Credit and Credit Cards

What is Credit?
Common types of
Cost of Credit.
Applying for Credit.
How Credit Cards
Using Credit

• Able to buy needed items now
• Don’t have to carry cash
• Creates a record of purchases
• More convenient than writing checks
• Consolidates bills into one payment

• Interest (higher cost of items)
• May require additional fees
• Financial difficulties may arise if one loses track of how much has been spent each month
• Increased impulse buying may occur

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What is Credit?

How would you respond if someone asked you, Will you lend me $10? I promise I will repay you next week.  Assume that you have the money to lend, and the person is an acquaintance, someone you don't know very well.  What would you do?

No matter what your response, you probably would decide the matter based on your assessment of the borrower:  Can I trust this person?  Trust is the essence of credit. 

If you foresee the day that you will want to exhibit the trust required to borrow money to buy a car, a house, or for higher education, read on.  This chapter explains what credit is and when to use it.  You will learn how to shop for credit and determine the best buy.  And you will know how to build a good credit history.

What is Credit?

Credit is the most complex of the engines that drive the American economy.  Businesses borrow; factories buy raw materials on credit; people buy cars and homes on credit; states and even the Federal government borrow money.  It pays to understand what credit is  and what it is not.

  •  Credit is your reputation for financial responsibility, which entitles you to be trusted when buying or borrowing.  Your ability to borrow is based on the lender's belief that you will repay your debt.
  • Credit is also the time allowed for payment for something sold on trust.  Notice how these two definitions are related.  You can't get credit (time to repay) without a good reputation, and you will not get the good reputation unless you develop a history of repaying on time (called your credit history).


  • Credit is a source of revenue for financial institutions.  The difference between what they pay in interest on savings, and earn in finance charges on loans, is used to pay expenses and make a profit.


  • Credit is not more money; it is tomorrow's money.  Credit lets you spend future income so you can enjoy certain benefits now.  This is beneficial if it helps you reach an important goal or weather an emergency.  But the ability to “buy now and pay later” can be a big temptation that leads to credit abuse and too much debt.

Spending tomorrow's income today means you could be spending next month's car payment, or next year's college money, without realizing it.  The only way to tell is by making a budget.  For each new credit decision, you must figure out if you can make the loan repayment and still meet your financial responsibilities and save for goals.

You avoid the dangers of misusing credit if you follow these guidelines.  Only borrow for a worthwhile purpose and never borrow more than you can comfortably repay.  Good reasons to borrow are:

  •  When the benefits greatly outweigh the cost of credit It makes sense to borrow to buy a house or a car or any worthwhile purchase that improves the quality of your life and that would take too long to save for.

  •  In an emergency.  Good credit provides a safety net, giving you a ready source of cash in a crisis.

  • To take advantage of a profitable opportunity.  Credit can be used to save money, or even to make money as when used within an investment program.  Most entrepreneurs borrow the money they need to start their new businesses.

Equal Credit Opportunity for All

In the past, women, young adults, and the elderly experienced discrimination by some lenders when they went to borrow money.  To stop this discrimination, Congress enacted The Equal Credit Opportunity Act, which makes sure the lender will be fair.

The Equal Credit Opportunity Act starts all credit applicants off on the same footing.  It says that race, color, age, sex, marital status - and certain other factors - may not be used to discriminate against you in any part of a credit dealing. 

What is Credit?

Credit is a promise to repay an obligation.

Who are the parties involved?

A credit transaction involves at least two parties:

The lender provides value in the form of cash, merchandise or some other item of value.

The borrower makes a commitment to pay what he or she owes according to a pre-agreed schedule.

How does a lender decide whether or not to give you credit?

Lenders need to feel confident you will repay.

Decisions to extend credit are usually based on the “Three Cs of Credit.”

What are the Three Cs of Credit?

 Credit the borrower's willingness to pay

 Capacity the borrower's ability to repay the obligation

 Character the borrower's stability


  •   Send an email to the instructor and answer the following question.
  • Based on the 3 good reasons to use credit, give an example of each and justify why you would use credit in that situation. (3 paragraph)


      Chapter 1
• Read what is Credit?
• Email - 3 Paragraphs
     Chapter 2
• Read "3 Common Types of Credit"
• Email - 3 Types of Credit.
     Chapter 3
• Read The cost of credit. and How much Can I afford?
• How deep can they go? worksheet
• Finance Charge PowerPoint
• Finance Charge Worksheet
• Shopping for a Computer
    Chapter 4
• Read Appling for Credit
• fill out credit application
• Email about Credit report
    Chapter 5
• Read How Credit Cards work
• Credit Card statement quiz
• Credit Card term crossword puzzle
• Email Questions
• Credit Card term quiz
• Final Email