INTRODUCTION TO BUSINESS & MARKETING CREDIT

Objectives Compare the types of consumer credit Describe the advantages and disadvantages of using credit Identify the elements of creditworthiness (3 C’s)

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 Credit Card Student Loan Car Loan Mortgage

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

WHEN YOU APPLY FOR CREDIT, CREDITORS WANT TO MAKE SURE YOU ARE WORTH THE RISK. Creditworthiness (3 C’s)

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