CONSUMER CREDIT Understanding the fundamentals of using credit and identifying its benefits and costs

Credit Vocabulary credit finance charge down payment installment loan promissory note collateral cosigner credit rating

Using Credit Creditor Debtor Credit Fundamentals Using Credit Credit – Two Parties are involved, it is the act of borrowing of funds, the system is legalized and structured, but it relies on TRUST Creditor The one who sells on credit They make the loan Debtor The one who buys on credit They receive the loan

Types of Credit Credit Fundamentals Trade Credit – Receives goods and pays for them later. ex.) A business receives land and equipment to build a store Loan Credit – Receives money for a specific purchase. ex.) A student borrows money for college expenses Installments – Payments over time that are specified in amounts including interest. ex.) Car Payments Sales Credit – Using credit cards or a charge account to buy on credit when making a purchase. ex.) Groceries or Gas

Credit Fundamentals Charge Accounts Regular Accounts– Using credit to make purchases for everyday needs and small purchases. Required to make full payment within a stated Period (25-30 days) ex.) Lawyers, Dentists, Plumbers, and others. Budget Accounts– Credit agreement that requires the debtor to make fixed payments over several months. ex.) Infomercial - 3 easy payments of $29.95

Credit Fundamentals Charge Accounts Revolving Accounts – Most Common, used to charge purchases at anytime, and only part of the debt must be paid each month. These Accounts have Credit Limits (Maximum) require Payments, and Finance Charges (Interest Rates) when the balance is not paid in full. ex.) Credit Cards

Understanding Credit http://www.channelone.com/life/credit

Credit Cards Bank Cards Travel & Entertainment Retail Store Cards MasterCard and VISA are two of the most common. The banks take on the liability and expense of granting the credit Travel & Entertainment Ex.) Diner’s Club –designed for the business person, typically involves rewards Retail Store Cards Store offers the credit Own financing offers Ex.) Best Buy Card, Kohl’s Card, Gap Card Oil Company Like a Retail Store Card, but it is Co-Branded and can be used a other locations.

Installment Credit Features of Installment Credit Is a contract issued by the seller that requires periodic payments at specific times. The seller usually adds in Finance Charges. Features of Installment Credit Signing a sales contract that shows the terms of the purchase. Receive the purchased item at the time of sale Making a down payment Paying a finance charge on the amount owed Making regular payments at stated times

Consumer Loans Installment Loans Single Payment Loan Promissory Note Similar to Installment Credit, specific payments plus interest over a time period. Single Payment Loan You do not pay until the end of the loan period. Usually 60 to 90 days, paying the loan and the finance charges. Promissory Note A written promise to repay a loan with interest and a specific due date. Collateral Using property to secure the loan. The property may be taken if the loan is not repaid. Cosigner An individual that is supporting the loan and promises to repay the loan if you do not pay as promised.

Benefits of Credit Convenience Immediate Possession Savings Easy for purchases, never have to carry cash. Immediate Possession You can have the item now, and begin using the item right away. Savings Allow you to make a purchase of an item on sale instead of at a later time. Credit Rating Your reputation for paying bills on time. Allows you to establish that you are a dependable debtor and becomes valuable when you want to make a larger purchase. Useful for Emergencies Unexpected situations allows you to access money that you do not necessarily have on hand.

Credit Concerns Overbuying Careless Buying Higher Prices Making a Purchase that is more than you can afford. Careless Buying Credit can cause you to become an impulse buyer, instead of a smart consumer. Higher Prices Businesses are charged by credit companies for allowing credit as a form of purchase, or offer their own financing. Customer debts can go unpaid and an increase in prices occurs. Overuse Don’t spend above your means. Even though it is buy now and pay later, you still need to be able to pay it.

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 be the total cost of your purchase, including the finance charges? What would you save if you paid cash? Will the payments be too high for your income?