Credit

What is Credit?

Credit is the privilege of using someone else’s money for a period of time and is accepted as a substitute for cash

Creditor is any person/ business that grants a loan or sells on credit Debtor is any person/ business that buys on credit or receives a loan

Advantages & Disadvantages

Advantages:1. Instant Enjoyment2. Convenience3. Emergencies4. Savings5. Credit Rating 6. Purchase Record

Disadvantages

1. Credit Costs2. Impulse Buying3. Overbuying4. Financial Difficulties

Types & Sources of Credit

Charge Account- contract between a consumer and a retailer for sales in the retailer’s stores(Revolving credit account- allows consumers to charge purchases at any time, but they must pay a minimum monthly payment until the account is paid in full)

Layaway- the store sets the product aside while the customer makes equal payments for a set numbers of weeks until the price is paid in full

Credit Cards

Bank-Issued (Visa or MasterCard): financial institutions issue cards to customer whose credit rating is good

Travel & Entertainment Cards (American Express):Consumers use these cards to pay for such services and products

Consumer Loans

Term Loans: form of installment credit in which the borrower agrees to make fixed monthly payments over a period of time or termDemand Loans: special kind of short term loan with flexible paymentsStudents Loans: guaranteed by both the federal and provincial gov’t and are available through most banks Mortgage Loans: a long-term credit plan for buying property

Cost of Credit

Principal (the amount of money borrowed) is the chief factor in determining the interest cost Other factors: • The term for repaying the loan• Current interest rates• Inflation and general economic conditions• Security or collateral • Risk and credit rating Term: of the loan also determines the interest rate

Security & Collateral

Depending on the principal involved and the borrower’s credit rating, collateral may be required as security for a loan.When a borrower offers a home, a car, or stock and bonds as collateral, the risk of the loan is reduced because the lender can sell this security if the borrower fails to repay the loan

Risk & Credit Rating

The borrowers credit history and credit rating also affect the cost of a loan. A borrower who has a record of borrowing money and repaying it promptly will probably get a competitive interest rate from the lender

Applying for Credit

Credit Application: an information form that a borrower must complete before being granted a loan, charge account, or credit card. The completed credit application helps the lender make a decision about granting credit or approving loan

Credit Worthiness: before lenders decide whether or not to grant credit or a loan

Three C’s of Credit

Character: refers to a borrower's willingness to repay a loan when it’s due

Capacity: refers to a borrower’s ability to make payments on time and to pay a debt when it’s due.

Capital: is the value of a borrower’s assets

Credit Application & Credit Bureaus

Credit Application:Lenders check the info on a credit application

Credit BureausIs a business that gathers credit information on all borrowers in a particular region for the purpose of selling that information to credit grantors