CREDIT BASICS CHAPTER 6 LESSON 3 WHAT IS

CREDIT BASICS CHAPTER 6, LESSON 3

WHAT IS CREDIT? • Credit: using someone else’s money – Money must be repaid – Credit has a cost • Debtor: the person receiving the money • Creditor: the person lending the money • Credit and loan agreements are enforceable contracts – Do you remember the four parts of a binding contract?

WHAT IS CREDIT? (CONTINUED) • Four binding parts of a contract: – Agreement: offer must be made and accepted – Competent parties: legal age and mentally competent – Consideration: something of value must be exchanged – Legality: must be legal and enforceable • Credit and loan agreements are contracts! • The debtor promises to repay the creditor • Penalties and repercussions if the contract is broken

TYPES OF CREDIT • Loan credit – Money is borrowed to be used for a special purpose – Money can come from banks, credit unions, and finance companies – Money is repaid in installments • Over a period of time • Sales credit – The purchase of a good or services is charged to your account – Money is repaid on the terms of your credit company

GRANTING CREDIT • Credit application – Contact information – Credit reference – Questions • Income • Current debt • Employment • Assets • Three Cs of Credit – Character: willingness to repay a debt – Capacity: ability to repay a debt – Capital: value of the borrower’s possessions

BENEFITS OF CREDIT • Convenience: easy to shop without carrying a lot of cash • Immediate possession: have the item now, but pay for it later • Savings: buy an item when it goes on sale; sometimes special offers for credit holders • Credit rating: by paying for things with credit and making timely payments, you can improve your credit score and get loans at lower interest rates in the future • Useful in emergencies: a payment option in uncertain times

CONCERNS OF CREDIT • Overbuying: spending more than you can afford to pay back; buying items you do not need simply because they are available through credit • Careless buying: temptation to buy now rather than wait for a better price or offer • Higher prices: increased business costs are passed along to customers, so businesses that are cash only can offer lower prices • Overuse of credit: you are buying on the assumption you will have the money later; don’t take on more debt that you can comfortably repay