What Types of Credit Can Consumers Get - Financial Literacy - أول ثانوي

5 Managing Credit Why do people use credit?

LESSONS What Types of Credit Can 5.1 Consumers Get? What Are the Advantages and 5.2 Disadvantages of Credit? How Can You Protect Yourself 5.3 Against Credit Fraud and Scams? onsumers buy products and ser- Cvices every day. Some of those decisions are good; some are not. This chapter is about making good buying choices and using credit wisely. Overuse and misuse of credit can lead to many undesirable outcomes. There are many types of consumer credit. Some types are relatively inexpensive and easy to use. Other types are restrictive, expensive, and can lead to financial disaster. High fees and penalties are often imposed on those who are rated as poor credit risks. Making the right buying decisions and being smart about using credit can maximize your purchasing power. 149

Link to digital lesson 回回 回 www.len.edu.sa 5.1 What Types of Credit Can Consumers Get? Learning Objective Once you have completed this lesson, you should be able to: ⚫ explain the concept of credit ⚫ define different types of credit available to consumers, such as credit cards and consumer loans. Key Terms Credit Borrower Debt Lender Mada card Credit card Charge card Consumer loan Annual percentage rate (APR) Service credit Credit the ability to borrow money and pay it back later Borrower a company or individual who takes money from someone else Dubl money that must be repaid Lender an organization u person who gives money to someone else Mada card a debit card issued by local banks that allows a cardholder to access in their current account Credit Credit is the ability to borrow money and pay it back later. The purpose of credit is to allow buyers to purchase items and pay for them in the future. The person who borrows money is called a borrower (debtor), and the money that must be repaid is called debt. A lender (creditor) is a person or institution that loans money to others. Lenders charge money for this service in the form of fees. You can get started with credit by opening a current account and getting a Mada card. Once you prove that you can manage those accounts and have a steady source of income, you will have a much better chance of qualifying for credit. When you apply for most forms of credit, you will need to fill out a credit application. The application will ask for your name and address. وزارة التعليم 150 Financial Literacy

You will also be asked questions such as: ⚫ where you work ⚫how much you make how long you have worked there. The application must be completed truthfully and all relevant informa- tion must be disclosed, as omissions (or untruths) may lead to the credit being denied for this and also future applications. A credit application allows the lender to determine whether you are creditworthy. The more creditworthy a person is, the better the credit benefits will be. Main credit benefits include: amount of credit available: The better the credit score, the more credit is offered. A credit score is a tool used by lenders to help determine whether you qualify for certain services. There is more information on credit scores in the next lesson. cost of fees: The more trustworthy the borrower is, the lower the fees are. amount of products offered: More options are available to those deemed trustworthy. There are different types of credit available. They are designed to meet different consumer needs. The main forms of credit are credit cards, charge cards, consumer loans, lines of credit, and service credit. 1. Credit Cards There are two types of credit card commonly used in Saudi Arabia. To differentiate them, we will refer to one as a "credit card" and one as a "charge card". Credit cards are available from banks and other institutions, and are usually issued through a provider such as Visa or MasterCard. With a credit card, you can buy products or get cash at ATMs around the world. Bank credit cards usually have a set limit that a person is able to bor- row. After using the card, the account holder makes payments to the account, usually each month. The entire debt or part of the debt can be paid each month= If the debt is not repaid, fees will be charged on the outstanding bal- a plastic card linked to a credit account that can be used to make purchases وزارة التعليم 20173-1445 CHAPTERS Managing Credit 151

Charge card a type of electronic payment card for which the cardholder must pay the balance in full by the due date Consumer loan the loan provider purchases assess for the consumer and sells the Assels back to them at a profit after a set period of time Would you the pay with a credit card or a charge card? Why? ance. Accounts can have an ongoing balance, but a minimum monthly payment is usually required. If the outstanding balance is paid in full each month, no fee will be charged. It is important however to regulate credit card borrowing and keep it affordable An inability to make minimum repayments will negatively impact your credit history and make it difficult to successfully apply for future credit. Credit card fees can be higher than other forms of credit. Credit cards may also charge an annual fee for the privilege of having access to credit, however many credit cards now have associated benefits, such as: cashback on purchases ⚫ discounts at certain shops • worldwide travel insurance. A charge card is different from a credit card because the cardholder must pay the balance in full by the due date. A monthly billing period is common. Because charge card balances must be paid in full each month, there are no borrowing fees. Thus, charge cards often require a large annual fee, but they usually have high or no credit limits. If the bill is not paid on time, late fees and other penalties may apply. Charge cards are widely accepted nationwide and internationally. An example of a charge card is American Express. 2. Consumer Loans Banks and consumer finance companies make consumer loans. A consumer loan is when a loan provider pur chases an asset for the consumer and sells it back to the consumer at a mark up after a set period of time. Regular payments are made until the consumer has made the final payment. Loans do not allow for: 152

continuous borrowing: each loan is for a specific purpose ⚫ varying payment amounts: the payments are divided over a fixed amount of time. For example, a consumer might borrow SAR 8,000 and pay a fee of 4%. This is called the annual percentage rate (APB). The consumer (borrower) is required to make regular payments, which includes the fee, for a set period of time until the loan is repaid. Figure 5.1.1 shows an example of a consumer loan payment plan. Aunual percentage rata (APR) the cost of the credit extended to the consumer by the bank Amount borrowed Annual percentage rate (APR) Number of monthly payments Amount of monthly payment (including both principal and APR) Total amount to be repaid (36 payments of SAR 236.19) Total APR paid for the loan SAR 8,000.00 4% FIGURE 5.1.1 Personal Loan Payment Plan 36 SAR 236,19 SAR 8,502.84 SAR 502.84 Loans are often useful for larger purchases where the consumer does not have the required amount of money, and is unlikely to be able to save the total amount in the required time frame. Loans are useful for larger purchases such as: cars ⚫ furniture home improvements or repairs. Personal credit scores can improve as more credit is used appropriately and credit histories improve. A better credit score often allows for lower APRS. 4. Service Credit Almost everyone uses some type of service credit. Your telephone and utility services are provided a month in advance; then you are billed. Service creditis also extended by doctors, dentists, lawyers, dry clean- ers, and others. These businesses often provide services in advance that Ayoil pay for later. 2021-1445 Service ciali the ability to receive services and pay for them later CHAPTERS Managing Credit 153

Why do cell phone contracts use service.credit? وزارة التعليم 154 Financial Literacy Review Questions Choose the correct answer. 1. The purpose of credit is to allow buyers to purchase items and pay for them immediately. a. Live b. false 2. Which of the following is NOT a benefit of credit cards? a. cashback on purchases b. fees payable discounts at certain shops d. worldwide travel insurance 3. Which of the following is NOT an appropriate use for a loan? a. purchasing a car b. new furniture c. weekly shopping d. home improvements 4. Service credit allows consumers to pay for a service and receive it later. a. true b. false