Credit

What is it? – the ability of a customer to buy goods or services before paying for them, based on an agreement to pay later. Always investigate the terms of credit before using it. What to investigate 1. finance charge – total amount paid to use credit. 2. Annual Percentage Rate – cost of credit as an annual % of the principal borrowed.

Advantages Immediate possession – can enjoy goods and services immediately. Flexibility – can time purchases to take advantage of sales and bargains. Safety – not carrying large amounts of cash. Emergency funds – source of money if a need arises – ex. -car breaks down. Character reference – good credit history can be used as a character reference.

Disadvantages Overspending – make it too easy to spend money. As debt mounts repayment becomes more difficult. Higher cost – stores that accept credit add administrative costs to the item prices. Impulse buying – people buy things that they don’t need because they have a means to do so.

Kinds of credit Home mortgages – long term loan to purchase a house – usually has the lowest interest rates. Auto and consumer loans – installment loans of 3-5 years for a specific purchase. Charge accounts – specific to certain stores. Credit cards – charge account that allows you to shop at different places.

Cost of Credit Lenders look at three things: 1. character – personal qualities – honesty 2. capacity – ability to pay debts – income v. expenses. 3. Capital – what you own that can be used to back up a loan – known as collateral. New borrowers may need a co-signer.

Principal plus interest = total expenditure Total expenditure-principal = cost of credit How to figure: # of payments x amount= TE Problem with only making minimum payment: payment comes off of interest first. May take forever to pay off principal. Credit card companies must now tell you how long it will take to pay off the principal.