1. CHAPTER 25
WHAT IS CREDIT

2. NATURE OF CREDIT
Credit is an agreement to get money, goods, or services now in exchange for a promise to pay in the future.
Delay payment of item until you have money
Creditor – one who lends money or provides credit
Debtor – one who borrows money or uses credit

3. WHAT IS CREDIT?
Whether you get credit is based on the creditor’s confidence that you will make payments and give money back.
Interest – the fee creditors charge for using credit
Interest = Principal borrowed * rate * time of loan
Different creditors (credit providers) charge different interest rates
Shop around for best deal on interest

4. WHO USES CREDIT? Several different people/groups
Consumers – buy goods and services (this is called Consumer Credit)
Businesses – to buy goods for production (this is called (Commercial Credit)
Federal government –funding
Local and state government – borrow for public goods

5. ADVANTAGES OF CREDIT Main advantage is that credit is convenient
Do not have to carry large amounts of cash
Can have things rather than save for them
Comes in handy for emergencies
Have to have credit to buy certain things
Online purchases or airline tickets over the phone
Credit contributes to the growth of the economy
Buy more with credit, so more jobs for workers

6. CREDIT RATING
Credit Rating – Measure of person’s ability and willingness to pay debts on time.
Good credit rating tells others you are responsible and a good credit risk
Bad credit rating tells others you should not be trusted with credit

7. DISADVANTAGES OF CREDIT
Easy to misuse
Tempting to buy things you:
Do not need
Can not afford
Buy too much
Items can cost more on credit because you have interest charges
Longer you take to pay, more interest charges

8. MORE DISADVANTAGES
Bills will pile up until you reach your credit limit
Credit Limit – the most you are allowed to charge
Making payments late or missing payments lowers your credit rating
Credit is not money you own, it is money you owe

9. STOP SLIDE

10. TYPES OF CREDIT LENGTHS
Short-term – less than one year
Clothes, credit card purchases
Medium-term – one to five years
Computer, furniture, car
Long-term – more than five years
College loans, house

11. TYPES OF CREDIT Charge Accounts Credit Cards Banks/Financial Inst.
Regular
Revolving
Budget
Credit Cards
Single-purpose
Multi-purpose
Travel & entertainment
Banks/Financial Inst.
Single Payment
Installment
Mortgage
Seller Provided
Consumer Finance
Payroll Advance

12. CHARGE ACCOUNTS One of most common types of short/medium term credit
Buy now on credit and pay later
NOT A CREDIT CARD
Can pay full balance or part of balance owed

13. CHARGE ACCOUNTS Regular Charge – Usually a 30 day loan
Buy something from store, get bill, pay off
Furnace company work on furnace
Revolving Charge – Borrow up to certain amount, pay off over time.
Pay all or part, borrow more and make payments
Relationship with hardware store
Budget Charge – Borrow one amount
Set up payments over time to pay back
Car or large appliance

14. CREDIT CARDS Like charge accounts, but can be used in more places
Some come with annual fees
All charge interest on unpaid balances
This is how the credit card company makes $
Shop between cards to find one best for you

15. CREDIT CARDS Single-purpose cards – Only buy goods at one store
Kohl’s card, JCPenney Card
Generally not an annual fee
Revolving Credit
Multi-purpose cards (most common) – Use at many stores
Visa/MasterCard
Sometimes annual fee

16. CREDIT CARDS
Travel, Business and Entertainment Cards – Primarily used for travel/business/entertainment
American Express and Diners Club
Usually have to pay off each month
Regular charge account
Usually higher annual fee

17. STOP SLIDE

18. BANK/FINANCIAL LOANS Usually lower interest rates on loans at banks
Usually have to have better credit rating to get loans through these
Sometimes have to be a member (credit union)

19. BANK/FINANCIALS
Single Payment Loan – usually short period, borrow money and pay money and interest in one payment at end of term
Farmers, individuals needing short term cash
Installment Loan – Repay loan with set amount over time.
Length of loan and amount of each payment determined up front
Car, student loan, appliances

20. BANK/FINANCIALS Mortgage Loans – long term installment loan
Boat, house, some cars
Typically 10 – 15 – 20 – 30 year terms
Must put down collateral
Collateral is something of equal/greater value to the loan
Bank takes collateral if you do not make payments

21. SELLER-PROVIDED CREDIT
In-store credit traditionally for larger cost items
Generally short or medium term credit
Makes it easier for customers to buy from store
Keep more customers
Company gets more money by also collecting interest (finance charges)

22. CONSUMER FINANCE COMPANIES
Specialize in loans to people who can not get credit elsewhere
Turned down from a bank
No job or steady income
Poor credit risk
Usually short or medium term loans
Very high interest rate, as there is a lot of risk
Use this ONLY IF you are told no by a bank and have no other options

23. RISK Risk is from the standpoint of who?
Creditor is the one risking his/her goods based on your (debtor) promise to repay
As with anyone, the more risky something is, the more you want in return
To get more in return, the creditor will charge more in interest to get more money back whenever possible

24. RISK
When someone doesn’t keep their promise (pay back), creditor loses money
Creditor makes it up by charging ALL people more
So when anyone doesn’t pay back, we ALL lose by paying more in interest

25. STOP SLIDE

26. PAYROLL ADVANCE LOAN The LAST place you should ever go for a loan
People need money to get from paycheck to paycheck
Highest of all interest rates
Greatest amount of risk for creditor
Two types of payroll advance loans
Pawn shop
Borrow until payday

27. PAWN SHOPS Get loan for 50% or less of value Get ticket to claim item
Have a certain amount of time to claim item
Pay back loan AND interest
If pay back, get item back
If not pay back, pawn shop sells item to recover costs
Very high interest rates
No credit check so very high risk for creditor

28. PAWN SHOPS How do I get a pawn loan? Cash N Pawn AP Pawn
Bring in any item of value in good working order. We will calculate the amount for it, then lend you roughly half of what we believe we can sell it for. You have to repay the loan and related charge within the specified term, or you default and the item becomes our property (generally between 30 – 120 days).
Cash N Pawn
AP Pawn
Express Loan Rates

29. BORROW UNTIL PAYDAY Very short term loans (up to two weeks)
Write check for $115 to borrow $100
This is Annual Percentage Rate of over 300%
Many states do not allow this type of loan
Must only have proof of checking account and employment
EXTREMELY high risk for creditor
AVOID AT ALL COSTS

30. BORROW UNTIL PAYDAY Payday loans or Loan Sharks?
Borrowing is a good thing?
Federal Government's Advice
Just for Military?

31. STOP SLIDE