WHAT IS CREDIT AND HOW IS IT USED?

In today's world we buy goods and services with cash or credit. Cash involves the exchange of money for goods and services. Credit involves the promise to pay at some future date. Those who extend credit usually charge an amount of money, called interest, for this service. The main advantage of credit is that it makes it possible to buy more than it would be possible, if only cash were used. That is why credit has been popular since ancient times. Today it is an important part of economic life. People make use of many types of credit. These include the following:

ü Credit cards

ü Charge accounts

ü Bank loans

ü Mortgages on property

ü Public borrowings through notes and bonds

Credit cards are used every day by millions of people. These cards are offered by banks, gasoline companies, stores, credit companies, and others. Holders of a credit card can use it only in places that accept that particular card.

Credit cards are made of plastic, and each card has its own identification number. When an item is bought, the seller makes an imprint of that number on a paper form. The sum involved and the names of the cardholder and the seller are also imprinted or written on the form. The completed form is then signed by the cardholder, who receives a copy. Other copies are kept by the seller. The seller later presents a copy of the form to the credit card company and receives payment. A percentage fee of a few per cent is paid by the seller to the credit company for its service.

A sales record is collected on computers by the credit card company. This company sends a monthly bill to each cardholder. Interest is charged, if the cardholder does not pay the bill within a stated period of time. Some credit card companies also have a small yearly charge for cardholders.

Convenience and money safety are two reasons for the wide use of credit cards. The cardholder is protected in the event the card is lost or stolen. The cardholder must notify the company promptly of such loss. He or she is not held liable for the misuse of the lost card above a certain amount, usually $50. Along with the advantages there are also some disadvantages in using credit cards. Easy use of credit cards can encourage the buying of items that are not really needed. In addition, cardholders often give little thought to how payments will be made in future. Failure to pay on time can lead to high interest costs and can result in heavy debt.

Charge accounts are forms of credit that some businesses extend to customers. A receipt is signed for the purchase, and the customer is billed for purchases at the end of the month. A charge account's main advantage is its convenience. Many businesses that allow charge accounts also accept credit cards.

Bank loans or borrowing money at interest from banks is an important form of credit. Commercial loans are taken by business people and usually involve fairly large sums. Personal loans are taken by individuals for personal reasons and usually are for small sums. Interest charges on all loans vary from month to month. Naturally borrowers try to get loans when the interest cost will be lowest. Many banks charge lower rates of interest to their best customers.

Buyers of land and property make use of mortgage loans for credit. A mortgage is a legal claim against property by a lender. Failure by the borrower to repay the loan and interest on time allows the lender to claim the property.

A public borrowing is one that invites the general public to lend money as an investment. In return they are given interest-bearing notes or bonds. These are promises to pay back the loans, with interest, at stated periods of time. Notes are usually for shorter periods of time than bonds.

GLOSSARY

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