MCS 2100 Lecture Notes - Lecture 5: Revolving Credit, Debit Card, Cash Advance

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Credit
Consumer credit
-Consumers have 3 alternatives in financing current purchases: draw on savings, using present
earnings, or borrow against their expected future income
oEach have a trade off
-Consumer credit based on trust in people’s ability and willingness to pay bills when due
Consumer credit in our economy
-Back then, cost of credit was added to prices of goods
-Consumer credit is a major force in north America
-“as the consumer goes, so goes the economy”
-Baby boom added to growth of consumer credit
oPeople in this age group always disproportionate users of credit- since consumption is
highest as families are formed and homes are purchased and furnished
Uses and Misuses of Credit
-Many valid reasons for using credit
oMay be possible to buy a item now for less money than in the future
oBorrowing for a higher education
-Shopaholics most vulnerable to misusing credit
-Post-secondary students prime target for credit card issuers
-Using credit increases the amount of money a person can spend to purchase goods and services
now.
oTrade off is that it decreases the amount of money that will be available to spend in the
future
-If decide to use credit, make sure the benefit of making the purchase now outweigh the cost of using
credit
Advantages of credit
-Credit card permit you to purchase goods even when funds are low
-Many shoppers believe its easier to return merchandise they have purchased on account
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oProvide shopping convenience and efficiency of paying for several purchases with one
monthly payment
-Credit more than a substitute for cash.
-Using credit card provide up to a 30-day “float”
-Some large companies offer rebates on purchases by using their own credit card
-Credit indicates stability, good risk usually means you’re a responsible individual
Disadvantages of Credit
-Temptation to overspend
oEspecially during period of inflation
-Failure to repay a loan may results in loss of income, valuable property and your reputation
oCan lead to court action and bankruptcy
-Misusing credit can create long-term financial problems, damage to family relationships, and slowing
of progress towards financial goals.
-Doesn’t increase purchasing power
oTires up the use of furture income
-Credit cost money
oService that you must pay
oTrade off with cash- cost more due to monthly finance charges and the compounding effect
of interest on interest
Types of Credit
2 basic types: consumer loans and revolving credit
-Consumer loans- one time loans that the borrowers repay in a specified period of time with pre-
determined payment schedule
oContract, list of repayment terms.
oDown-payment may be required
-Revolving credit- A line of credit in which loans are made on a continuous basis and the borrower is
billed periodically for at least partial payment
oUsing credit card issued by a department store, using a bank credit card
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