will it be as if you had paid cash

Credit Contracts Know what you are signing (KWYS) – Is the contract you are asked to sign completely filled in? Do not sign it if there are any blanks. It is proper to draw a line through blank spaces before you sign the contract – Under what conditions can the seller repossess the merchandise if you do not pay on time