Introduction to Business & marketing CREDIT Introduction to Business & marketing

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.

What is Credit?

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

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

Types of Credit

Types of Consumer Credit Charge Account credit provided by a store or company for customers to buy its products

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

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

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

Types of Loans Short-term: one year or less Medium-term: one to five years Long-term: more than five years Store Card Car Loan Mortgage Credit Card Student Loan

Pros & Cons of Using Credit

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

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

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!

Creditworthiness (3 C’s) When you apply for credit, creditors want to make sure you are worth the risk.

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

3 C’s: Character Character is the consumer’s proven trustworthiness in repaying debts. Creditors will check: Credit references Credit report

3 C’s: Capital Capital is the amount of money the applicant has beyond their current debts. Creditors will check: Savings Investments Potential collateral

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.

The Importance of Credit Reports Maintaining Credit The Importance of Credit Reports

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

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.

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.