Credit ESSENTIALS

1. Credit ESSENTIALS Introduction to Business and Marketing – Ch 25.1

2. OBJECTIVES • Define credit • Indicate three factors that affect interest paid • Identify different groups who use credit • Identify advantages and disadvantages of using credit

3. THE MAIN IDEA • Credit allows borrowers to purchase items that they otherwise could not afford. • Consumers, businesses, and governments all borrow money.

4. 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

5. WHO’S INVOLVED… A creditor charges a fee to a debtor for using their money, which is called interest. CREDITOR: someone who lends money or provides credit DEBTOR: someone who borrows money or uses credit INTEREST: a fee for borrowing money

6. INTEREST • The amount of interest to be paid is based on three factors: • The interest rate • The length of the loan • The amount of the loan

7. 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

8. 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

9. 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

10. 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.

11. 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

12. 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

13. 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?

14. 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)