Download Chapter 29

CHAPTER 29
THE FUNDAMENTALS
OF CREDIT
WHAT CREDIT IS
• Privilege of using someone else’s money
for a period of time
• debtor--a person who buys on credit or
receives a loan
• creditor--a person who sells on credit
or makes a loan
• depends on trust; creditor believes the
debtor will pay back later
TYPES OF CREDIT
• Loan credit--borrow money for some
special purpose
• Sales credit--charge a purchase at the
time you buy the good or service
(charge accounts or credit cards)
• Trade credit--used by a business
when it receives goods from a
wholesaler and pays for it at a specified
date; 2/10, n/30
USERS OF CREDIT
• Almost all American consumers
• Businesses
• Government
GRANTING OF CREDIT
• Credit references (businesses or
individuals who granted credit in the
past and can verify your credit record)
• TO BECOME A DEBTOR YOU MUST
PROVE THAT YOU ARE A GOOD CREDIT
RISK!
THE THREE C’s OF CREDIT
1. Character--refers to honesty and
willingness to pay back a debt; how you
pay for future bills can be predicted by
how you paid for past bills
2. Capacity--refers to the ability to pay a
debt when it is due; size of income and
current debt will be scrutinized
3. Capital--value of borrower’s
possessions; includes money and
property
BENEFITS OF CREDIT
• Convenience--shop without cash;
urgent need and not enough cash
• Immediate possession--do not have
to wait until enough money is saved
• Savings--allows one to buy something
when it is on sale
• Credit rating--develop a favorable
credit rating
• Useful in emergency--especially
when you run out of cash
PRECAUTIONS FOR USING
CREDIT
• Overbuying--buy more than you can
afford or buying things you do not need
• Careless buying--become lazy
consumer and stop comparison shop
• Higher prices--stores that sell only for
cash can offer lower prices; extending
credit is costly
• Overuse of credit--too much owed;
too much borrowing can lead to
bankruptcy
QUESTIONS TO ASK
• How am I benefiting from the use of
credit?
• Is this the best buy I can make or
should I shop around?
• What will be the total cost for the
purchase including interest and other
charges?
• What would I save if I paid cash?
• Will the payment be too high
considering my income?