 What are advantages of credit  What are disadvantages of credit

 What is the price of credit? › Interest charged to you on amount borrowed  Credit is the receipt of funds with the promise to pay for them in the future Credit  Principal is the amount originally borrowed. Principal  Interest is the amount the borrower must pay for the use of someone else’s funds. Interest

 One of the most common types of debt is installment debt (equal payments over a period of time)  A mortgage is debt owed on houses, buildings, or land. mortgage › Largest form of installment debt in US  Durable goods – manufactured items that last longer than 3 years on installment plan Durable goods › Examples

 Allows the borrower to enjoy product now rather than later › Spread payments over time

 2 major types of credit are… › Credit cards › Borrow from financial institution  Financial institutions borrow funds at one interest rate and lend it at a higher rate

 Commercial Banks  Savings and Loan Associations  Savings Banks  Credit Unions  Finance Companies

 Commercial Bank – main functions accept deposits, make loans, and transfer (offers bank services) Commercial Bank › Control largest funds & widest range of services › Examples:

 Savings and Loan Associations – accepts deposits and makes loans Savings and Loan Associations › Make many mortgages

 Savings Banks – makes deposits for small savers Savings Banks  Credit Unions – bank owned by its members and offers banking services Credit Unions  Finance Companies – take over contracts for installment debts from stores and ads a fee for collecting debt Finance Companies

 Charge Account – credit from a specific company allowing you to buy now and pay later Charge Account  Credit Card – credit that allows you to make a purchase now and pay later Credit Card

 Finance charge – cost of credit expressed on monthly statement in $ & ¢ Finance charge › See pg 97 table for calculations  Annual Percentage Rate (APR) – cost of credit expressed as a yearly % Annual Percentage Rate (APR)

 Lenders determine creditworthiness by evaluating a borrower’s credit history

 Credit Bureau: private business that investigates a person to determine the risk involved in lending to them Credit Bureau:  Credit check: investigation of a person’s income, current debts, personal life, and past history of borrowing &repaying debts Credit check:  Credit rating: rating of the risk involved in lending to a specific person or business Credit rating:

 Capacity to pay (how much debt you have) Capacity  Character (reputation/are you reliable) Character  Collateral – something of value that lender can claim if you can’t pay Collateral

 Secured loan – loan backed by collateral  Unsecured loan – loan guaranteed only by a promise to repay it › Higher interest rate › Might lend funds with a cosigner

 Be responsible  Not paying results in.. › Higher interest rates › Bad credit rating  Keep records and notify of any fraud immediately