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INTRODUCTION TO BUSINESS & MARKETING CREDIT. Objectives Compare the types of consumer credit. Describe the advantages and disadvantages of using credit.

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Presentation on theme: "INTRODUCTION TO BUSINESS & MARKETING CREDIT. Objectives Compare the types of consumer credit. Describe the advantages and disadvantages of using credit."— Presentation transcript:


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 Credit Card Student Loan Car Loan Mortgage

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!


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.


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.

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