1. Credit: A Promise to Pay
Chapter 28
Credit: A Promise to Pay

2. The Nature of Credit Definitions
Credit- opportunity to obtain money, goods, or services now in exchange for a promise to pay in the future
Creditor- Lender of money or credit
Debtor- Borrower
Consumer Credit- Credit for personal reasons
Commercial Credit- Credit for business purposes

3. The Nature of Credit Why Use Credit? Convenience Emergencies
Expensive items
Payments spread out over period of time

4. The Nature of Credit Advantages to Credit
Use item while you are paying for it
Establish a credit rating- measure of a person’s ability and willingness to pay
Factors in credit rating: income, current debt, info about personal life, and how debts have been paid in the past
Don’t have to carry large amounts of cash with you.
Credit contributes to the growth of our economy

5. The Nature of Credit Disadvantages to Credit
Does the store accept credit
Temptation to buy things they do not need or cannot afford
Credit payments may pile up, tough to meet all financial obligations
Late or missed payments hurt credit rating
Businesses may add to prices to meet obligations
Costs money

6. Where to go for Credit Lending Institutions
Commercial banks, credit unions, savings and loan associations, savings banks.
Long-term credit used for large purchases such as houses and businesses
Paid back over a period of more than five years
Advantage: get the loan from the institution and buy from a different business.
May shop around for the loan with the lowest fees

7. Where to go for Credit Consumer Finance Companies
Loans for people who cannot get credit elsewhere b/c of lack of a steady job or poor credit rating
Cost of the loan is higher b/c of the greater risk (interest rate)

8. Where to go for Credit Charge Accounts
Charge account- short-term credit that allows a person to make purchases up to a certain amount in a store
ie. Kohls, Sears, Home Depot, ect
“Buy now, pay later”
Get a bill in the mail, may pay off or pay some of balance.

9. Where to go for Credit Charge Accounts Regular charge account
Requires people pay for purchases in full within a certain period of time
If bill is paid on time, no interest, otherwise interest is charged to the balance
Revolving charge account
Pay portion of the amount owed each month, with interest charge on unpaid portion

10. Where to go for Credit Charge Accounts Installment charge account
Installment payments- regular payment on a loan or on a large purchase spread out over a period of time
Payments are the same amount that includes part of the interest and amount due
Big-ticket items- costly items that is often bought on credit. ie., car, house, ect.
Most charge accounts combine regular and revolving features.

11. Where to go for Credit Credit Card Companies
Issue cards that work like charge accounts
May have an annual fee
Earn money from interest
Credit Limit- max amount of purchases a person can charge at any given time.
Three types of credit cards:
Single-purpose, multipurpose, travel and entertainment

12. Where to go for Credit Types of Credit Cards
Single-purpose- can only be used to buy goods or services at the business or branches of the business that issued the card. (like a revolving charge account)
Receive a monthly statement when you can pay all or part of the amount you owe.
ie., Marathon gas card
No annual fee

13. Where to go for Credit Types of Credit Cards
Multipurpose- issued by banks that work like revolving charge accounts
May be used at many different stores
ie. MasterCard, Visa
May have an annual fee

14. Where to go for Credit Types of Credit Cards
Travel and entertainment cards- like regular charge accounts, you must pay the full amount due each month
ie. American Express and Diners Club
Annual fees
Accepted worldwide for purchases connected with travel, business, and entertainment

15. Credit and Business Use credit like individuals
May need short or long term loans
Manufacturers buy raw materials, new machinery, factories, or trucks on credit
When businesses borrow money, the costs of credit may be passed to the consumers with higher prices

16. Credit and Business Use credit to sell products
Accepting credit costs the company
Offering own credit increases costs

17. Government and Credit Using credit increases the national debt
Military spending
Federal government uses credit to pay for many of the services it provides to American citizens b/c it is unwilling to increase taxes
State and local gov’ts may use credit for highways, housing, stadiums, and water systems
They pay for these services with taxes