INTRODUCTION TO BUSINESS & MARKETING

CREDIT

Objectives

Compare the types of consumer credit.

Describe the advantages and disadvantages

of using credit.

Identify the elements of creditworthiness (3

C’s).

Explain the importance of credit reports.

What is Credit?

Credit: Key Terms

Credit – an agreement to obtain money, goods, or services NOW in exchange for a promise to pay LATER

Creditor – lends money or provides credit

Debtor – borrows money or uses credit

Credit

Credit is based on the creditor’s confidence that the debtor can and will repay the debt (creditworthiness).

Interest – fee that creditors charge a debtor for using their money

Types of Credit

Types of Consumer Credit

Charge Account credit provided by a store or company for customers to buy its products

Types of Consumer Credit

Credit Card – can be used in many different places

Issued by banks (i.e., Bank of America Visa card)

Some have annual fees ranging from $25 to $80

Creditors earn money from interest charges, annual fees, and penalties

Types of Consumer Credit

Installment Loans – loans repaid in regular equal payments over a period of time

Includes student, car, and home improvement loans

Debtor receives loan for a certain about of time (i.e., 60 month loan)

Debtor makes equal monthly payments that cover loan plus interest

Types of Consumer Credit

Mortgage Loan – a form of installment loan, only it is written for a long period of time (15 – 30 years)

Home serves as collateral, something of value the bank can take

Types of Loans

Short-term: one year or less

Medium-term: one to five years

Long-term: more than five years

Store Card

Credit Card

Student Loan

Car LoanMortgage

Pros & Cons of Using Credit

Advantages of Using Credit

Convenient Shop and travel without carrying large amounts of cash Buy expensive items (like cars) now and use right away Good for emergencies (i.e., unexpected car repairs)

Establish Credit Rating A credit rating is a measure of a person’s ability and

willingness to pay debts on time. Good ratings tell other lenders you are a responsible

borrower and a good credit risk.Contribute to the Growth of Economy

Consumers are able to buy more goods and services Businesses can hire more workers to produce more

Disadvantages of Using Credit

Easy to Misuse Tempting to buy things you cannot afford or don’t

need

Can be difficult to resist sales or offers for more credit

Higher Cost Things cost more when using credit instead of

cash because of the interest fees

Committing Future Income Debt must be repaid

The Truth About Credit

The more credit card bills you have, the harder they are to pay.

After a while, you may reach your credit limit (point where you cannot charge anymore).

Late or missed payments lower your credit rating!

WHEN YOU APPLY FOR CREDIT, CREDITORS

WANT TO MAKE SURE YOU ARE WORTH THE

RISK.

Creditworthiness (3 C’s)

3 C’s: Capacity

Capacity is the consumer’s ability to repay the loan.

Creditors look for: Verified employment

and income Debt Ratio – current

amount of debt compared to income

3 C’s: Character

Character is the consumer’s proven trustworthiness in repaying debts.

Creditors will check: Credit references

Credit report

3 C’s: Capital

Capital is the amount of money the applicant has beyond their current debts.

Creditors will check: Savings Investments Potential

collateral

Creditworthiness – The 3 C’s

Your 3 C’s will also affect your credit limit. Debtors are usually allowed a higher limit if bills

are paid on time.Your 3 C’s may affect your annual

percentage rate. Annual Percentage Rate (APR) – credit interest

rate calculated on a yearly basis Credit cards might offer a low introductory APR

such as 3% but then your rate could jump to 20% after a few months.

When comparing APR, read the fine print! Many will say “APR as low as…” which means not everyone will qualify.

THE IMPORTANCE OF CREDIT REPORTS

Maintaining Credit

Purpose of a Credit Report

Data Collection Track your personal, financial, and employment

information over timeCredit History

Credit lenders examine your past credit behaviors to determine how you might handle credit with them in the future

Employment Not all employers will check it, but some what to

see that you have demonstrated responsibility in your personal and professional life

What is in a credit report?

Personal Information Name, address, social security number, date of

birth, employment informationCredit Accounts

Type of account, date account opened, credit limit / loan amount, current balance, payment history

Credit Inquiries All creditors who have checked your credit report

in the last two yearsPublic Record / Collection Items

Bankruptcies, foreclosures, overdue debt collection, etc.

Credit Bureaus

The three major credit bureaus are: TransUnion Equifax Experian

Consumers have the right to request one free credit report per year from each bureau.

You should check your credit report on a regular basis to protect yourself from identity theft.