Unit 2 – FinanceUnit 2 – Finance Topic #2 – Credit Topic #2 – Credit

1. Users of Credit1. Users of Credit2. Advantages and Disadvantages2. Advantages and Disadvantages of Credit of Credit3. Types of Credit3. Types of Credit4. Cost of Credit4. Cost of Credit5. Obtaining Credit5. Obtaining Credit

The World of CreditThe World of Credit

Credit DefinedCredit Defined The privilege of using someone else’s money for The privilege of using someone else’s money for

a period of timea period of time Substitute for liquid cashSubstitute for liquid cash

Parties involved in a Credit transactionParties involved in a Credit transactionCreditor – Person or business that grants a loan orCreditor – Person or business that grants a loan or

sells on credit sells on creditDebtor – person or business that buys on creditDebtor – person or business that buys on credit

and receives the loan. and receives the loan.

Advantages of Using CreditAdvantages of Using Credit

AdvantagesAdvantages Instant enjoyment Instant enjoyment

and/or gratificationand/or gratification ConvenienceConvenience Help in an emergencyHelp in an emergency Establish a healthy Establish a healthy

credit ratingcredit rating May help with May help with

budgeting due to budgeting due to monthly statementmonthly statement

DisadvantagesDisadvantages Impulse buyingImpulse buying OverspendingOverspending Financial difficultiesFinancial difficulties Credit losesCredit loses

USERS OF CREDITUSERS OF CREDIT

1.1. General ConsumersGeneral Consumers

2.2. The GovernmentThe Government

3.3. BusinessesBusinesses

USERS OF CREDITUSERS OF CREDITConsumersConsumers General consumers use credit to purchase:General consumers use credit to purchase: 1. Big ticket items such as a home, car,1. Big ticket items such as a home, car,

TV, and vacations as well as TV, and vacations as well as 2. Smaller items such as a restaurant2. Smaller items such as a restaurant

meal, shoes, clothes , etc. meal, shoes, clothes , etc.

From Whom Do Consumers Borrow Money?From Whom Do Consumers Borrow Money? Banks, Businesses for short-term credit, Credit Banks, Businesses for short-term credit, Credit

Card companies.Card companies.

Users of CreditUsers of Credit

BusinessesBusinesses Credit may be used for long-term purchases Credit may be used for long-term purchases

such as land, building, equipment, start-up costs such as land, building, equipment, start-up costs to start open or start a new businessto start open or start a new business

Credit may be used for short-term reasons such Credit may be used for short-term reasons such as inventory, supplies, etc.as inventory, supplies, etc.

From Whom Do Consumers Borrow Money?From Whom Do Consumers Borrow Money? Banks, Credit Card companies, government, Banks, Credit Card companies, government,

other businessesother businesses

Users of CreditUsers of Credit

The GovernmentThe Government Borrows money at the federal, provincial, and municipal Borrows money at the federal, provincial, and municipal

level to provide goods and services to citizenslevel to provide goods and services to citizens For example, money is borrowed to build schools, For example, money is borrowed to build schools,

hospitals, highways, airports, pay the salaries of hospitals, highways, airports, pay the salaries of employees.employees.

Where Does the Government Borrow Money From?Where Does the Government Borrow Money From? Citizens through Savings Bonds, Canada Treasury Bills Citizens through Savings Bonds, Canada Treasury Bills

(T-Bills, ) and Banks etc.(T-Bills, ) and Banks etc.

Business Which Grant CreditBusiness Which Grant Credit

1.1. Financial BusinessesFinancial Businesses BanksBanks Credit UnionsCredit Unions Trust CompaniesTrust Companies

2.2. Retail BusinessesRetail Businesses Retail credit cardsRetail credit cards Purchase merchandise, no money down for a Purchase merchandise, no money down for a

certain time framecertain time frame Credit accounts where customers pay within 30 Credit accounts where customers pay within 30

days of purchase and the business keeps track days of purchase and the business keeps track (Accounts Receivable for a business)(Accounts Receivable for a business)

Extending Business CreditExtending Business Credit

AdvantagesAdvantages Major purchasesMajor purchases Consolidate Consolidate

numerous billings at numerous billings at onceonce

Convenience of Convenience of company expensescompany expenses

Overcome cash-flow Overcome cash-flow shortagesshortages

DisadvantagesDisadvantages Increased costs due Increased costs due

to interestto interest Defaulting on a loan, Defaulting on a loan,

loss of credibility, risk loss of credibility, risk of insolvency, of insolvency, bankruptcybankruptcy

Types and Sources of CreditTypes and Sources of Credit

1.1. Credit CardsCredit Cards Bank-issued credit cardsBank-issued credit cards Travel and entertainment credit cardsTravel and entertainment credit cards Retailer credit cardsRetailer credit cards

2. Installment Credit Cards2. Installment Credit Cards

3. Loans3. Loans Term loansTerm loans Demand loansDemand loans Student loansStudent loans Mortgage loansMortgage loans

Credit CardsCredit Cards Provide quick and easy credit to individuals who do not want to Provide quick and easy credit to individuals who do not want to

pay in cash or don’t have the cash on hand at the time of purchasepay in cash or don’t have the cash on hand at the time of purchase

Upon successful application for a credit card, individuals are Upon successful application for a credit card, individuals are permitted up to a predetermined maximum amount of credit on permitted up to a predetermined maximum amount of credit on their card. Amounts may increase or decrease depending upon a their card. Amounts may increase or decrease depending upon a track record of responsible usage.track record of responsible usage.

If used correctly, credit cards provide up to a 30 day interest-free If used correctly, credit cards provide up to a 30 day interest-free loan to the consumerloan to the consumer

If the entire monthly balance or balance due is not paid off within If the entire monthly balance or balance due is not paid off within the time permitted, interest is charged from the date of each the time permitted, interest is charged from the date of each purchase, usually around 18% a year, or .0493% daily.purchase, usually around 18% a year, or .0493% daily.

Interest does accumulate on top of interest until it is paid in full.Interest does accumulate on top of interest until it is paid in full.

Credit CardsCredit Cards

Credit card issuers (banks, retailers) will likely Credit card issuers (banks, retailers) will likely check an individual’s credit rating before check an individual’s credit rating before granting a credit card.granting a credit card.

If it is the individual’s first credit card, the dollar If it is the individual’s first credit card, the dollar limit one can spend each month will be small to limit one can spend each month will be small to minimize risk of losing money on amounts not minimize risk of losing money on amounts not paid by the user. The amount may also depend paid by the user. The amount may also depend on whether the individual has a job.on whether the individual has a job.

Credit CardsCredit Cards Users must pay of the minimum balance due indicated Users must pay of the minimum balance due indicated

by the credit card issuer to ensure his/her credit rating is by the credit card issuer to ensure his/her credit rating is not hurt. Interest, however will begin to be charged from not hurt. Interest, however will begin to be charged from the date of purchase until the balance is paid in full.the date of purchase until the balance is paid in full.

Credit card issuers offer various rewards to encourage Credit card issuers offer various rewards to encourage individuals to use their credit card versus another individuals to use their credit card versus another company and to use it as often as possible. Why – to company and to use it as often as possible. Why – to make and/or save money depending on who the issuer make and/or save money depending on who the issuer is.is.

What type of reward programs are out there?What type of reward programs are out there? - Aeroplan for air miles- Aeroplan for air miles - free groceries- free groceries - 2% rebate on all purchases- 2% rebate on all purchases

Credit CardsCredit Cards

Bank credit card companies (Visa and Bank credit card companies (Visa and Mastercard) make money in two ways:Mastercard) make money in two ways:

1. Charging interest on purchases1. Charging interest on purchases

2. Charging stores that accept their credit2. Charging stores that accept their credit cards from customers a fee on the cards from customers a fee on the purchase price of the sale – usually purchase price of the sale – usually between 2-4% of the sale price. between 2-4% of the sale price.

Credit CardsCredit Cards

Retailer credit cards (Canadian Tire, Retailer credit cards (Canadian Tire, Sears, etc) make money from their cards Sears, etc) make money from their cards in two ways:in two ways:

1. charging interest1. charging interest 2. save money on charges and fees that2. save money on charges and fees that

bank credit card companies would bank credit card companies would charge them for consumers purchasing charge them for consumers purchasing items using bank visa or mastercard items using bank visa or mastercard credit cards. credit cards.

Credit CardsCredit Cards

Banks and retailers would prefer Banks and retailers would prefer customers pay off their credit card customers pay off their credit card balances in full every month. Why?balances in full every month. Why?

Credit CardsCredit Cards

On average, Canadians carry 3 credit On average, Canadians carry 3 credit cardscards

There are over 600 issuers of credit cardsThere are over 600 issuers of credit cards Bank-issued cards such as Visa and Bank-issued cards such as Visa and

Mastercard, account for largest Mastercard, account for largest percentage of consumer spendingpercentage of consumer spending

Non retail charge cards (i.e. Canadian Tire Non retail charge cards (i.e. Canadian Tire Credit card) will be accepted virtually Credit card) will be accepted virtually everywhere for any type of purchaseeverywhere for any type of purchase