CreditWhat Is Credit?

Why it is Important You’ll probably use credit some day. When

you do, it will be helpful to know what credit is and the types of credit you can use.

Credit Buying an item now and paying for it later

can be an easy and convenient way to make a purchase

Consumers use credit to buy everything from a tank of gasoline to a new car.

How does buying on credit work?

Credit: The Promise to Pay Credit is an agreement to get money, goods,

or services now in exchange for a promise to pay in the future.

When buying on credit, you are delaying payment for the item

The one who lends money or provides credit is called the creditor.

Credit: The Promise to Pay The one who borrows money or uses credit is

called the debtor. Credit is based on the creditor’s confidence

that the debtor can and will make the payments

Credit is a matter of trust.

Credit: The Promise to Pay Creditors charge a fee for using their money, which

is called interest. The amount of interest is based on three factors:

Interest rate Length of the loan Amount of the loan

It’s important to shop around for credit because creditors may charge different rates.

Who Uses Credit The type of credit used by people for personal

reasons is called consumer credit. Examples of consumer credit would be

buying: House Car Boat Student Loans

Who Uses Credit Business often use credit for the same reasons

that consumers do. They might need to borrow money to buy

goods or pay salaries. Credit used by business is called commercial

credit.

Who Uses Credit When businesses borrow money, they often

pass along the cost of interest to consumers by charging higher prices on their products.

The federal government uses credit to pay for many of the services and programs it provides to its citizens.

During WWII the federal government uses credit to finance military spending.

Who Uses Credit State and local governments use credit to pay

for such things as highways, public housing, stadiums, and water systems.

Everyone Uses Credit

Advantages of Credit The main advantage of credit is that it’s

convenient. You can shop and travel without carrying

large amounts of cash Instead of saving for an expensive, like a car

you can get it and use it right away.

Advantages of Credit Without credit, there are some things you

can’t buy. To order airline tickets over the phone or

shop on the internet, you need a credit card Buying on credit enables you to establish a

credit rating A credit rating is a measure of a person's

ability and willingness to pay debts on time.

Advantages of Credit A good credit rating tells other lenders that

you are a responsible borrower and a good credit risk.

Finally credit contributes to the growth of our economy.

When consumers make credit purchases, businesses must hire more workers and produce more goods to keep up

Disadvantages of Credit Since credit is so convenient to use, it can also be

easy to misuse. With credit, it’s tempting to buy things you can’t

afford, buy too much, or buy things you don’t need. Items also cost more when you use credit instead of

cash b/c of the interest The more items you charge the longer it will take

you to pay off

Disadvantages of Credit Example:

Credit Card Balance = $3,000 Interest Rate = 19.8% Minimum Payment = 2% or $60 Time to pay off = 32 years Interest you would pay = $9,483

Disadvantages of Credit As the credit card bills pile up, you might

have problems paying them. You may reach your credit limit, the point

where you can’t charge anymore Late or missed payments lower your credit

rating, which will make it difficult for you to get credit in the future.

Disadvantages of Credit According to a recent report, half of the

people with credit problems are b/w the ages of 18 and 32.

Remember to use credit wisely You will have to pay the money back

Types of Credit Short-term loans last for one year or less. Medium-term loans last for one to five years. Long-term loans last longer than five years.

Charge Accounts One of the most common types of short-term

and medium-term credit is the charge account.

Dealers or stores generally offer these types Customers will charge items at the store and

will pay some of the total when the bill arrives.

There are 3 main types of charge accounts

Regular Charge Accounts These accounts require that you pay for

purchases in full within a certain period of time, usually 25 or 30 days

If the bill is paid on time, you don’t have to pay interest.

If you don’t pay the entire bill, interest is charged on the amount that hasn’t been paid.

Revolving Charge Accounts A revolving account allows you to borrow or

charge up to a certain amount of money and pay back a part of the total each month.

Interest will be paid on the unpaid amount.

Budget Charge Accounts Budget charge accounts let you pay for costly

items in equal payments spread out over a period of time.

Each payment includes part of the total due on the item plus interest.

Large home appliances, cars, and furniture are bought this way

Credit Cards Credit cards are like charge accounts but

some can be used in many different places. Some credit cards have annual fees, which

might range from $25 to $80. Credit card companies earn money from the

interest they charge. Interest rates vary a lot. There are 3 basic types of credit cards

Single Purpose Cards Single-purpose cards can only be used to buy

goods or services at the business that issued the card.

Single-purpose cards operate like revolving charge accounts

Each month you receive a statement listing all the purchases you made in the past 30 days

Single Purpose Cards You can pay part or the entire amount you

owe Credit cards issued by oil companies, best

buy, kohl's are example of single-purpose credit cards

There is no annual fee for single-purpose cards

Multipurpose Cards Multipurpose cards are also called bank credit

cards because banks issue them. Multipurpose cards work like a revolving

charge account. These cards may be used at many different

stores, restaurants , and other businesses all over the world

MasterCard and Vise are examples

Travel and Entertainment Cards Travel and entertainment cards usually work like

regular charge accounts. You must pay the full amount due each month. Cards such as American Express, and Diners Club

are examples They are accepted worldwide for purchases

connected with travel, business, or entertainment

Banks and Other Financial Institutions Financial institutions, such as banks, savings

and loans, and credit unions offer many types of loans.

Financial institutions usually have the lowest rates on their loans, but they place more demands on the borrower.

For example, they’ll only lend money to people with good credit ratings.

Single Payment Loans The debtor pays back this type of loan in one

payment, including interest (at the end of the loan period).

Many farmers secure single payment loans in the spring to pay for their seed and fertilizer

They will then pay it back in the fall after they harvest their crops

Installment Loans Installment loans are loans repaid in regular

payments over a period of time. The debtor makes equal monthly payments,

which cover the amount of the loan and the interest.

Examples would include student loans, personal loans, and car loans

Mortgage Loan A mortgage loan is a form of an installment

loan only it is written for a long period, such as 15 to 30 years.

Self-Provided Credit Many stores provide credit for their

customers. Clothing, Furniture, appliance, boat, and car

dealers are among those who offer credit for customers

Generally, seller-provided credit is extended for less than one year up to five years

Self-Provided Credit One of the reasons they provide such credit is

to make it easier for consumers to buy their products, and discourage them from going elsewhere.

They offer higher interest rates

Consumer Finance Companies Consumer finance companies specialize in

loans to people who might not be able to get credit elsewhere.

The cost of a loan from a consumer finance company is higher than the cost of a loan from other sources since this loan involves a greater risk.

Consumer Finance Companies The interest rate a consumer finance company

charges varies from state to state and can be more than 20 percent.

Before getting a loan from one of these companies, check to see if you can secure a comparable loan from a bank, savings and loan, or a credit union

Payroll Advance Services Many people have difficulty making their

paychecks stretch from one payday to the next.

If you don’t have any savings and an unexpected expense occurs, you might look for a short-term loan until payday

Pawnshop Loan A pawnshop loan is based on the value of

something you own. For example you could pawn your bicycle for

an amount of money that is less than the bike is worth.

You receive a ticket for the item and can redeem, or buy back, your bike w/n a certain period of time for the loan amount plus a service charge

Pawnshop Loan The service charge is like interest that other

loans would charge If you don’t redeem it, the pawnshop sells

your bike Generally the cost of this type of loan is very

high

Borrow Until Payday Loan Some businesses provide very short-term loans,

usually for 5 to 14 days. The cost of this kind of loan is especially high. Percentages could range from 400%-1,000% when

calculating it on a annual basis A payday loan is made without a credit check, but

you must have proof of a checking account and employment.

Borrow Until Payday Loan It is strongly recommended that you don’t use

this source of credit People with poor credit ratings are most likely

to use this service because they can’t get a loan anywhere else.