Credit

1. Credit

2. Credit • What is it? – the ability of a customer to buy goods or services before paying for them, based on an agreement to pay later. • Always investigate the terms of credit before using it. • What to investigate 1. finance charge – total amount paid to use credit. 2. Annual Percentage Rate – cost of credit as an annual % of the principal borrowed.

3. Advantages • Immediate possession – can enjoy goods and services immediately. • Flexibility – can time purchases to take advantage of sales and bargains. • Safety – not carrying large amounts of cash. • Emergency funds – source of money if a need arises – ex. -car breaks down. • Character reference – good credit history can be used as a character reference.

4. Disadvantages • Overspending – make it too easy to spend money. As debt mounts repayment becomes more difficult. • Higher cost – stores that accept credit add administrative costs to the item prices. • Impulse buying – people buy things that they don’t need because they have a means to do so.

5. Kinds of credit • Home mortgages – long term loan to purchase a house – usually has the lowest interest rates. • Auto and consumer loans – installment loans of 3-5 years for a specific purchase. • Charge accounts – specific to certain stores. • Credit cards – charge account that allows you to shop at different places.

6. Cost of Credit • Lenders look at three things: 1. character – personal qualities – honesty 2. capacity – ability to pay debts – income v. expenses. 3. Capital – what you own that can be used to back up a loan – known as collateral. New borrowers may need a co-signer.

7. Principal plus interest = total expenditure • Total expenditure-principal = cost of credit • How to figure: # of payments x amount= TE • Problem with only making minimum payment: payment comes off of interest first. May take forever to pay off principal. Credit card companies must now tell you how long it will take to pay off the principal.