CREDIT ESSENTIALSIntroduction to Business and Marketing – Ch 25.1

OBJECTIVES

Define credit

Indicate three factors that

affect interest paid

Identify different groups

who use credit

Identify advantages and

disadvantages of using

credit

THE MAIN IDEA

Credit allows borrowers

to purchase items that

they otherwise could

not afford.

Consumers, businesses,

and governments all

borrow money.

CREDIT: The Promise to Pay

Consumers use credit to

buy goods and services

now and pay for it later

Makes buying more

convenient

Allows customers to buy

things they might not

otherwise be able to

afford

CREDIT: an agreement to obtain money, goods, or services now in exchange for a promise to pay in the future

WHO’S INVOLVED…

A creditor charges a

fee to a debtor for

using their money,

which is called

interest.

INTEREST: a fee for borrowing money

DEBTOR: someone who borrows money or uses credit

CREDITOR: someone who lends money or provides credit

INTEREST

The amount of

interest to be paid is

based on three

factors:

1. The interest rate

2. The length of the

loan

3. The amount of the

loan

WHO USES CREDIT?

Many people use credit

To a great extent, credit has

replaced money as a means of

making purchases.

Consumer Credit – credit used

for personal reasons Home purchase (Mortgage) Car purchase Shopping Entertainment

WHO USES CREDIT

Commercial Credit – credit

used by businesses

Business use credit for similar

reasons as consumers

Buy raw materials and machinery

Buy factories or trucks

When businesses borrow money

they often pass the cost on to

consumers

WHO USES CREDIT

The federal government uses

credit to pay for many of the

services and programs it

provides to its citizens.

State and local governments

use credit to pay for

Highways

Public housing

Water systems

ADVANTAGES OF USING CREDIT

Credit is convenient.

You can shop and travel without carrying

cash.

You can buy items right away without saving.

Credit is useful in an emergency.

Credit can help you keep track of spending.

Credit contributes to economic growth.

ADVANTAGES OF USING CREDIT Buying on credit

enables people to

establish a credit rating

A good credit rating

tells other lenders that

you are a responsible

borrower and a good

credit risk

CREDIT RATING: a measure of a person’s ability and willingness to pay debts on time

DISADVANTAGES OF USING CREDIT

Credit can be easy to misuse

Items cost more when you use credit

Using credit means you have committed some

of your future income to your debt

You cannot use credit after you reach your

credit limit

Late or missed payments lower your credit

rating

FACTORS TO CONSIDER

Do you have the cash you need for the down

payment?

Do you want to use your savings instead of

credit?

Can you afford the item?

Could you use the credit in some better way?

Could you put off buying the item for a while?

What are the costs of using credit?

FUN FACTS

The average American

household carries a

balance of $7,500 - $8,000

Women are more likely

than men to carry a credit

card balance

In 2010 American

consumers paid an

estimated$72 Billion more

than they spent (interest)