The Fundamentals of Credit

1. The Fundamentals of Credit Unit 9 Chapter 29 Introduction to Business

2. Polonius cautioned, “Neither a borrower nor a lender be,” but today providing credit has become a way of life in our country and around the world. 80% of gasoline, 100% online purchases, $2 million dollar loans to business expansion, State of Louisiana sold bonds to raise money (another form of credit).

3. What is credit? Credit is the privilege of using someone else’s money for a period of time. That privilege is based on the belief that the person receiving credit will honor a promise to repay the amount owed at a future date.

4. Bernie Madoff Hedge fund “expert” claims to always buy low and sell high. Impossible! Supposedly purchased well known stocks in companies like Johnson & Johnson, Intel, Pepsi. Never did! Ponzi Scheme – take money from others making them believe in something that is not true and pockets the money. 65 billion Trust? Yes Criminal activity? Yes

5. Debtor Anyone who buys on credit or receives a loan.

6. Creditor The person or company that sells on credit or lends money.

7. Trust Means that the creditor believes that the debtor will honor the promise to repay.

8. Quick Review of what we’ve learned so far……. • Credit • Debtor • Creditor • Trust • Privilege to use someone’s money • Buys on credit or receives a loan • Sells on credit or makes a loan • Believes the debtor will repay as promised

9. Types of Credit Loan credit Sales credit Trade credit

10. Loan credit Borrow to purchase something special. Usually requires a written contract. Installment loan or consumer loan Examples: car, home, jewelry, or furniture. More expensive or long term.

11. Sales Credit Using a charge card or credit card to make the purchase. Less expensive or convenient purchase. Some businesses (few) have accounts receivables this sale to a customer would also be a sales credit transaction.

12. Trade Credit Used by businesses when a wholesaler delivers goods and pays for them later. Trade terms 2/10, n/30 means they will get a 2% discount if paid in 10 days and the balance “net” is due in 30 days.

13. Granting of credit Must be able to prove that you are a good credit risk. Not everyone desiring credit will receive it. Credit references are businesses or individuals from whom you have received credit from in the past – who can verify your credit record. Pay on time |DMV records |court judgments | collection agency reports

14. The Three C’s of Credit • Character • Capacity • Capital • Your honesty and willingness to repay when it is due. • Your ability to repay. Large enough income to repay the debt • Value of your possessions, including money you have. This gives lenders assurance that you will meet your obligations.

15. Benefits • Convenience • Immediate possession • Savings (get it on sale) • Credit rating • Emergency ready • Manage budget

16. Precautions Overbuying – buying something more expensive than you can afford Careless buying – may not check for sales, or do not compare prices Overuse of credit – over using your credit card can result in too much being owed. Buy it now and Pay it later sounds good, but if you can not pay it later there is a problem

17. So….. What did we learn today? • Credit • Debtor • Creditor • Trust • Types of Credit • Loan Credit • Sales Credit • Trade Credit • Terms 2/10, n/30 • Granting of credit • Prove or establish good credit risk behavior • Three C’s of Credit • Character • Capacity • Capital • Benefits • Precautions