Chapter 25 What is Credit?

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1 The Nature of Credit Credit: The Promise to Pay Who Uses Credit? Advantages of Credit Disadvantages of Credit Summary Chapter 25 What is Credit?

2 The Nature of Credit Credit: The Promise to Pay Who Uses Credit? Advantages of Credit Disadvantages of Credit Summary The Nature of Credit: Buy now, pay later What can you buy using credit? How does buying on credit work? What are the advantages and disadvantages of using credit? SNL

3 The Nature of Credit Credit: The Promise to Pay Who Uses Credit? Advantages of Credit Disadvantages of Credit Summary Credit: The Promise to Pay Credit an agreement to get money, goods, services now in exchange for a promise to pay in the future One who lends money/provides credit creditor One who borrows money/uses credit - debtor Creditors charge a fee for using their money interest Amount of interest depends on: 1. Interest Rate 2. Length of the loan 3. Amount of the loan Credit is your financial trustworthiness

4 The Nature of Credit Credit: The Promise to Pay Who Uses Credit? Advantages of Credit Disadvantages of Credit Summary Who Uses Credit? Consumer credit credit used by people for personal reasons Commercial credit credit used by businesses Federal, state and local governments also uses credit to fund programs and projects

5 The Nature of Credit Credit: The Promise to Pay Who Uses Credit? Advantages of Credit Disadvantages of Credit Summary Advantages of Credit: Convenience Don t have to carry cash & worry about it getting lost or stolen Don t have to save for expensive items Useful for emergencies Pay for things over the phone/internet Allows you to establish a credit rating measure of person s ability and willingness to pay debts on time Helps you keep track of your spending Contributes to the growth of our economy

6 The Nature of Credit Credit: The Promise to Pay Who Uses Credit? Advantages of Credit Disadvantages of Credit Summary Disadvantages of Credit: Easy to misuse Tempting to buy things you can t afford Items cost more on credit because of interest Credit limits Late/missed payments lower credit rating Credit is money you owe, not own!

7 The Nature of Credit Credit: The Promise to Pay Who Uses Credit? Advantages of Credit Disadvantages of Credit Summary Credit is more than just a plastic card used to buy things. It s your financial trustworthiness. Good credit means that your history of payments, employment and salary make you a good candidate for a loan, and creditors (those who lend money or services) will be more willing to work with you. Having good credit usually translates into lower payments and more ease in borrowing money. Bad credit, however, can be a big problem. It usually results from making payments late or borrowing too much money, and it means that you might have trouble getting a car loan, a credit card, a place to live and, sometimes, a job. Fed Res PSA

8 Types of Credit Charge Accounts Credit Cards Banks & Other Financial Inst. Seller-Provided Credit Consumer Finance Companies Payroll Advance Services Types of Credit: Credit is available from many different sources. Loans can be: Short-term (one year or less) Medium-term (one to five years) Long-term (more than five years)

9 Types of Credit Charge Accounts Credit Cards Banks & Other Financial Inst. Seller-Provided Credit Consumer Finance Companies Payroll Advance Services Charge Accounts: Charge account credit provided by a store or company for creditworthy customers to buy its products. 4 types: 1. Regular Accounts pay in full in approx. 30 days 2. Revolving Accounts borrow up to a certain amount, pay back part or entire balance, pay interest on unpaid balance 3. Installment Account usually one-time purchase for higher-priced items; may require down payment and paid over a period of time (appliance) 4. Budget Accounts pay for costly items in equal payments spread over a period of time, including interest (utility bill) Can only be used at store providing the credit.

10 Types of Credit Charge Accounts Credit Cards Banks & Other Financial Inst. Seller-Provided Credit Consumer Finance Companies Payroll Advance Services Credit Cards: Can be used in many different places. Some have annual fees and they charge interest on unpaid balances. 3 basic types: 1. Single-purpose cards can be used at the business that issued the card. No annual fees. Pay monthly. Ex: Exxon, GAP 2. Multipurpose cards banks issue them and can be used at many different places. Ex: MasterCard, Visa 3. Travel and Entertainment Cards must be paid in full each month; accepted worldwide for purchases related to travel, business and entertainment. Ex: American Express, Diners Club

11 Types of Credit Charge Accounts Credit Cards Banks & Other Financial Inst. Seller-Provided Credit Consumer Finance Companies Payroll Advance Services Banks & Other Financial Institutions: Banks, savings and loans, and credit unions offer many types of loans: 1. Single Payment Loan pay back the loan plus interest in one payment at the end of the loan period 2. Installment Loan loans repaid in regular payments over a period of time (Ex: student loans) 3. Mortgage Loan form of installment loan over a longer period of time and some require collateral

12 Charge Accounts Credit Cards Types of Credit Banks & Other Financial Inst. Seller-Provided Credit Consumer Finance Companies Payroll Advance Services Seller-Provided Credit: Stores who offer credit for their customers. Credit is usually extended for 1-5 years. Makes it easier to buy their products and discourage them from going elsewhere.

13 Types of Credit Charge Accounts Credit Cards Banks & Other Financial Inst. Seller-Provided Credit Consumer Finance Companies Payroll Advance Services Consumer Finance Companies: Specialize in loans to people who might not be able to get credit elsewhere. Usually 1-5 year loans Higher rates (higher risk)

14 Types of Credit Charge Accounts Credit Cards Banks & Other Financial Inst. Seller-Provided Credit Consumer Finance Companies Payroll Advance Services Payroll Advance Services: Payday loan cash advance secured by a personal check Short-term Very high cost