8.01

Evaluate various sources of credit available to the government,

business, and consumers.

T008.01.01

G3

Who uses Credit?

• Consumer Credit

– Credit used by people for personal reasons.

• Commercial Credit

– Credit used by businesses.

T008.01.02

G4

Types of CreditCharge Accounts – most common type of short- term or medium-term

credit.

– Regular Charge Accounts• Require that you pay for purchases in full within a certain period

of time.

– Revolving Charge Accounts• Allows you to borrow or charge up to a certain amount of money

(credit limit) and pay back a part or the entire balance each month.

– Budget Charge Accounts• Allows you to pay for costly items in equal payments spread out

over a period of time.

T008.01.03

G5

Credit CardsSingle-Purpose

• Can only be used to buy goods or services at the business that issued the card.

• Examples: JC Penney, Sears

Multipurpose• Similar to a revolving charge account.• May be used at several locations.• Examples: Visa and Master Card

Travel and Entertainment• Similar to regular charge accounts.• Must be paid in full each month.• Example: American Express

T008.01.04

G6

Banks and Other Financial Institutions

• Single Payment Loan– Debtor pays off loan in one payment.– Promissory Note

• Written promise to repay with interest.

• Installment Loan– Repaid in regular payments.

T008.01.05

G7

Installment LoansTypes:

– Student, mortgage, automobile, etc.

• Secured vs. Unsecured– Secured loans are backed by collateral (help guarantee the repayment of a

loan).

• Closed vs. Open Ended – Closed-end credit is used for a specific purpose and involves a definite

amount of money.– Open-end credit gives you a certain limit on the amount of money you can

borrow.

• Cosigner – Responsible for the repayment of a loan if the original party does not pay.

T008.01.06

G8

Seller-Provided Credit

• Many stores provide credit to customers.

T008.01.07

G9

Consumer Finance Companies

• Specialize in loans to people with poor credit ratings.

• The cost of credit is higher than other institutions.

T008.01.08

G10

Payroll Advance Services

• Short-term loans.

• Pawnshop – Based on the value of something you own.

• “Borrow Until Payday” Loan– Cost is extremely high.

T008.01.09

G11

BondsBonds – written promise to repay a loan with interest

on a specific date. The buyer of the bond is considered the creditor.

• Corporate Bonds– Usually used to finance buildings and equipment.

• Municipal Bonds– State and local governments use these to finance projects.

• Savings Bonds– Sold by federal government.

T008.10.10

G12

Other Sources of Credit for Businesses

• Small Business Administration – Offers a number of financial, technical, and

management programs to help businesses.

T008.01.11

G13

Other Sources of Credit for Consumers

• Life Insurance Plans– Cash Value Insurance

• Provides both savings and death benefits.

• Retirement Plans

T008.01.12

G14

8.02

Explain when and why borrowing is used for the purchase of goods and

services.G23

T008-02.01

Terms• Credit

– Privilege of using someone else’s money for a period of time.

• Creditor– One who sells on credit or makes a loan.

• Debtor– Anyone who buys on credit or receives a loan.– Obligated to pay back the loan.

G24

T008-02.02

Why Use Credit?

• Convenience– Shop without carrying cash.

• Immediate Possession– Allows you to have possession on the goods or

services now.

• Emergencies– Helps in case of a serious situation.

G25

T008-02.03

8.03

Determine the advantages and disadvantages of using credit.

T008-03.01

G32

Advantages• Immediate Possession• Convenience

– Buy now and pay later.

• Emergencies• Saving Money

– Buy an item while it is on sale.

• Credit Rating– Establish a favorable credit rating.

• Growth of the Economy– Buying goods will help the economy expand.

T008-03.02

G33

Disadvantages• Overbuying

– Most common hazard.

• Careless Buying– Comparison shopping may not be a priority– Encourages impulse buying

• Higher Prices– Some stores offer discounts for cash sales.

T008-03.03

G34

Disadvantages continued

• Overuse of Credit– Too much is owed – unable to pay back.

• Credit Fees– Interest paid on balance

• Habit Forming

T008-03.04

G35

Results of Overuse

• Garnishment of Wages– Money deducted from wages for money owed.

• Repossession– Loss of property because of failure to repay

loan.

• Bankruptcy

T008-83.05

G36

8.04

Discuss the factors on which credit is granted and the cost of credit.

G42

T008-04.01

Process of Obtaining Credit

1. Credit Application

2. Documentation

3. Processing

4. Underwriting

5. Closing

6. Funding

G43

T008-04.02

Credit Application

• Form on which you provide information needed by a lender to make a decision about granting credit or approving a loan.

• Provide the following information:– Salary, Employer, Outstanding Credit (Debt),

Assets, Credit References, Checking and Savings Accounts, Stock Portfolio, etc.

G44

T008-04.03

Documentation

• Creditor will collect and verify necessary documentation for the extension of credit.– Examples: Bank statements, credit card

statements, past W-2’s, etc.

G45

T008-04.04

Processing

• Building of loan file.

• Evaluating credit worthiness.

G46

T008-04.05

Credit Worthiness Terms (Processing)The C’s of Credit Worthiness• Capacity

– Your ability to pay (income)

• Character– Earned by paying bills on time and being a trustworthy,

reliable, stable person.– References – people you have borrowed from in the past.

• Collateral – Security to help guarantee that the creditor will be repaid.

G47

T008-04.06

Credit Worthiness Terms (Processing)

continued• Credit History– Indicates the amount of debt you have and your payment

history.

• Capital – How much you have beyond what you owe.

• Credit Limit– Maximum amount you can borrow.

• Cosigner– Responsible for a loan if you, the original debtor, do not

pay.

G48

T008-04.07

Underwriting

• Reviewing loan for soundness.

• Consumer Reporting Agencies– Company that compiles and keeps records on

consumer payment habits.– Used to evaluate creditworthiness.

• Examples: Equifax, Experian, and TransUnion.

G49

T008-04.08

Closing

• Representative explains terms of credit.

• Debtor signs appropriate forms.

G50

T008-04.09

Funding

• Creditor will issue credit/funds to the debtor.

G51

T008-04.10

Denial of Credit

• Fair Credit Opportunity Act requires that credit denial cannot be based on sex, family, religion, etc.

• Must be based on ability to pay back loan.

G52

T008-04.11

Cost of Credit• Interest Rates

– Percentage that is applied to debt.

• Principal– Amount of money borrowed.

• Time Factor– Length of time for which interest will be charged.

• Maturity Date– Date on which a loan must be repaid.

G53

T008-04.12

• Finance Charge or Fees– Cost of credit stated in a dollar figure

• Annual Percentage Rate (APR)– Indicates how much credit costs on a yearly basis.

• Grace Period– Time period during which no finance charges will

be added to an account.

• Cash Advance– Borrow money on a credit card.

Cost of Credit continued

G54

T008-04.13

Simple Interest Formula

I=PRT

I=Interest

P=Principal

R=Rate

T=Time

T008-04.14

G55

8.05

Examine bankruptcy and credit laws.

G70

T008-05.01

Your Credit• Credit Bureau

– An agency that collects information on how promptly people and businesses pay their bills.

– Information retrieved from banks, finance companies, stores, credit card companies, and other lenders.

• Building Credit– Open a checking or savings account– Apply for a local department store credit card.– Take out a small loan from your bank. – Pay all loans and credit card bills on time.

G71

T008-05.02

Handling Credit Problems

• Credit Counselor– Helps consumers with credit problems.

• Consolidation Loan– Combines all your debts in order to make one monthly

payment on several different loans or credit cards.

G72

T008-05.03

Handling Credit Problems continued

• Credit Services– Consumer Credit Counseling Service

• Nonprofit organization that provides debt counseling services for families and individuals with serious financial problems.

– Debt Repayment Plan• Reorganizes debt and sometimes includes

renegotiating terms of debt.• Creditors will often accept such arrangements for

partial payment, rather than not be repaid.

G73

T008-05.04

What if you are denied credit?

• The Equal Credit Opportunity Act says:– You have the right to know the reasons.

– You are entitled to know what specific information in the credit report led to your denial.

– No fee will be charged if you state why you are requesting a copy of the report.

– You are entitled to ask the credit bureau to investigate any inaccurate or incomplete information and correct your records.

G74

T008-05.05

Truth-in-Lending Laws

• Requires that you be told the cost of a credit purchase in writing before you sign a credit agreement.

• Protects consumers against unauthorized use of credit cards.– Limits your liability to $50 for unauthorized

credit card purchases made prior to notification of the issuer.

G75

T008-05.06

Usury Laws

• Restricts the amount of interest that can be charged.

G76

T008-05.07

Equal Credit Opportunity Act

• The credit application can be judged only on the basis of financial responsibility.

• Cannot discriminate based on gender, age, ethnicity, or religion.

• Allows only three reasons for denying credit:– Low income

– Large current debts

– Poor record of making payments in the past

G77

T008-05.08

Fair Credit Billing Act• Requires creditors to correct billing

mistakes brought to their attention.

• Requires creditor to inform consumers of steps they need to take to get the error corrected.

G78

T008-05.09

Fair Credit Reporting Act

• Gives consumers the right to know what specific information credit bureaus are providing to potential creditors, employers, and insurers.

G79

T008-05.10

Fair Debt Collection Practices Act

• Protects consumers from collection agents.

• Collection agents:– Must identify themselves.– Cannot tell others about the debt.– Cannot harass debtor.

G80

T008-05.11

Federal Trade Commission(FTC)

• Enforces laws on credit.

G81

T008-05.12

Bankruptcy

Legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts.

G82

T008-05.13

US Bankruptcy Act of 1978• Chapter 7 (Liquidation)

– Draw up a petition listing assets and liabilities.

– Most of the debtor’s assets are sold to pay off creditors.

– Cannot release debt on alimony, child support, taxes, fines, educational loans, and court fees.

• Chapter 11 – (Reorganization) Businesses Only

• Chapter 13– Propose a plan for using future earnings and assets to

eliminate debts over a period of time.

G83

T008-05.14

Effects of Bankruptcy

• Kept on file with credit bureau for 10 years.

• Affects credit rating, future extensions of credit, loss of jobs, etc.

T008-05.15

G84