Credit: A Promise to Pay Chapter 28 Credit: A Promise to Pay

The Nature of Credit Definitions Credit- opportunity to obtain money, goods, or services now in exchange for a promise to pay in the future Creditor- Lender of money or credit Debtor- Borrower Consumer Credit- Credit for personal reasons Commercial Credit- Credit for business purposes

The Nature of Credit Why Use Credit? Convenience Emergencies Expensive items Payments spread out over period of time

The Nature of Credit Advantages to Credit Use item while you are paying for it Establish a credit rating- measure of a person’s ability and willingness to pay Factors in credit rating: income, current debt, info about personal life, and how debts have been paid in the past Don’t have to carry large amounts of cash with you. Credit contributes to the growth of our economy

The Nature of Credit Disadvantages to Credit Does the store accept credit Temptation to buy things they do not need or cannot afford Credit payments may pile up, tough to meet all financial obligations Late or missed payments hurt credit rating Businesses may add to prices to meet obligations Costs money

Where to go for Credit Lending Institutions Commercial banks, credit unions, savings and loan associations, savings banks. Long-term credit used for large purchases such as houses and businesses Paid back over a period of more than five years Advantage: get the loan from the institution and buy from a different business. May shop around for the loan with the lowest fees

Where to go for Credit Consumer Finance Companies Loans for people who cannot get credit elsewhere b/c of lack of a steady job or poor credit rating Cost of the loan is higher b/c of the greater risk (interest rate)

Where to go for Credit Charge Accounts Charge account- short-term credit that allows a person to make purchases up to a certain amount in a store ie. Kohls, Sears, Home Depot, ect “Buy now, pay later” Get a bill in the mail, may pay off or pay some of balance.

Where to go for Credit Charge Accounts Regular charge account Requires people pay for purchases in full within a certain period of time If bill is paid on time, no interest, otherwise interest is charged to the balance Revolving charge account Pay portion of the amount owed each month, with interest charge on unpaid portion

Where to go for Credit Charge Accounts Installment charge account Installment payments- regular payment on a loan or on a large purchase spread out over a period of time Payments are the same amount that includes part of the interest and amount due Big-ticket items- costly items that is often bought on credit. ie., car, house, ect. Most charge accounts combine regular and revolving features.

Where to go for Credit Credit Card Companies Issue cards that work like charge accounts May have an annual fee Earn money from interest Credit Limit- max amount of purchases a person can charge at any given time. Three types of credit cards: Single-purpose, multipurpose, travel and entertainment

Where to go for Credit Types of Credit Cards Single-purpose- can only be used to buy goods or services at the business or branches of the business that issued the card. (like a revolving charge account) Receive a monthly statement when you can pay all or part of the amount you owe. ie., Marathon gas card No annual fee

Where to go for Credit Types of Credit Cards Multipurpose- issued by banks that work like revolving charge accounts May be used at many different stores ie. MasterCard, Visa May have an annual fee

Where to go for Credit Types of Credit Cards Travel and entertainment cards- like regular charge accounts, you must pay the full amount due each month ie. American Express and Diners Club Annual fees Accepted worldwide for purchases connected with travel, business, and entertainment

Credit and Business Use credit like individuals May need short or long term loans Manufacturers buy raw materials, new machinery, factories, or trucks on credit When businesses borrow money, the costs of credit may be passed to the consumers with higher prices

Credit and Business Use credit to sell products Accepting credit costs the company Offering own credit increases costs

Government and Credit Using credit increases the national debt Military spending Federal government uses credit to pay for many of the services it provides to American citizens b/c it is unwilling to increase taxes State and local gov’ts may use credit for highways, housing, stadiums, and water systems They pay for these services with taxes