what is credit?. credit is an arrangement to receive cash, goods, or services now and pay for them...
TRANSCRIPT
Chapter 8.1What is Credit?
Credit is an arrangement to receive cash, goods, or services now and pay for them in the future.
Borrowing money or using a credit card is ‘using’ credit.
Consumer credit is the use of credit for personal needs.
Most common form = credit card account Consumer spending and demand indicator
Using Consumer Credit Wisely
An entity that lends you your money is a creditor.
Examples: financial institution, merchant, or individual
Good credit is valuable!!
Using Consumer Credit Wisely
What are some reasons for using credit?
When might it be inappropriate to use credit?
Record answers in your notes
Brainstorm
Giving or receiving money is the act of finance.
Before using credit, consider: Do you want to use your savings instead of credit? Can you afford the item? Could you put off buying the item for a while? What are the costs of using credit?
Factors to Consider Before Using Credit
You are also agreeing to pay the fee that the creditor adds on to your purchase.
Example: If you do not pay your credit card bill in full every month, you are charged interest on the amount you have not paid.
Factors to Consider Before Using Credit
Enjoy goods and services now and pay for them later
Combine several purchases, making one monthly payment
Record of expenses and safe than carrying cash
If used wisely, other creditors view you as responsible
Advantages
Temptation to buy more than you can afford
Risk of losing your good credit reputation.
Risk of losing income and property to repay your debts
If your income doesn’t increase, may have difficulty paying bills
Disadvantages
1. Closed-end credit
2. Open-end credit
Two Basic Types of Credit
One-time loan, paid back over a specified period of time in payments of equal amounts.
Involves an agreement, or contract.
Examples: Vehicle loans (title), large appliances, furniture
Closed-End Credit
Three most common types:
Installment sales credit – high priced merchandise (large appliances, furniture, etc), usually a down payment is required
Installment cash credit – direct loan for personal money (home improvements, vacation, etc.), no down payment
Single lump-sum credit – must be repaid in full on a specified day, usually 30 to 90 days.
Closed-End Credit
Credit as a loan with a limit on the amount of money you can borrow for a variety of goods and services
Line of credit = maximum amount of money allowed
Examples: Visa, MasterCard, Department Stores
Billed for at least a partial payment of the total amount you owe
May have to pay interest or other finance charges
Open-End Credit
STOP
Sources of Consumer Credit
Chapter 8.1
Borrowed money with an agreement to repay it with interest within a certain amount of time.
Inexpensive Loans: Low interest Family or parents
Medium-Priced Loans: Moderate interest Savings and Loan Associations, Commercial Banks,
Credit Unions
Loans
Expensive Loans: High interest Finance companies, retail stores
Home Equity Loans: Based on your home equity
Difference between the current market value of your home and amount your still owe on the mortgage
Interest is tax-deductible Missing payments = possible loss of home
Loans (continued)
Average cardholder has more than nine credit cards.
Grace period – time period during which no finance charges will be added
A finance charge is the dollar amount you pay to use credit.
Pay in full and on time = no finance charge Includes late payment fees, interest, and annual fee.
Credit Cards
Debit Cards: Electronically subtracts money from your savings or
checking account to pay for goods/services.
Some can be used as credit and delays automatically subtracting from your account
Cobranding: Linking a credit card with a business trade name
offering “points” or “premiums”
Increasingly popular
Offers cash rebates on specified products/services
Do not confuse the following with basic credit cards:
Smart Cards: Contains a computer chip and stores 500 times as
much data as a normal credit card.
Example: Purchase a plane ticket, store it digitally, and track frequent flyer miles
Figure 2
Summarizes the major sources of consumer credit.
Which credit source would you use for the following loans and why:
Mortgage Vehicle Loan Your first credit card
Record answers in your notes
Textbook Page 231
Page 233
#1-4, 6 (one or two sentences)◦ Turn in when complete
Mini-QUIZ TOMORROW on Ch.8.1
Homework: Research two colleges of interest to you and locate the tuition for the Fall 2013 Semester. Include on a piece of paper your name, each college, and the tuition. ◦ DUE FRIDAY
Review Key Concepts