2 Using creditCredit is the privilege of using someone else money for a period of timeThe person receiving the credit will promise to repay the money with interest in a certain period of timePerson who buys on credit is the debtor
3 Using credit cont. Person who makes the loan is the creditor Without trust the credit system could not operateYou will sign an agreement saying you will pay the money back.
4 Types of credit Trade credit Businesses may secure long term loans Used by businessesReceive goods from a supplier and pays for them laterBusinesses may secure long term loansFor land, equipment and building.Consumers use of creditFor items that will last a long timeSometimes for convince
5 Types of credit cont. Loan credit Sales credit Usually for a special purpose i.e. buying a homeUsually involves signing a contractRepay in installmentsSales creditIF you charge a purchase at the time you buy the goodMost businesses offer sales creditInvolves the use of charge accounts and credit cards by the consumer.
6 Charge accounts Regular accounts Budget accounts Requires the buyer to make full payment within daysMay be a limit to the amount that can be chargedPeople use this everyday for small purchasesDoctors, dentists, lawyers, and plumbers commonly offer this type of credit.Budget accountsUsually offered by some stores and utility companies.Requires fixed payments over a certain amount of monthsUsually 90 daysWith utility companies the estimate your usage for monthsYou avoid large payments during certain parts of the year.
7 Charge accounts cont. Revolving accts Features of revolving credit Most popular form of sales creditYou may charge a purchase at any timeYou have to pay only part of the debt each monthFeatures of revolving creditA maximum amount may be owed (credit limit)Payment is required at least once a monthFinancial charge is added if total amount is not paidInterest and charges.Convenient but easy to overspend.
8 Credit Cards Bank Cards Master card and Visa are the top 2 Sometimes there is an annual feeBanks and merchants make agreements to accept the credit cards.At the end of the day the store sends all of the credit receipts to the bank.The next day the bank pays the business the amount minus the sales fee.The fee covers the banks expense.The bank is doing work that the credit card company would do.Customers like them because they are accepted any where
9 Credit cards cont. Travel and entertainment cards Oil Company Cards Subscribers pay a yearly membership feeUsually higher than bank cardCardholders have no spending limitMust pay full balance each monthReceive a detailed record which can be used for taxesAmerican Express, Carte Blanche, Diners club are examplesOil Company CardsSome are issued by the oil company themselvesSome are affiliated with a bank card companyRetail store cardsWill have the name of the store on themi.e. Best Buy, Home Depot, Lowes,Are only accepted at the issuing store
10 Installment creditUsed for expensive purchases such as furniture and appliancesIt is a contract where the debtor must make periodic payments at specified timesThe seller adds finance charges to the cost of the item.Differs from using credit cards
11 Features of installment credit Signing a sales contract shows that shows the terms of the purchaseReceiving the purchased item at the time of saleSeller can repossess if payments are not madeMaking a down payment at the time of purchasePaying a finance charge on the amount owedMaking regular payments at stated timesUsually weekly or monthly
12 Consumer Loans Installment Loan Single payment loan You agree to make monthly payments for specific amounts over a period of time.The total amount repaid is the amount borrowed plus the finance charges of your loan.Single payment loanYou do not pay anything until the end of the loan periodUsually daysAt that time you will pay the full amount plus finance charges.
13 Consumer loans and lenders Lender needs some assurance that you are going to repay the loanYou may sign a promissory noteWritten promise you will repay the loan with the finance charges in a specific amount of time. See. Page 454 Figure 18-1CollateralYou might have to put some property down as security. i.e. car, houseCosignerIF you do not have established credit or any property you will need a cosignerThe person that cosigns is responsible for payment of the loan if you fail to pay.
14 Benefits of creditConvenience- Credit can make it easy for you to buy without carrying cashImmediate possession- Credit allows you to have an item nowSavings- Sometimes credit allows you to buy an item on sale at a good price
15 Benefits of credit cont. Credit rating- is a persons reputation for paying bills onetime.If you buy on credit and pay your bills you will increase your credit ratingIt is valuable when you need to borrow money.Useful for emergencies- Access to credit can help in unexpected situationsi.e. car repairs
16 Credit concerns Overbuying Carless Buying Sometimes you buy items that you really cannot afford.Attractive store displays and advertisements invite you to make the purchase.Carless BuyingIf you become lazy in your shopping you may not be shopping carefully.You may fail to make comparisons.Credit can tempt you to not wait for a better price.
17 Credit concerns cont. Higher prices Overuse of credit Stores that accept cash only may charge a lower price then those who offer credit.When you do not pay as agreed there are collection costs.Some businesses write this off as uncollectable debtIncreases amounts for everyone.Overuse of creditBuying now and paying later sounds good.The amount can become a problem later onYou may have high interest if you cannot pay off the bills.
18 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 the total cost of your purchase including finance charges?What would you save if you paid cash?Will the payments be too high for your income.