Credit 101

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    This is defined as money that is loaned by a creditor – it helps us make investments on our journey to financial independence.

    Some Credit Products:

    Consumer Loan

    A sum of money that a creditor loans to a borrower to use for purchasing goods

    Investment Loan

    A loan used for starting or improving a business.  Loans used for educational purposes are also regarded as investment loans

    Home Loan

    Loan used for home improvement or purchasing a new house

    Credit Card

    An unsecured revolving loan which utilises a plastic card. It is used to make purchases and pay for services wherever cards are accepted or to withdraw cash from an automated teller machine (ATM)

    Benefits of formal credit include:

    • The ability to invest at levels which you would not normally be able to invest
    • Helps the borrower establish a credit history

    Use credit and make that business idea a reality.

    Advice when Accessing & Using Credit:

    • Payments should not exceed 20% of your monthly income
    • Read and fully understand all loan contracts before signing
    • Make timely and full monthly payments to avoid late fees and interest
    • Report your credit card if it is lost or stolen
    • Borrow to acquire assets which will increase in value or generate income

    An important Difference

    • A credit card is a tool for spending money that is loaned to you
    • A debit card is a tool for spending your own money

    The Five C’s of Credit

    What banks and other lenders evaluate about potential borrower when making a lending decision.

    Character
    Personal and business reputation of borrower revealed through a Credit History. This is a series of information about debt and debt payment by a borrower that is used to establish whether someone is likely to be able to pay back money if they ask for more credit. Jamaica now has a credit bureau

    Capacity
    The mean by which the borrower will repay the debt

     

    Capital
    Refers to how much risk the borrower is willing to take with regard to the loan being sought; how much money is the borrower willing to invest in the business

    Collateral
    Refers to any asset of a borrower (for example, a home) that a lender has a right to take ownership of and use to pay the debt if the borrower is unable to make the loan payments as agreed

    Conditions
    Refers to the financial conditions that exist at the time of the loan, including the prevailing interest rate, principal amount and general market conditions