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