1. Introduction to Business & marketing
CREDIT
Introduction to Business & marketing

2. Objectives Compare the types of consumer credit.
Describe the advantages and disadvantages of using credit.
Identify the elements of creditworthiness (3 C’s).
Explain the importance of credit reports.

3. What is Credit?

4. Credit: Key Terms
Credit – an agreement to obtain money, goods, or services NOW in exchange for a promise to pay LATER
Creditor – lends money or provides credit
Debtor – borrows money or uses credit

5. Credit
Credit is based on the creditor’s confidence that the debtor can and will repay the debt (creditworthiness).
Interest – fee that creditors charge a debtor for using their money

6. Types of Credit

7. Types of Consumer Credit
Charge Account credit provided by a store or company for customers to buy its products

8. Types of Consumer Credit
Credit Card – can be used in many different places
Issued by banks (i.e., Bank of America Visa card)
Some have annual fees ranging from $25 to $80
Creditors earn money from interest charges, annual fees, and penalties

9. Types of Consumer Credit
Installment Loans – loans repaid in regular equal payments over a period of time
Includes student, car, and home improvement loans
Debtor receives loan for a certain about of time (i.e., 60 month loan)
Debtor makes equal monthly payments that cover loan plus interest

10. Types of Consumer Credit
Mortgage Loan – a form of installment loan, only it is written for a long period of time (15 – 30 years)
Home serves as collateral, something of value the bank can take

11. Types of Loans Short-term: one year or less
Medium-term: one to five years
Long-term: more than five years
Store Card
Car Loan
Mortgage
Credit Card
Student Loan

12. Pros & Cons of Using Credit

13. Advantages of Using Credit
Convenient
Shop and travel without carrying large amounts of cash
Buy expensive items (like cars) now and use right away
Good for emergencies (i.e., unexpected car repairs)
Establish Credit Rating
A credit rating is a measure of a person’s ability and willingness to pay debts on time.
Good ratings tell other lenders you are a responsible borrower and a good credit risk.
Contribute to the Growth of Economy
Consumers are able to buy more goods and services
Businesses can hire more workers to produce more

14. Disadvantages of Using Credit
Easy to Misuse
Tempting to buy things you cannot afford or don’t need
Can be difficult to resist sales or offers for more credit
Higher Cost
Things cost more when using credit instead of cash because of the interest fees
Committing Future Income
Debt must be repaid

15. The Truth About Credit
The more credit card bills you have, the harder they are to pay.
After a while, you may reach your credit limit (point where you cannot charge anymore).
Late or missed payments lower your credit rating!

16. Creditworthiness (3 C’s)
When you apply for credit, creditors want to make sure you are worth the risk.

17. 3 C’s: Capacity Capacity is the consumer’s ability to repay the loan.
Creditors look for:
Verified employment and income
Debt Ratio – current amount of debt compared to income

18. 3 C’s: Character
Character is the consumer’s proven trustworthiness in repaying debts.
Creditors will check:
Credit references
Credit report

19. 3 C’s: Capital
Capital is the amount of money the applicant has beyond their current debts.
Creditors will check:
Savings
Investments
Potential collateral

20. Creditworthiness – The 3 C’s
Your 3 C’s will also affect your credit limit.
Debtors are usually allowed a higher limit if bills are paid on time.
Your 3 C’s may affect your annual percentage rate.
Annual Percentage Rate (APR) – credit interest rate calculated on a yearly basis
Credit cards might offer a low introductory APR such as 3% but then your rate could jump to 20% after a few months.
When comparing APR, read the fine print! Many will say “APR as low as…” which means not everyone will qualify.

21. The Importance of Credit Reports
Maintaining Credit
The Importance of Credit Reports

22. Purpose of a Credit Report
Data Collection
Track your personal, financial, and employment information over time
Credit History
Credit lenders examine your past credit behaviors to determine how you might handle credit with them in the future
Employment
Not all employers will check it, but some what to see that you have demonstrated responsibility in your personal and professional life

23. What is in a credit report?
Personal Information
Name, address, social security number, date of birth, employment information
Credit Accounts
Type of account, date account opened, credit limit / loan amount, current balance, payment history
Credit Inquiries
All creditors who have checked your credit report in the last two years
Public Record / Collection Items
Bankruptcies, foreclosures, overdue debt collection, etc.

24. Credit Bureaus The three major credit bureaus are:
TransUnion
Equifax
Experian
Consumers have the right to request one free credit report per year from each bureau.
You should check your credit report on a regular basis to protect yourself from identity theft.