Chapter 6Consumer Credit

Section 6.1

What is consumer credit?

Using Consumer Credit Wisely Credit – an arrangement to receive cash,

goods, or services now and pay for them in the future.

Consumer credit – the use of credit for personal needs

Creditor – person that lends money. (Merchant, financial institution, or individual)

Credit Uses and Misuses Using credit may increase the amount of

money you spend now, but the cost of credit decreases the amount of money you will have in the future.

Cost of credit – the extra money that you pay over the actual price of what you are charging (interest and fees)

Factors to think of before using credit Do you have the cash you need for a down

payment Do you want to use your savings instead of credit Can you afford the item Could you use credit in some better way Could you put off buying the item for a while What are the costs of using credit***Make sure the benefits of making the purchase

outweigh the costs of credit*****

Advantages of Credit Let’s you enjoy goods and services now Allows you to make several purchases with

one monthly payment Gives you a record of your expenses If you use credit wisely, lenders view you as

a responsible person

Disadvantages of Credit Credit costs money The temptation to buy more than you can

afford You can lose your credit reputation You can lose your income and property

Closed-End Credit Closed – end credit is a one time loan that

you will pay back over a specified period of time

Examples: Mortgage, vehicle loans, installment loans

These types of loans usually carry lower interest rates than open ended credit

Open- Ended Credit Open-Ended Credit is a loan with a certain limit on

the amount of money you can borrow for a variety of goods and services

Examples: department store credit cards and bank credit cards

Line of Credit – the maximum amount of money that the creditor allows you to spend

With open ended credit you can use your card for an unlimited amount of purchases as long as you don’t exceed your line of credit.

Loans Borrowed money with an agreement to repay it

with interest within a certain amount of time Inexpensive Loans – parents or other family

members Medium Priced loans – commercial banks,

savings and loans Expensive loans – finance companies and retail

stores Home equity loans (HELOC) – based on your

home equity, interest is tax deductible

Credit Cards Grace Period – a time period during which

no finance charges will be added to your account

Finance Charge – the total dollar amount you pay to use credit

Most card companies have eliminated annual fees, some still charge fees, but typically $20 or less.

Types of Cards Debit Cards – money comes directly out of your

checking account. Can also be used at ATM machines. Sometimes carry a fee for each purchase

Smart Card – equipped with a computer chip that stores 500 times the amount of data of a normal card, keeps track of information such as frequent flyer miles

Travel and Entertainment cards – the balance is due in full at the end of each month

Choosing a Credit Card Page 160 Figure 6.3 Before you enter the credit world you need

to know what is best for you What factors should you be thinking about

when choosing a credit card?