Chapter 16What is Credit?

Borrower(Debtor) – Someone who borrows money

Creditor – Person or company who loans money or extends credit.

Capital Vs. Collateral

Capital – Property you possess (such as bank accounts, investments, and other assets) that is worth more than your depts.

Collateral – Property pledged to assure repayment of a loan. (if you do not make your loan payments, the creditor can seize the pledged property)

To qualify for credit(borrowed money), you must have the ability to repay a loan. Having a job is important Creditors may require you have some capital

Amount of money borrowed is called the Principal

Balance Due is the Principal Amount plus Interest Due

Total Finance Charge is Interest Due plus additional fees

When your credit card bill arrives, you can make a ….

Minimum Payment This is the least

amount you may pay per billing period

Full Payment This represents paying

the entire balance due in full.

Other You can choose to

pay a sum that is greater than the minimum yet less than the Full payment amount.

What is an installment agreement?

Installment Agreement – This type of agreement is usually for particularly expensive purchases. You agree to make regular payments for a set period of time. At the end of that time, you will have repaid the entire debt. This is an example of a secured loan because the goods you purchased with the loan serve as collateral for the money loaned.

Can you give an example of a secured loan?

What is a “line of credit” and how is it established?

A “line of credit” is a pre-established amount that can be borrowed on demand with no collateral.

To establish a line of credit, you fill out the application with a lender. Lenders examine your income and financial position and approve and amount that they believe you can repay. With a line of credit, money is always available should you need it.

What is deferred billing?

Deferred billing is a service available whereby purchases are not billed to the customers until later. For example, merchandise purchased in February may not be billed till March, with no payment due till April.

Advantages and Disadvantages of Consumer credit

Advantages: Expands purchasing

potential Can raise your

standard of living(access to more expensive items)

Can help you establish a good credit record

Provides emergency funds

Is convenient

Disadvantages: May cost more than

cash purchases(merchants often pass transaction costs onto customer) (interest and fees may be charged as well)

May tie up future income

for a long time Can lead to

overspending and possibly bankruptcy