chapter 4 credit: going into debt

What are advantages of credit What are disadvantages of credit

What is the price of credit?› Interest charged to you on amount borrowed

Credit is the receipt of funds with the promise to pay for them in the future

Principal is the amount originally borrowed.

Interest is the amount the borrower must pay for the use of someone else’s funds.

One of the most common types of debt is installment debt (equal payments over a period of time)

A mortgage is debt owed on houses, buildings, or land.› Largest form of installment debt in US

Durable goods – manufactured items that last longer than 3 years on installment plan› Examples

Allows the borrower to enjoy product now rather than later› Spread payments over time

2 major types of credit are…› Credit cards› Borrow from financial institution

Financial institutions borrow funds at one interest rate and lend it at a higher rate

Commercial Banks Savings and Loan Associations Savings Banks Credit Unions Finance Companies

Commercial Bank – main functions accept deposits, make loans, and transfer (offers bank services)› Control largest funds & widest range of

services› Examples:

Savings and Loan Associations – accepts deposits and makes loans› Make many mortgages

Savings Banks – makes deposits for small savers

Credit Unions – bank owned by its members and offers banking services

Finance Companies – take over contracts for installment debts from stores and ads a fee for collecting debt

Charge Account – credit from a specific company allowing you to buy now and pay later

Credit Card – credit that allows you to make a purchase now and pay later

Finance charge – cost of credit expressed on monthly statement in $ & ¢› See pg 97 table for calculations

Annual Percentage Rate (APR) – cost of credit expressed as a yearly %

Lenders determine creditworthiness by evaluating a borrower’s credit history

Credit Bureau: private business that investigates a person to determine the risk involved in lending to them

Credit check: investigation of a person’s income, current debts, personal life, and past history of borrowing &repaying debts

Credit rating: rating of the risk involved in lending to a specific person or business

Capacity to pay (how much debt you have)

Character (reputation/are you reliable) Collateral – something of value that

lender can claim if you can’t pay

Secured loan – loan backed by collateral

Unsecured loan – loan guaranteed only by a promise to repay it› Higher interest rate› Might lend funds with a cosigner

Be responsible Not paying results in..

› Higher interest rates› Bad credit rating

Keep records and notify of any fraud immediately