Chapter 11. Credit – supplying of money, goods, or services at present in exchange for the...
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Transcript of Chapter 11. Credit – supplying of money, goods, or services at present in exchange for the...
THE MEANING OF CREDIT Credit – supplying of money, goods, or
services at present in exchange for the promise of future payment
Creditor – business that extends credit
TYPES OF CREDIT Secured credit – backed by a pledge of
property, or collateral
Unsecured credit – not backed by collateral
TYPES OF CREDIT Closed-end credit – one-time
extension of credit for a specific amount and time period
Open-end credit – line of credit – can be used repeatedly
TYPES OF CREDIT Single-payment – pay entire amount
due in a single payment
Installment – set portion paid at regular intervals
PROS AND CONS OF CREDIT Pros
Temporary expansion of income
ConvenienceFinancial
responsibility
Cons Interest and fees Increased cost of
merchandiseOpportunity cost
THREE C’S OF CREDIT Character – a person’s reputation
Capacity – earning power and potential to pay debts from regular income
Capital – items owned, or assets
CREDIT APPLICATION Employment Residence Home ownership Monthly housing costs Credit references Collateral Bank references
EQUAL CREDIT OPPORTUNITY ACT Federal law ensuring that all consumers
are given an equal chance to obtain credit.GenderMarital statusRaceReligionNational originAgePublic assistance
CREDIT REPORTING OR RATING Credit bureau – firm that collects
information about the credit worthiness of consumers from banks, stores, and other creditorsEquifax, Experian, TransUnion
Credit report – record of a particular consumer’s transactions and payment patternsDate account was openedBalance owedPayment amountLate payments
CREDIT REPORTING OR RATING Credit score – numerical rating, based
on credit report information that represents a person’s creditworthiness
Credit rating – an evaluation of a consumer’s credit history
ESTABLISHING CREDIT Open checking and savings accounts.
Make regular deposits and avoid overdrawn checks.
Put utility bills in your name and pay promptly.
Ask a cosigner to help you get a loan.Cosigner – person with established credit
history who signs the contract with you
TYPES OF CREDIT CARDS Private label cards – can be used only at
a single retailer General purpose card – can be used at
millions of locations worldwideVISAMasterCardDiscoverAmerican Express
COMPARING TERMS Annual fee Annual percentage rate Variable APR Computation method Minimum payment Grace period Minimum finance charge Other fees Credit limit Special features and services
TRUTH IN LENDING ACT Creditors must adequately inform
consumers about credit terms and cost.APRHow variable rates are calculatedWhen payments are dueFees
LOANS Home loans – closed-end installment
loans, repayment plan is typically 15-20-30 years. The home is security for the loan.
Home equity loan – loan for a variety of purposes, uses equity in home as security, may be closed or open ended
Home improvement loan – for repairs or improvements, closed-end loan with 5 year term
MORE LOANS Vehicle loan – closed-end, secured loan
for the purpose of buying a vehicle, repayment terms can be from 3-6 years
Personal line of credit – open-end, unsecured loan
Student loans – pay for higher education, often have low interest rates and flexible repayment schedule
CONSUMER FINANCE COMPANIES Businesses that specialize in making
small or personal loansGive credit to those who can not get it
elsewhereCharge more for loans because:
Must borrow money for loans High overhead, small loans Customers are high risk
Payday loans Write check to loan company for amount
needed plus a fee, they hold your check for a certain amount of time, very high fees
INSURANCE POLICY LOANS Life insurance – policy holder can borrow
against the amount paid in premiumsDrawbacks
Death – will deduct any outstanding loan amounts before paying benefits
Companies do not remind you to pay back the loan
PRIVATE LOANS Friends or family members
Keep loan smallBe prepared to show proof of repaymentAgree with lender on interest rateAgree on payment planBe specific – PUT IT IN WRITING!Pay promptly.Get and keep a signed receipt for each
payment.