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CHAPTER 29 THE FUNDAMENTALS OF CREDIT WHAT CREDIT IS • Privilege of using someone else’s money for a period of time • debtor--a person who buys on credit or receives a loan • creditor--a person who sells on credit or makes a loan • depends on trust; creditor believes the debtor will pay back later TYPES OF CREDIT • Loan credit--borrow money for some special purpose • Sales credit--charge a purchase at the time you buy the good or service (charge accounts or credit cards) • Trade credit--used by a business when it receives goods from a wholesaler and pays for it at a specified date; 2/10, n/30 USERS OF CREDIT • Almost all American consumers • Businesses • Government GRANTING OF CREDIT • Credit references (businesses or individuals who granted credit in the past and can verify your credit record) • TO BECOME A DEBTOR YOU MUST PROVE THAT YOU ARE A GOOD CREDIT RISK! THE THREE C’s OF CREDIT 1. Character--refers to honesty and willingness to pay back a debt; how you pay for future bills can be predicted by how you paid for past bills 2. Capacity--refers to the ability to pay a debt when it is due; size of income and current debt will be scrutinized 3. Capital--value of borrower’s possessions; includes money and property BENEFITS OF CREDIT • Convenience--shop without cash; urgent need and not enough cash • Immediate possession--do not have to wait until enough money is saved • Savings--allows one to buy something when it is on sale • Credit rating--develop a favorable credit rating • Useful in emergency--especially when you run out of cash PRECAUTIONS FOR USING CREDIT • Overbuying--buy more than you can afford or buying things you do not need • Careless buying--become lazy consumer and stop comparison shop • Higher prices--stores that sell only for cash can offer lower prices; extending credit is costly • Overuse of credit--too much owed; too much borrowing can lead to bankruptcy QUESTIONS TO ASK • How am I benefiting from the use of credit? • Is this the best buy I can make or should I shop around? • What will be the total cost for the purchase including interest and other charges? • What would I save if I paid cash? • Will the payment be too high considering my income?