Chapter 25 The Basics of Credit

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1 Chapter 25 The Basics of Credit Section 25.1 Credit Essentials Read to Learn Define and indicate three factors that affect the interest that is paid. Name different groups in our economy who use. Identify three advantages and disadvantages of using. The Main Idea Credit allows borrowers to purchase items that they otherwise could not afford. Consumers, businesses, and governments all borrow money. There are advantages and disadvantages to using. Key Concepts The Pros and Cons of Using Credit an agreement to obtain money, goods, or services now in exchange for a promise to pay in the future debtor someone who borrows money or uses or someone who lends money or provides interest a fee for borrowing money 1

2 consumer commercial the type of used by people for personal use the type of used by businesses rating a measure of a person s ability and willingness to pay debts on time Consumers use to buy all kinds of goods and services. an agreement to obtain money, goods, or services now in exchange for a promise to pay in the future A or charges a fee to a debtor for using their money, which is called interest. or someone who lends money or provides debtor someone who borrows money or uses interest a fee for borrowing money The amount of interest to be paid is based on three factors: To a great extent, has replaced money as a means of making purchases. 1. The interest rate 2. The length of the loan 3. The amount of the loan 2

3 Two types of are consumer and commercial. Businesses often pass the cost of on to consumers. consumer the type of used by people for personal use commercial the type of used by businesses The federal government uses to pay for many of the services and programs it provides to its citizens. State and local governments use to pay for things such as highways, public housing, and water systems. Credit Users The card industry has terms for its customers. Revolvers are people who roll their balances over month to month, and never pay in full. Rate surfers or gamers are people who switch cards based on interest rates. The Pros and Cons of Using Credit To use effectively, the consumer must know its advantages and disadvantages. Graphic Organizer Advantages of Credit Advantages of Credit Credit is convenient. You can shop and travel without carrying cash. You can buy items right away without saving. Credit is useful in an emergency. Credit can help you keep track of spending. Credit contributes to economic growth. A good rating tells other lenders that you are a responsible borrower and a good risk. rating a measure of a person s ability and willingness to pay debts on time 3

4 Graphic Organizer Disadvantages of Credit Credit can be easy to misuse. Items cost more when you use. Using means you have committed some of your future income to your debt. You cannot use after you reach your limit. Late or missed payments lower your rating. Graphic Organizer Factors to Consider Before Using Credit Do you have the cash you need for the down payment? Do you want to use your savings instead of? Can you afford the item? Could you use the in some better way? Could you put off buying the item for a while? What are the costs of using? Figure 25.1 Annual Percentage Rate for Monthly Payments Credit Card Debt The average American household carries a card balance of $7,500 to $8,000. You work in the promotions department of a card company. The company instructs you to set up a booth on college campuses in an attempt to get incoming freshmen to sign up for a card. You are told to offer a pre-approved line of with a higher-than-average interest rate. Decision Making Would the fact that the majority of people you will be soliciting have limited, if any, disposable income affect your decision? Explain. Answer Answers should suggest that knowingly marketing a product to people who cannot afford it is referred to as predatory marketing because it preys on people s needs regardless of their economic situation. 4

5 1. What is? an agreement to get money, goods, or services now in exchange for a promise to pay in the future 2. What is the difference between commercial and consumer? Commercial is used by business whereas consumer is used by the consumer. 3. Why is it important to have a good rating? It shows that a consumer is a responsible borrower and a good risk. 5

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