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I. What is Credit, Really? In the last six chapters, we examined financial literacy concepts and topics related to the theme of earning an income . We covered salary and employee benefits, taxes, income distribution by class, banks, paycheck deductions, and working overseas. With this chapter we shift themes to explore concepts and topics related to wealth . We start by examining an essential tool for building a healthy, thriving economy and personal wealth: credit . You hear the word credit all the time, but what is it, really? In a financial context, credit is a contractual agreement wherein a person immediately receives something of value by promising to pay for the thing later . It’s a simple concept: someone borrows someone else’s money (usually a bank’s) to buy something today and repay the money at a later date with interest, which is a fee charged to use the money. The borrowed money is called a loan . II. The Benefits of Credit: Purchasing Power Global Wealth-building. At this stage in your life, you may not have much experience with credit or an appreciation of its immense impact on world history. Credit is very important because it provides capital, which is money that can be used to produce or acquire things of value . Throughout history, credit provided the capital that fueled economic expansion. Some of the earliest written documents ever found, from Ancient Sumer, are records of debts and loans. In the Middle Ages, merchants loaned money to farmers when their crops failed and banks loaned money to ambitious kings to fund expensive wars to expand their empires. (The loans were often repaid in plunder.) Bank loans to Italian city-states provided much of the capital to fund the magnificent art and architecture of the Renaissance. The voyages of Columbus, Magellan and other explorers were paid for with loans. Banks have even made loans to entire countries to prop up their troubled economies. Most of the awesome tech devices, medicines, and appliances we rely on to make our lives better were developed with borrowed money. Without credit to provide capital for exploration, innovation, and invention, our world would be a very different place. The availability of credit has advanced civilization and improved standards of living and overall happiness and health. Consumer vs. Non Consumer Credit If credit can be used by ancient mariners, kings, Renaissance city-states, explorers and innovators, why shouldn’t it be available to regular folks? Let’s look at some of the modern types of credit you are likely to encounter in your everyday life. Let’s start by comparing consumer and non-consumer credit . Consumer Credit. Loans made for the purchase of non-investment types of goods or services for personal, family, or household purposes are called consumer credit . This includes loans for cars, household appliances, furniture, and especially purchases made by credit card for such things as clothes, restaurant meals, and travel. The basic difference between consumer and non-consumer credit boils down to the concept of investment vs. non-investment . Things bought with consumer credit are non- investment, meaning they lose value over time. For example, if you use your credit card to go out to dinner, the food you ate may have been delicious and the meal memorable, but the value of the food PRODUCT PREVIEW
THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY 117
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