What is Credit?

1. What is Credit? Chapter 25

2. Brainstorm! • What is credit? • How are you affected by credit? • List several forms of credit.

3. Credit Essentials Chapter 25 Section 1

4. Credit • An agreement to get money, goods, or services now in exchange for a promise to pay in the future. • Delaying the payment for an item.

5. Creditor • The one who lends money or provides credit. • Examples: person, financial institution

6. Debtor • The one who borrows money or uses credit. • Credit is based on the confidence that the debtor can and will make the payments (trust).

7. Interest • The fee charged by creditors for using their money. • The amount of interest is based on three factors. • Interest rate – percentage of the total amount borrowed. • Length of the loan – the longer you take to pay off a loan, the more interest. • Amount of the loan – the larger the amount, the more interest.

8. Consumer Credit • Type of credit used by people for personal reasons. • Examples: Vacations, restaurants, student loan

9. Commercial Credit • Credit used by a business. • When businesses borrow, they pass along the cost of the interest to consumers • Charging higher prices for their products. • Why might a business need to use credit?

10. Pros and Cons Activity • Take out a sheet of paper and cut in half • Working with one person beside you…. • On one half…write 3 advantages of using credit • On the other half…write 3 disadvantages of using credit

11. Credit • Convenient • Emergency situations • Online shopping • Credit rating – a measure of a person's ability and willingness to pay debts. • Keep track of spending • Contributes to the growth of our economy. • Easy to misuse • Items cost more (interest) • Bills tend to pile up • Lower credit rating • Half of all people with credit problems are between the ages of 18-32! Advantages Disadvantages

12. Types of Credit Chapter 25 Section 2

13. Types of Credit • Short-Term • One year or less • Medium-Term • One to 5 years • Long-Term • More than 5 years

14. Sources of Credit • Charge Accounts • Credit Cards • Banks and Other Financial Institutions • Seller-Provided Credit • Consumer Finance Companies • Other Types of Loans

15. Charge Accounts • One of the most common types of short-term and medium-term credit. • Generally offered by stores • Buy now and pay later • When the bill arrives in the mail, the customer can pay the total amount owed or the entire amount.

16. Credit Cards • Like charge accounts but can be used in many places. • Fees, terms, and interest rates vary by company. • Single-purpose, multipurpose, travel/entertainment.

17. Banks and Other Financial Institutions • Offer many types of loans. • More demands on the borrower. • Tend to have lower interest rates. • Three types of loans: • Single Payment – pays back loan in one payment • Installment – student loans, personal loans. • Mortgage – only written for a long period, collateral.

18. Seller-Provided Credit • Generally extended for less than one year, up to five years. • Provided to make it easier for consumers to buy their products and not to go elsewhere. • Examples: clothing, furniture, appliances, car dealers.

19. Consumer Finance Companies • Specialize in loans to people who might not be able to get credit elsewhere. • Loans usually range from less than one year, up to five years. • Higher interest than a bank

20. Other • Payday Advance • Many people have difficulty making their paychecks stretch from one payday to the next. • If you don’t have any savings and an unexpected expense occurs, you might look for a short-term loan until payday. • Pawnshop • Based on a value of an asset