1. Credit Fundamentals
18-1

2. Using credit
Credit is the privilege of using someone else money for a period of time
The person receiving the credit will promise to repay the money with interest in a certain period of time
Person who buys on credit is the debtor

3. Using credit cont. Person who makes the loan is the creditor
Without trust the credit system could not operate
You will sign an agreement saying you will pay the money back.

4. Types of credit Trade credit Businesses may secure long term loans
Used by businesses
Receive goods from a supplier and pays for them later
Businesses may secure long term loans
For land, equipment and building.
Consumers use of credit
For items that will last a long time
Sometimes for convince

5. Types of credit cont. Loan credit Sales credit
Usually for a special purpose i.e. buying a home
Usually involves signing a contract
Repay in installments
Sales credit
IF you charge a purchase at the time you buy the good
Most businesses offer sales credit
Involves the use of charge accounts and credit cards by the consumer.

6. Charge accounts Regular accounts Budget accounts
Requires the buyer to make full payment within days
May be a limit to the amount that can be charged
People use this everyday for small purchases
Doctors, dentists, lawyers, and plumbers commonly offer this type of credit.
Budget accounts
Usually offered by some stores and utility companies.
Requires fixed payments over a certain amount of months
Usually 90 days
With utility companies the estimate your usage for months
You avoid large payments during certain parts of the year.

7. Charge accounts cont. Revolving accts Features of revolving credit
Most popular form of sales credit
You may charge a purchase at any time
You have to pay only part of the debt each month
Features of revolving credit
A maximum amount may be owed (credit limit)
Payment is required at least once a month
Financial charge is added if total amount is not paid
Interest and charges.
Convenient but easy to overspend.

8. Credit Cards Bank Cards Master card and Visa are the top 2
Sometimes there is an annual fee
Banks and merchants make agreements to accept the credit cards.
At the end of the day the store sends all of the credit receipts to the bank.
The next day the bank pays the business the amount minus the sales fee.
The fee covers the banks expense.
The bank is doing work that the credit card company would do.
Customers like them because they are accepted any where

9. Credit cards cont. Travel and entertainment cards Oil Company Cards
Subscribers pay a yearly membership fee
Usually higher than bank card
Cardholders have no spending limit
Must pay full balance each month
Receive a detailed record which can be used for taxes
American Express, Carte Blanche, Diners club are examples
Oil Company Cards
Some are issued by the oil company themselves
Some are affiliated with a bank card company
Retail store cards
Will have the name of the store on them
i.e. Best Buy, Home Depot, Lowes,
Are only accepted at the issuing store

10. Installment credit
Used for expensive purchases such as furniture and appliances
It is a contract where the debtor must make periodic payments at specified times
The seller adds finance charges to the cost of the item.
Differs from using credit cards

11. Features of installment credit
Signing a sales contract shows that shows the terms of the purchase
Receiving the purchased item at the time of sale
Seller can repossess if payments are not made
Making a down payment at the time of purchase
Paying a finance charge on the amount owed
Making regular payments at stated times
Usually weekly or monthly

12. Consumer Loans Installment Loan Single payment loan
You agree to make monthly payments for specific amounts over a period of time.
The total amount repaid is the amount borrowed plus the finance charges of your loan.
Single payment loan
You do not pay anything until the end of the loan period
Usually days
At that time you will pay the full amount plus finance charges.

13. Consumer loans and lenders
Lender needs some assurance that you are going to repay the loan
You may sign a promissory note
Written promise you will repay the loan with the finance charges in a specific amount of time. See. Page 454 Figure 18-1
Collateral
You might have to put some property down as security. i.e. car, house
Cosigner
IF you do not have established credit or any property you will need a cosigner
The person that cosigns is responsible for payment of the loan if you fail to pay.

14. Benefits of credit
Convenience- Credit can make it easy for you to buy without carrying cash
Immediate possession- Credit allows you to have an item now
Savings- Sometimes credit allows you to buy an item on sale at a good price

15. Benefits of credit cont.
Credit rating- is a persons reputation for paying bills onetime.
If you buy on credit and pay your bills you will increase your credit rating
It is valuable when you need to borrow money.
Useful for emergencies- Access to credit can help in unexpected situations
i.e. car repairs

16. Credit concerns Overbuying Carless Buying
Sometimes you buy items that you really cannot afford.
Attractive store displays and advertisements invite you to make the purchase.
Carless Buying
If you become lazy in your shopping you may not be shopping carefully.
You may fail to make comparisons.
Credit can tempt you to not wait for a better price.

17. Credit concerns cont. Higher prices Overuse of credit
Stores that accept cash only may charge a lower price then those who offer credit.
When you do not pay as agreed there are collection costs.
Some businesses write this off as uncollectable debt
Increases amounts for everyone.
Overuse of credit
Buying now and paying later sounds good.
The amount can become a problem later on
You may have high interest if you cannot pay off the bills.

18. Questions to Ask How will you benefit from this use of credit?
Is this the best buy you can make or should you shop around?
What will the total cost of your purchase including finance charges?
What would you save if you paid cash?
Will the payments be too high for your income.