CREDIT
INTRODUCTION TO BUSINESS & MARKETING
Objectives
 Compare the types of consumer credit.
 Describe the advantages and disadvantages of
using credit.
 Identify the elements of creditworthiness (3 C’s).
 Explain the importance of credit reports.
What is Credit?
Credit: Key Terms
 Credit – an
agreement to obtain
money, goods, or
services NOW in
exchange for a
promise to pay LATER
 Creditor – lends
money or provides
credit
 Debtor – borrows
money or uses credit
Credit
 Credit is based on the
creditor’s confidence
that the debtor can
and will repay the debt
(creditworthiness).
 Interest – fee that
creditors charge a
debtor for using their
money
Types of Credit
Types of Consumer Credit
Charge Account
credit provided
by a store or
company for
customers to buy
its products
Types of Consumer Credit
 Credit Card – can be
used in many different
places
 Issued by banks (i.e.,
Bank of America Visa
card)
 Some have annual fees
ranging from $25 to $80
 Creditors earn money
from interest charges,
annual fees, and penalties
Types of Consumer Credit
 Installment Loans –
loans repaid in regular
equal payments over a
period of time
 Includes student, car,
and home improvement
loans
 Debtor receives loan for
a certain about of time
(i.e., 60 month loan)
 Debtor makes equal
monthly payments that
cover loan plus interest
Types of Consumer Credit
 Mortgage Loan – a
form of installment
loan, only it is written
for a long period of
time (15 – 30 years)
 Home serves as
collateral, something
of value the bank can
take
Types of Loans
 Short-term: one year or less
 Medium-term: one to five years
 Long-term: more than five years
Pros & Cons of Using Credit
Advantages of Using Credit
 Convenient
 Shop and travel without carrying large amounts of cash
 Buy expensive items (like cars) now and use right away
 Good for emergencies (i.e., unexpected car repairs)
 Establish Credit Rating
 A credit rating is a measure of a person’s ability and
willingness to pay debts on time.
 Good ratings tell other lenders you are a responsible borrower
and a good credit risk.
 Contribute to the Growth of Economy
 Consumers are able to buy more goods and services
 Businesses can hire more workers to produce more
Disadvantages of Using Credit
 Easy to Misuse

Tempting to buy things you cannot afford or don’t need

Can be difficult to resist sales or offers for more credit
 Higher Cost

Things cost more when using credit instead of cash
because of the interest fees
 Committing Future Income

Debt must be repaid
The Truth About Credit
 The more credit card bills you have, the
harder they are to pay.
 After a while, you may reach your credit
limit (point where you cannot charge
anymore).
 Late or missed payments lower your
credit rating!
Creditworthiness (3 C’s)
WHEN YOU APPLY FOR
CREDIT, CREDITORS WANT
TO MAKE SURE YOU ARE
WORTH THE RISK.
3 C’s: Capacity
 Capacity is the
consumer’s ability
to repay the loan.
 Creditors look for:
 Verified
employment
and income
Ratio – current
amount of debt
compared to income
 Debt
3 C’s: Character
 Character is the
consumer’s proven
trustworthiness in
repaying debts.
 Creditors will
check:
 Credit
references
 Credit
report
3 C’s: Capital
 Capital is the
amount of money
the applicant has
beyond their
current debts.
 Creditors will
check:
 Savings
 Investments
 Potential
collateral
Creditworthiness – The 3 C’s
 Your 3 C’s will also affect your credit limit.
 Debtors are usually allowed a higher limit if bills are paid
on time.
 Your 3 C’s may affect your annual percentage rate.
 Annual Percentage Rate (APR) – credit interest rate
calculated on a yearly basis
 Credit cards might offer a low introductory APR such as
3% but then your rate could jump to 20% after a few
months.
 When comparing APR, read the fine print! Many will say
“APR as low as…” which means not everyone will qualify.
Maintaining Credit
T H E I M P O R TA N C E O F C R E D I T R E P O R T S
Purpose of a Credit Report
 Data Collection
 Track your personal, financial, and employment
information over time
 Credit History
 Credit lenders examine your past credit behaviors to
determine how you might handle credit with them in the
future
 Employment
 Not all employers will check it, but some what to see that
you have demonstrated responsibility in your personal
and professional life
What is in a credit report?
 Personal Information
 Name, address, social security number, date of birth,
employment information
 Credit Accounts
 Type of account, date account opened, credit limit / loan
amount, current balance, payment history
 Credit Inquiries
 All creditors who have checked your credit report in the
last two years
 Public Record / Collection Items
 Bankruptcies, foreclosures, overdue debt collection, etc.
Credit Bureaus
 The three major credit bureaus are:
 TransUnion
 Equifax
 Experian
 Consumers have the right to request one
free credit report per year from each bureau.
 You should check your credit report on a
regular basis to protect yourself from identity
theft.