Principles of Business and Personal Finance
NC Competency 008: Explain the concept of credit and its effect on the Individual and the total economy.
NC Objective 8.01: Evaluate various sources of credit available to government, business, and the consumer.
I. Credit
A. Credit in general is loans, bonds, charge-account obligations, and open-account balances with commercial firms.
B. Who uses Credit?
1. Consumer: is debt assumed by consumers for purposes others than home mortgages. Consumers can borrow through credit cards, lines of credit, loans against insurance policies, and many other methods. (*Federal Reserve Board releases the total amount of outstanding consumer credit on a monthly basis)
2. Commercial: short or long term loans to finance the operations of a business, such as purchase inventory, or the production and distribution of goods.
II. Types of Credit
A. Charge Accounts: most common type of short- term or medium-term credit.
1. Regular Charge Accounts
a. Require that you pay for purchases in full within a certain period of time.
2. Revolving Charge Accounts
a. Allows you to borrow or charge up to a certain amount of money (credit limit) and pay back a part or the entire balance each month.
3. Budget Charge Accounts
a. Allows you to pay for costly items in equal payments spread out over a period of time.
B. Credit Cards: are an indication to sellers that the person who received the card from the issuer has a satisfactory credit rating and that if credit is extended, the issuer of the card will pay (or see to it that the seller receives payment) for the merchandise delivered. Most credit cards are made of plastic with raised letters to facilitate creation of machine-readable sales slips and a magnetically coded strip that is read electronically and verified by telephone.
1. Single-Purpose Credit Card: Can only be used to buy goods or services at the business that issued the card.
Examples: JC Penney, Sears
2. Multipurpose Credit Card: Similar to a revolving charge account and may be used at several locations.
Examples: Visa and Master Card
3. Travel and Entertainment Credit Card: Similar to regular charge accounts and must be paid in full each month.
Example: American Express
C. Banks and Other Financial Institutions: are business entities formed to maintain savings and checking accounts, issue loans and credit, and deal in negotiable securities issued by government agencies and by corporations.
1. Single Payment Loan: Debtor pays off loan in one payment and with a written promise to repay with interest.
Example: Promissory Note
2. Installment Loan: Repaid in regular payments.
D. Installment loans: is a loan that is repaid in successive periods as agreed to by the contract.
1. Installment Loans Types:
a. Student, mortgage, automobile, etc.
b. Secured vs. Unsecured: Secured loans are backed by collateral (help guarantee the repayment of a loan).
c. Closed vs. Open Ended:
1. Closed-end credit is used for a specific purpose and involves a definite amount of money.
2. Open-end credit gives you a certain limit on the amount of money you can borrow.
d. Cosigner: Responsible for the repayment of a loan if the original party does not pay.
e. Consumer Finance Companies: Specialize in loans to people with poor credit ratings. The cost of credit is higher than other institutions.
E. Seller Provided Credit: Many stores provide credit to customers.
F. Consumer Finance Companies: company engaged in making loans to individuals or businesses. Unlike a bank, it does not receive deposits but rather obtains its financing from banks, institutions, and other money market sources.
G. Payroll Advance Services: are short-term loans or pawnshops
1. Based on the value of something you own.
2. “Borrow Until Payday” Loan
3. Cost is extremely high.
H. Bonds: written promise to repay a loan with interest on a specific date. The buyer of the bond is considered the creditor.
1. Corporate Bonds: Usually used to finance buildings and equipment.
2. Municipal Bonds: State and local governments use these to finance projects.
3. Savings Bonds: Sold by federal government.
I. Other Sources of Credit for Businesses
1. Small Business Administration: Offers a number of financial, technical, and management programs to help businesses. www.sba.gov
J. Other Sources of Credit for Consumers
1. Life Insurance Plans: Cash Value Insurance, provides both savings and death benefits and offers retirement plans.
Consumer Credit Vocabulary list
Budget Accounts: allows you to pay for costly items in equal payments spread over a period of time
Closed End Loan: involves definite sum of money
Corporate Bonds: used to finance building and equipment
Installment Loan: repaid in regular payments
Multi-Purpose Credit Card: may be used at several locations
Municipal Bonds: state and local governments use these to finance projects
Open End Loan: limit on amount of money you can borrow
Promissory Note: written promise to repay
Regular Charge Accounts: require that you pay for purchases in full within a certain time period
Revolving Charge Accounts: allows you to borrow or charge up to a certain amount of money and pay back a part or entire balance each month
Secured Loan: backed by collateral
Single-payment Loan: repaid in one payment
Single Purpose Credit Card: can only be used to buy goods or services at the business that issued the card
Small Business Administration Loans: offers a number of financial, technical, and management programs to help business
Supplier Credit: used by companies for supplies purchased on a regular basis
Travel and Entertainment Credit Card: similar to charge accounts
Unsecured Loan: not backed by collateral
US Savings Bonds: sold by federal government