Credit Fundamentals

Credit Fundamentals
Ch. 18-1 PoB 2011
Using Credit
 Credit – is the privilege of using someone else’s money
for a period of time
 Two parties are involved in a credit transaction:
 Debtor – anyone who buys on credit or receives a loan
 Creditor – the one who sells on a credit or makes a loan
Types of Credit
 Trade Credit – occurs when a company receives goods from a
supplier and pays for them later
 Secure long-term loans
 Borrow money for shorter period, 30 to 90 days
 Loan Credit – if you borrow money for some special purpose
 Involve a written contract
 The borrower agrees to pay the loan in specified amounts, called
installments, over a period of time
 Sales Credit – If you charge a purchase at the time you buy the
good or service
 Involves the use of charge accounts and credit cards
Charge Accounts
 Charge Account – represents a contract between the firm
offering the account and the customer
 Three type of charge accounts:
 Regular Accounts – requires the buyer to make full payment within
a stated period – usually 25 to 30 days
 Budget Accounts – requires that a customer make payments of a
fixed amount of several months
 Revolving Accounts – you may charge purchases at any time, but
only part of the debt must be paid each month
 Most popular form of sales credit
 Credit Limit – a maximum amount may be owed at one time
 Finance Charge – is the total dollar cost of credit, including interest and
all other charges
Credit Cards
 Bank Cards
Most popular all over the world
MasterCard and Visa are the best known
Sometimes you must pay an annual fee
Most credit card processing is done through Independent Sales
Organizations (ISOs)
 Charge Cards
American Express and Diners Club are widely used
Subscribers pay a yearly fee that is higher than the fee for bank cards
No spending limit
Offer proof of traveling expenses
Credit Cards
 Affinity Cards
 Are co-branded with an issuing bank
 All an organization, sports team, or other business to receive a
small percentage of credit sales
 Retail Store Cards
 Many retail stores off their own credit cards to customers
 Shows the name of the store that issued them
 Can only use this card at the issuing store
Installment Credit
 Installment Credit Sales – is a contract issued by the seller that
requires periodic payments at specified times
 Seller adds finance charges to the cost of items purchased
 Credit agreement shows the total amount to be paid
 Contractual agreement directly between seller and buyer
Installment Credit
 Following are some features of installment credit:
 Signing a sales contract that shows the terms of the purchase
 Receiving the purchased item at time of sale
 Be aware the seller has the right to repossess an item if payments are
not made on time
 Making a down payment, which is a payment of part of the
purchase price
 Paying a finance charge on the amount owed
 Making regular payments at stated times
 Penalties may be charged if a payment is received after the due date
Consumer Loans
 Loan – is an alternative to charge account buying or installment
sales credit
 Installment Loan – is one in which you agree to make monthly
payments in specific amounts over a period of time
 Total amount you repay includes the amount you borrowed plus the
finance on your loan
 Single-Payment Loan – you do not pay until the end of the loan
 At that time, you’ll repay the full amount borrowed plus the finance
Consumer Loans
 Promissory Note – is a written promise to repay based on a
debtor’s excellent credit history
 The amount borrowed, with interest, is due on a certain date
 Promissory Notes should include the following components:
 Principal – the amount that is promised to be paid
 Time – the days or months from the date of the note until it should
be paid
 Date of Maturity – the date on which the note is due
 Payee – the one to whom the note is payable
 Interest Rate – the rate paid for the use of the money
 Maker – the one who promises to make payment
Consumer Loans
 Promissory Note (continued)
 The lender may ask you to offer some property you own as
 Collateral – property that is used as security
 You give the lender the right to sell this property to get back the
amount of the loan if you do not repay it – Secured Loan
 If you do not have an established credit history or any property or
a good credit history, you may be able to get a relative or friend
who has property or good credit history to sign you note, known
as a co-signer
 The co-signer of a note is responsible for payment of the note if you
do not pay as promised
Benefits of Credit
 The main advantages of credit for consumers include the
Convenience – can make it easy for you to buy
Immediate Possession – allows you to have the item now
Savings – allows to buy an items on sale at a good price
Credit Rating – a person’s reputation for paying bills on time is
know as a Credit Rating
 Useful for Emergencies – access to credit can help in unexpected
Credit Concerns
 Overbuying
 A common spending hazard of credit involves buying something that is
more expensive than you can afford
 Careless Buying
 If you become impatient or distracted in your shopping, you may not
shop carefully
 Higher Prices
 Stores that only accept cash may sell items at lower prices than stores
that offer credit
 Overuse of Credit
 Buying now and paying later may sound like a good idea, but if too many
payments need to be made later, the total amount owed becomes a
Questions to Ask
 How will you benefit from this use of credit?
 Is this the best buy you can make or should you shop around?
 What will be the total cost of your purchase, including the
finance charge?
 What would you save if you paid cash?
 Will the payments be too high for your income?
1. What are the major types of consumer credit?
2. What are the main advantages of consumer credit?
3. What are the potential drawbacks of buying on

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