Basics of Credit
What is credit?
an agreement to obtain money, goods, or services now in exchange for a promise to pay in the future.
What is consumer credit?
Type of credit used by individuals for personal expenses
Why is credit considered convenient?
Allows people to shop and travel without carrying large amounts of cash
Why can credit be easy to misuse?
Credit makes it tempting to buy things people cannot afford or do not need, especially due to advertising and sales promotions
Why is it important to have a down payment when using credit?
A down payment reduces the amount borrowed, which in turn reduces interest costs
Who is a debtor?
someone who borrows money or uses credit
What is commercial credit?
Type of credit used by businesses to finance their operations or buy inventory
How does credit help in emergencies?
can be used when an urgent expense arises, such as car repairs, and there is no immediate cash available
How does interest make items more expensive?
Interest increases the total cost of items when they are purchased on credit rather than paid for in cash
What should you consider before using your savings instead of credit?
Whether using savings would be a better financial decision than taking on debt with interest
Who is a creditor?
someone who lends money or provides credit
How do businesses use credit?
Businesses use credit to buy raw materials, machinery, factories, trucks, or goods they later resell
What is a credit rating?
a measure of a person’s ability and willingness to pay debts on time
What happens when someone reaches their credit limit?
They cannot charge any more purchases until they pay off part of their balance
Why is affordability an important factor when using credit?
If a person cannot afford the payments, they may struggle with debt and financial problems
What is interest?
Fee creditors charge for using their money
How do governments use credit?
Governments use credit to finance services and programs, such as military spending, highways, public housing, stadiums, and water systems
How does credit help track spending?
Every credit purchase is recorded on a bill, helping consumers keep track of their expenses
How can late or missed payments impact a person’s credit rating?
Late or missed payments lower a person’s credit rating, making it harder to get credit in the future
How can delaying a purchase help manage credit use?
Waiting to buy an item can allow time to save money and avoid unnecessary debt
What are the three factors that determine the amount of interest paid?
The interest rate, the length of time of the loan, and the amount of the loan.
How does commercial credit impact consumers?
Businesses often pass the cost of interest to consumers by charging higher prices for goods and services
How does credit contribute to economic growth?
Allows consumers to buy more goods and services, increasing demand, which leads businesses to hire more workers and produce more goods
How can excessive credit use affect future income?
Credit debt must be repaid, meaning future income is already committed to covering past expenses
Why is it important to understand the costs of using credit?
Credit comes with interest and fees, which can make purchases more expensive over time