Understanding Credit Types and Uses

Study Notes

Credit is a sum of money made available to a borrower by a credit issuer, who will then repay the amount with interest.
Consumer credit is used by individuals to purchase goods and services while delaying payment.

Credit Cards: Allows for purchases with a line of credit, requiring monthly payments.
Line of Credit: A revolving loan that provides access to a specific amount of credit.
Mortgages: A loan specifically for purchasing real estate.
Student Loans: A loan designed to fund educational expenses.
Personal Loans: Used for various personal needs, such as debt consolidation or home improvements.
Pawnbroking Loans: Secure loans using personal property as collateral.
Payday Loans: Short-term, high-interest loans typically repaid on the next payday.
Buy Now, Pay Later: A financing option allowing for installment payments on purchases.
Car Loans: Loans specifically for purchasing vehicles.

Interest is added to the unpaid balance if it's not paid by the due date.
42% of credit card holders don't pay the full balance each month (according to a 2010 survey).
Credit card holders typically have a 21-day grace period before interest accrues.

Credit issuers assess a borrower's financial profile to determine their eligibility.
Factors analyzed include income, employment stability, debt levels, payment history, liquid assets, age, credit score, and assets (property and investments).

A guarantor is an individual who agrees to repay another individual's debt if they fail to do so.
Guaranty is required for individuals deemed risky by credit issuers due to factors like irregular income, high debt, poor credit, or a lack of credit history.
Guaranty applies to situations such as cell phone plans, credit card applications, apartment rentals, and furniture purchases.

Co-borrowing: An individual jointly contracts a loan with another individual, agreeing to repay the debt if the borrower fails to do so. In the event of a co-borrower's death, the responsibility of the debt falls upon their heirs.
Guaranteeing: An individual assumes responsibility for another person's debt. In the event of a guarantor's death, the responsibility for the debt is terminated.

Strained relationships can arise if difficulties arise with credit repayment.
The credit appears on both the borrower's and the guarantor's or co-borrower's credit reports.
If the borrower defaults, the credit issuer may require the guarantor or co-borrower to repay the entire amount in one installment.

Identify the real need behind a purchase, distinguishing between wants and needs.
Create a savings plan to finance desired goods or services.
Consider purchasing used items or borrowing from community resources to access affordable goods and services.
Sell assets.