1. What is Credit?
Chapter 25

2. Credit is an agreement to get money, goods, or services now in exchange for a promise to pay in the future.

3. Creditor – the one who lends money or provides credit
Debtor – the one who borrows money or uses credit
Interest – the fee creditors charge for using their money

4. Trust
Commitment
Promise
These are words that form the
fundamental principles of credit

5. When you apply for a credit card or sign a loan contract you promise to fulfill the terms of the deal. Your signature is your good faith statement to uphold the three principles (trust, commitment, and promise) with your lender.

6. When you apply for credit, there are five primary considerations, known as the Five C's, that affect a lender's decision to approve or decline your loan application.

7. Capacity Your ability to repay the loan.
Do you have a job or another income source?
Do you have any outstanding debts?

8. Debt - An obligation or liability to pay something to someone else.
Outstanding debts – debts that are not yet paid. What you still owe.

9. Character Whether your lender thinks you'll repay the loan.
Have you used credit before?
Do you pay your bills on time?

10. Credit History
Report that tells whether you pay your bills on time or have failed to pay debts.
Also indicates the amount of debt that you have.
Credit rating/score – measure of a person’s ability and willingness to pay debts on time.

11. Collateral What you agree to forfeit if you fail to repay your loan.
For example, if you are buying a car, it may be used as collateral to insure that you repay the loan. If you default, you lose your car.

12. Capital What you are worth.
Do you have other assets, such as a savings account, car, or certificate of deposit that could be used to repay the debt?

13. Federal and state regulations govern how lenders determine whether or not to accept loan applications, but lenders primarily base their decision on the Five Cs of credit.

14. Types of Credit Consumer credit – used by people for personal reasons.
Commercial credit – used by businesses.
When businesses borrow money, they often pass along the cost of interest to consumers by charging higher prices on their products.

15. Charge Account
One of the most common types of short-term and medium-term credit

16. Types of Charge Accounts
Regular Charge Accounts
Revolving Charge Accounts
Budget Charge Accounts

17. Regular Charge Accounts
Require that you pay for purchases in full within a certain period, usually 25 or 30 days
If the bill is paid on time, you don’t have to pay interest
If you do not pay the entire bill, interest is charged on the amount that hasn’t been paid
Example
Monthly utility bill

18. Revolving Charge Accounts
A charge account that does not have to be paid to a zero balance.
Allows you to borrow or charge up to a certain amount of money, and pay back a part of the total or the entire balance for each month.
Interest is charged on the unpaid amount.
Example
Department store purchases

19. Budget Charge Accounts
Let you pay for costly items in equal payments spread out over a period of time.
Many are medium-term loans for up to five years.
Each payment includes part of the total due on the item plus interest
Used to purchase:
Large home appliances
Cars
Furniture

20. Credit Cards Single-Purpose Cards Multipurpose Cards
Travel and Entertainment Cards

21. Single-Purpose Cards
These cards can only be used to buy goods or services at the business that issued the card
Best Buy
Kohls
Sears
Exxon/Mobil

22. Multipurpose Cards
Also called bank credit cards because banks issue them
Citibank Visa
MBNA Visa
LL Bean MasterCard

23. Travel and Entertainment Cards
Usually work like regular charge accounts (must be paid in full when due)
Usually have an annual fee
American Express
Diner’s Club

24. Banks and Other Financial Institutions
Financial institutions, such as banks, savings and loans, and credit unions offer many types of loans.
They do place more demands on the borrower, which can make it more difficult to get a loan.
They only want to lend money to people with good credit ratings.

25. Examples
Single Payment Loan
Installment Loan
Mortgage Loan

26. Single Payment Loan Loans repaid in one payment, including interest.
Used by farmers
Borrow money in the spring to buy seed and fertilizer
Pay back the loan in the fall after they have harvested their crops

27. Installment Loan
Loans repaid in regular payments over a period of time
Student loans
Personal loans
Home improvement loans
Car loans
Example – car payment of $250 per month for 60 months.

28. Mortgage Loan Installment loan written for a long period of time
Debtor makes regular payments
Written over a long period of time
15 to 30 years
Home is used as collateral

29. Other Forms of Borrowing Money
Payroll Advance Services
Pawnshop Loan
Based on the value of something you own
The cost of this type of loan is very high
“Borrow Until Payday” Loan
Short-term loan for 5 to 14 days
Cost of loan is very high – could be as high as 1,000% when calculated on an annual basis

30. Chapter 25 Book Work Fast Review Page 408 #’s 1-3
Using Business Key Words Page 414 #’s 1-10