Types of Credit

• Nearly everyone who lives in the United States will make use of consumer credit at some point.

• Consumer Credit – credit extended for personal or household use, as opposed to business or commercial lending.

Types of CreditShort-Term Consumer Credit

• Short-term credit usually refers to debts that are paid within one year, although the term might be longer.

Short-Term Consumer Credit – Service Credit

• Many people are using service credit without even knowing it.

• Service Credit – when a service is provided before you pay for it; each month you receive a bill. For example:– Electricity, gas, telephone, cable, water, Internet,

and garbage collection.

Short-Term Consumer Credit – Service Credit

– Many doctors and dentists will send a bill after they have performed the service.

– If the bills are paid on time, there is usually no interest charge for service credit.

Short-Term Consumer Credit – Installment Credit

• Installment Credit – is repaid in equal amounts over a set period of time.– Many companies offer installment credit to

customers who buy expensive items.• Vehicles, furniture, and electronics

– A down payment is usually required.– A finance charge (interest) is added to the amount

owed, and the total is divided by the number of weeks or months that payments will be made.

Short-Term Consumer Credit – Installment Credit

• The buyer signs a contract agreeing to make the payments on the due dates, with interest and added charges for credit checks and other costs.– The buyer may actually pay double the original

price due to the charges and fees.

Short-Term Consumer Credit – Installment Credit

• Installment credit allows you to use the goods while you are paying for them.

• Actual ownership remains with the seller, however, until you have paid the total amount.

• If you default (miss a payment), the seller can repossess the goods.

Short-Term Consumer Credit – Installment Credit

• Even if the seller repossess the goods, you can still be required to keep up the payments.

• How much can you safely buy on installment credit? That depends on many factors including your personal values.

• A common rule-of-thumb states you should not have more than 20% of your take-home pay allocated to installments.

Short-Term Consumer Credit – Installment Credit

• You are the best judge of your own finances, but remember that large debts can leave you with no way to meet future needs or emergencies.