Chapter

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Credit in America

16.1 Credit: What and Why 16.2 Types and Sources of Credit

16

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Lesson 16.1

Credit: What and Why

GOALS n Discuss the history of credit and the role

of credit today. n Explain the advantages and

disadvantages of using credit.

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The Need for Credit n Credit is the use of someone else’s

money, borrowed now with the agreement to pay it back later. n Credit Cards n Student Loans n Mortgages n Line of Credit

n 80% of US purchases are on credit

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The Use of Credit

n A debtor is a person who borrows money from others.

n A debtor must be qualified to receive credit. n This money, called debt, must be repaid.

n A creditor is a person or business that loans money to others.

n Creditors charge money for this service in the form of interest and fees.

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Qualifying for Credit

n To qualify for credit, you must have the ability to repay the loan.

n Qualification is based on three things: n Income n Financial Position n Collateral

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Income n Sources of income include:

n Job n Interest n Dividends n Alimony n Royalties

n Income represents cash inflow. n When your earnings exceed your expenses, you

have the capacity to take on debt.

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Financial Position n Capital is the value of property you possess (such

as bank accounts, investments, real estate, and other assets) after deducting your debts.

n Having capital tells the creditor that you have accumulated assets, which indicates responsibility.

n Your debt represents cash outflow and will be compared to your cash inflow (income).

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Collateral n To borrow large amounts of money, creditors often

want more than just your promise to repay; they want collateral.

n Collateral is property pledged to assure repayment of a loan. n Secured Loan

n If you do not make your loan payments, the creditor can seize the pledged property. n Repossessed

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Making Payments n Once you have completed a credit purchase, you

owe money to the creditor.

n The principal (amount borrowed) plus interest for the time you have the loan is called the balance due.

n The finance charge is the total dollar amount of all interest and fees you pay for the use of credit. n Minimum Payment

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Advantages and Disadvantages of Credit n Advantages

n Purchasing power n Emergency funds n Convenience n Deferred billing n Proof of purchase n Safety

n Disadvantages n Higher costs n Finance charges n Tie up income n Overspending

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Assignment n Edmodo n 16.1 Assessment

n Chapter 16 Vocabulary

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Lesson 16.2 Types and Sources of Credit

GOALS n List and describe the types of credit

available to consumers. n Describe and compare sources of credit.

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Types of Credit

n Open-end credit

n Closed-end credit

n Service credit

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Open-End Credit

n Open-end credit is where a borrower can use credit up to a stated limit.

n Charge Cards n Credit Card Accounts n Revolving accounts

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Charge Card n Charge Card Agreement a consumer

promises to pay the full balance owed each month.

n  American Express and Diner’s Club

n 25-day billing period

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Revolving Accounts n Revolving Accounts a consumer has the

option each month of paying in full or making payments at least as high as the stated minimum.

n  Visa, MasterCard, Discover, and Store Accounts

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Credit Card Agreements

n A credit card is a form of borrowing and usually involves interest and other charges.

n The terms of the credit card agreement affect the overall cost of the credit you will be using.

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Credit Card Agreements n Credit card agreement terms to consider:

n Annual percentage rate (APR) n The annual percentage rate (APR) is the cost of

credit expressed as a yearly percentage. n Truth-in-Lending Law

n Grace period n The grace period is a timeframe within which you may

pay your current balance in full and incur no interest charges.

n Fees n Annual fees, transaction fees, and penalty fees

n Method of calculating the finance charge

(continued)

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Closed-End Credit n Closed-end credit is a loan for a specific

amount that must be repaid in full, including all finance charges, by a stated due date.

n Also called installment credit n Does not allow continuous borrowing or varying

payment amounts n Often used to pay for very expensive items,

such as cars, furniture, or major appliances

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Service Credit

n Service credit involves providing a service for which you will pay later.

n For example, your utility services are provided for a month in advance; then you are billed.

n Many businesses extend service credit. n Terms are set by individual businesses.

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Assignment

n Stock Market Update

n Chapter 16 Vocabulary

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Sources of Credit

n Retail stores n Credit card companies n Banks and credit unions n Finance companies n Pawnbrokers n Private lenders n Other sources of credit

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Retail Stores n Examples of retail stores include department

stores, discount stores, and specialty stores.

n Many retail stores offer their own credit cards. n These cards are accepted only at the issuing store. n Store credit customers often receive discounts, advance

notice of sales, and other privileges not offered to cash customers or to customers using bank credit cards.

n Most retail stores also accept credit cards issued by major credit card companies.

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Credit Card Companies n Credit card issuers

n Visa, MasterCard, American Express, Discover n Financial institutions

n All-Purpose Cards: Line credit. Cash advance, access checks,

n Other organizations n Affinity Cards: colleges, professional

organizations

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Banks and Credit Unions

n Credit cards

n Closed-end loans n Specific loans for cars, homes, vacations

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Credit Card Companies

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Finance Companies n A finance company is an organization that makes

high-risk consumer loans. n There are two types of finance companies:

n Consumer finance companies: Loans for durable goods n Sales finance companies: Loans through authorized

reps. (GMAC Financial Services, Ford Motor Credit n Loan sharks are unlicensed lenders who charge

illegally high interest rates. n A usury law is a state law that sets a maximum

interest rate that may be charged for consumer loans.

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Pawnbrokers n A pawnbroker (or pawnshop) is a legal

business that makes high-interest loans based on the value of personal possessions pledged as collateral.

n Possessions that are readily salable (such as guns, cameras, jewelry, radios, TVs, and collector’s coins) are usually acceptable collateral.

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Private Lenders

n One of the most common sources of cash loans is the private lender.

n Private lenders might include parents, other relatives, friends, and so on.

n Private lenders may or may not charge interest or require collateral.

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Other Sources of Credit

n Life insurance policies

n Borrowing against a deposit

n Borrowing against an asset

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Assignments

n Edmodo: n 16.2 Assessment

n Chapter 16 Vocabulary