CREDIT and its importance

CREDIT Businesses or Individuals can obtain products or money and promise to pay later Two forms of Credit: Business and Consumer Why is CREDIT important?

CREDIT Used by Businesses to: Purchase goods that are sold to customers Used to buy materials and equipment to make items to sell to people IMPORTANT BECAUSE: Gives customers products to buy Provides employment

CREDIT Used by Individuals/Consumers to Purchase: Items they otherwise could not afford house, car, furniture, appliances Items while delaying payment IMPORTANT BECAUSE: Allows people to have possessions Strengthens economy

TWO TYPES OF CREDIT Consumer Credit Business Credit

Consumer Credit Consumers can get credit from many sources: Department Stores, Oil Companies, Credit Unions, and Banks. Credit is based on income and credit history. Credit is limited based on one’s ability to pay.

Consumer Credit Credit Cards Bank Credit Cards Travel/Entertainment Credit Cards Retail Credit Cards Secured and Unsecured Loans

Bank Credit Cards Banks issue the cards and set their own rates Visa and MasterCard SPONSOR bank cards but do not issue them directly. Accepted by most business all over world as they are backed by the sponsors.

Bank Credit Cards Banks get money from finance charges (interest on balances) membership fees retailer fees (charge 2% to stores for use) Credit card interest rates move with govt rates Typically range from 12% - 18%

Travel/Entertainment Credit Cards Similar to bank credit cards but issued by companies instead of banks These companies/cards are geared around travel or entertainment purposes Increasing acceptance by other retailers

Retail Credit Cards Some retail stores are large enough that they can offer their own credit cards Typically have highest interest rate (16-28%)

Terms and Conditions   Annual Percentage Rate (APR) for Purchases 0% introductory APR for 7 months from date of account opening. After that, your APR will be 13.99%, 15.99%, 18.99%, or 23.99%, based on your creditworthiness. These APRs will vary with the market based on the Prime Rate. Credit Cards lure you in with 0% introductory rates BUT the APR numbers are more important You will most likely have this credit card for more than 7 months   APR for Balance Transfers 13.99%, 15.99%, 18.99%, or 23.99%, based on your creditworthiness, for transfers completed within 2 months from date of account opening. These APRs will vary with the market based on the Prime Rate. Why would a credit card allow you to transfer debt from another card to this one?

Terms and Conditions   APR for Cash Advances 21.99% This APR will vary with the market based on the Prime Rate. Cash Advance is like using your Credit Card as an ATM card Just watch out for the interest rate! You pay interest from the moment you take a cash advance!   Penalty APR and When it Applies Up to 29.99%, based on your creditworthiness. This APR will vary with the market based on the Prime Rate. This APR may be applied to your account if you: (1) Make a late payment or  (2) Make a payment that is returned. How Long Will the Penalty APR Apply? If your APRs are increased for either of these reasons, the Penalty APR may apply indefinitely. Bottom Line: BE ON TIME WITH PAYMENTS!

Terms and Conditions   Annual Fee None Some cards have an added fee you must pay each year Oftentimes with Perk Cards   Transaction Fees Balance Transfer Cash Advance Foreign Purchase Transactions Either $5 or 4% of the amount of each transfer, whichever is greater. Either $10 or 5% of the amount of each cash advance, whichever is greater. 3% of each purchase transaction in US dollars.   Penalty Fees Late Payment Returned Payment Up to $35 Paid for each month you are late But remember…this could also cause your interest rate to increase!

Credit Card Balance Practice

Secured and Unsecured Loans Written contract to borrow money to make purchases. Many times contracted with banks or credit unions. Contract is signed with specific payment terms and penalties for not meeting terms. Usually used for large purchases (house, car, machinery, etc.)

Secured and Unsecured Loans Backed by something of value (property, vehicles, jewels, etc) known as collateral If not repaid, lender keeps collateral Unsecured Loan Written promise to pay without collateral. Requires excellent credit.

Types of Accounts These are the different ways that credit cards and loans may be issued. Regular Account (30 days) Budget Account (90 days) Installment Account Revolving Account

Regular Account (30 days) This account allows customers to buy during the month and pay their balance at the end. This is usually done through an invoice (bill), not with a credit card. No fees if paid in full. Finance charges apply if not paid in full in 30 days.

Budget Accounts Allows for the payment of a purchased item to be extended over an period of time (90 days … sometimes 1 yr or more). “No payment, no Interest for 90 Days !” No interest if account is paid in full within the time period.

Installment Accounts Allows for multiple payments over an extended period of time. Normally used for large purchases (college tuition, cars, appliances, etc) Charges interest rates over time. Sometimes require down payments.

Revolving Account This account provides a credit limit and purchasers can continue to make purchases up to limit. (Typically Credit Cards) If balance is paid in one cycle period (25 days), no finance charges apply. Usually have minimum payments allowed.

Business Credit Generally same as Consumer Credit. Different contracts are written with specified terms: Credit Memorandums Letters of Credit Credit Drafts