1. Chapter 25
The Basics of Credit

2. Credit: The Promise to Pay
Credit-agreement to obtain money, goods, or services now in exchange for a promise to pay in the future.
Creditor-Lends money or provides credit.
Debtor-Borrows money or uses credit.
Interest-Fee charged by creditors for using their money. The amount of interest to be paid is based on three factors. One is interest rate, which is the percentage of the total amount borrowed. Another factor is the length of time of the loan. The longer you take to pay it off, the more interest you will have to pay. The other factor is the amount of the loan. The larger the amount, the more interest that will be charged.

3. Who Uses Credit?
Consumer Credit-credit used by people for personal reasons.
Commercial Credit-Credit used by businesses.

4. Advantages of Using Credit:
Convenience
Emergencies
Establish Credit Rating
Contributes to Economic Growth

5. Disadvantages of Credit:
Easy to Misuse
Costs more
Commitment of Future Income
Credit Limits

6. Factors to Consider Before Using Credit:
Do you have cash for a down payment?
Do you want to use your savings instead of credit?
Can you afford the item?
Could you use the credit in some better way?
Could you put off buying the item for a while?
What are the costs of using credit?

7. Sources of Credit
Charge Accounts-Credit provided by a store or company for its customers to buy its products. Buy now and pay later. Can pay partial bill or full amount.
Credit Cards-Similar to charge accounts but can be used in different places.
Single Purpose Cards
Multipurpose Cards
Travel and Entertainment Cards

8. Credit Cards
Single Purpose Cards-can be used to buy goods or services only at the business that issued the card. Monthly statements. Purchases over the last 30 days. Partial payment or full amount. Interest is charged on the unpaid balance.

9. Credit Cards
Multipurpose Cards-Bank Credit Cards. May be used at many different stores. Partial payment or full amount. Interest paid on unpaid balance. Ex. MasterCard, VISA.

10. Credit Cards
Travel and Entertainment Cards- Holders of travel and entertainment cards must pay full amount due at the end of each month. Accepted worldwide. Expenses such as travel, business, and entertainment, such as restaurant and hotel bills, car rentals, and airline tickets. Annual fee is higher than multipurpose cards.

11. Single Payment Loan The debtor pays back in one payment.
Including interest at the end of the loan period.
Farmers

12. Installment Loans
Student loans, car loans, and home improvement loans.
Repaid in regular monthly payments over a period of time.
Debtor makes equal monthly payments to cover the amount of the loan and interest.

13. Mortgage Loan
Installment Loan written for a long period of time, usually years.
Used to purchase real estate or home.
Home serves a collateral.

14. Other types of Lending Institutions
Seller Provided Credit
Consumer Finance Companies
PayDay Advance Services
Pawnshop Loan