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Consumer Credit & Types of Credit

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Silviana Falcon

on 14 April 2016

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Transcript of Consumer Credit & Types of Credit

Consumer Credit & Types of Credit

Credit is an arrangement to receive cash, goods or services now, and pay for them in the future

Consumer credit is the use of credit for personal needs, except a home mortgage, by individuals and families

What is Consumer Credit?

Three ways consumers can
finance purchases:

1) Draw on their savings

2) Use present earnings

3) Borrow against expected future income

Trade-offs with each alternative

Consumer credit: based on trust of people's ability and willingness to pay for bills when due.


Before you use credit for a major purchase, ask yourself some questions

Do I have the cash for the down payment?

Do I want to use my savings for this purchase?

Does this purchase fit my budget?

Could I use the credit I’ll need in some better way?

Before you use credit for a major purchase, ask yourself some questions

Can I postpone this purchase?

What are the opportunity costs of postponing this purchase?

Am I willing to pay double/triple the initial price tag?

Is this a need or is this an indulgence?

What are the dollar and psychological costs of using credit for this purchase?


Current use of goods and services

Permits purchase even when funds are low

A cushion for financial emergencies

Easier to return merchandise

Convenient when shopping


One monthly payment

Safer than cash

Needed for hotel, car reservations and shopping online

Can take advantage of float time/grace period

May get rebates, airline miles, or other bonuses

Indicates financial stability

Closed-End Credit / SECURED CREDIT
One-time loans for a specific purpose that you pay back in a specified period of time, and in payments of equal amounts.
You offer up an underlying asset (collateral) that the lender can liquify if you fail to make payments on your loan. For example: mortgage, automobile, or installment loans for furniture, appliances and electronics.
Types of Credit

There is no underlying asset that the creditor can come and take away if you do not pay the bill.
Use as needed until reaching line of credit max
Credit cards, departments store cards, bank credit cards, incidental credit.
You pay interest and finance charges if you do not pay the bill in full when due.

Eight out of ten U.S. households carry one or more credit cards

One-third are convenience users- pay balances in full each month

Two-thirds are borrowers, carrying a balance over, paying finance charges

Some use cards for cash advances – expensive

Co-branding - linking a credit card with a business offering rebates on products and services

Smart cards have an imbedded computer chip

Debit cards: similar impact as writing a check



Sign new cards when they arrive

Treat cards like money - keep them secure

Shred anything with your account number on it

Don’t give your number over the phone unless you initiate the call, and don’t put it on postcards

Get card & receipt after every transaction: compare receipts to bills when they arrive, checking for errors

Sign receipts and DO NOT leave tip section blank

Notify the card issuer if you don’t get your billing statement, or if your card is lost or stolen

Check credit report regularly


When you make purchases online use a secure browser

Keep records of online transactions

Review monthly statements-can do so online

Read policies of the websites you visit concerning refunds, site security, and privacy

Keep personal information private unless you know who is gathering it and why

Shop at businesses you know and trust

Never give out your password to anyone online

Don’t download attachment or open email files sent by strangers

Disadvantages of Credit
1) Temptation to overspend
2) Failure to repay the loan can result:
Loss of valuable property
Loss of your good reputation
Court Action
Misuse of credit
Long term financial problems
Damage to family relationships
Credit costs money, paying for purchases over time costs more than paying for them with cash
Uses and Misuses
Simple Interest Method
This is the most common method of calculating payments on an installment loan.

Let's say you ask for a loan of $8,000 at a rate of 6% for a period of two years to buy equipment needed for your new company:

A = P(1 + rt)

First, converting R percent to r a decimal
r = R/100 = 6%/100 = 0.06 per year,
then, solving our equation

Answer = 8000(1 + (0.06 × 2)) = 8960
A = $ 8,960.00

The total amount accrued, principal plus interest,
from simple interest on a principal of $ 8,000.00
at a rate of 6% per year
for 2 years is $ 8,960.00.
$746.66 in monthly installments
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