Chapter 4 Credit: Going into Debt

1. Chapter 4Credit: Going into Debt

2. Bell Ringer • What are advantages of credit • What are disadvantages of credit

3. Credit & Installment Debt • What is the price of credit? • Interest charged to you on amount borrowed • Creditis the receipt of funds with the promise to pay for them in the future • Principalis the amount originally borrowed. • Interestis the amount the borrower must pay for the use of someone else’s funds.

4. Installment Debt • One of the most common types of debt is installment debt (equal payments over a period of time) • Amortgageis debt owed on houses, buildings, or land. • Largest form of installment debt in US • Durable goods – manufactured items that last longer than 3 years on installment plan • Examples

5. Why use credit? • Allows the borrower to enjoy product now rather than later • Spread payments over time

6. Sources of Loans or Credit • 2 major types of credit are… • Credit cards • Borrow from financial institution • Financial institutions borrow funds at one interest rate and lend it at a higher rate

7. Types of Financial Institutions • Commercial Banks • Savings and Loan Associations • Savings Banks • Credit Unions • Finance Companies

8. Types of Financial Institutions • Commercial Bank – main functions accept deposits, make loans, and transfer (offers bank services) • Control largest funds & widest range of services • Examples:

9. Types of Financial Institutions • Savings and Loan Associations – accepts deposits and makes loans • Make many mortgages

10. Types of Financial Institutions • Savings Banks – makes deposits for small savers • Credit Unions – bank owned by its members and offers banking services • Finance Companies – take over contracts for installment debts from stores and ads a fee for collecting debt

11. Charge Accounts & Credit Card • Charge Account – credit from a specific company allowing you to buy now and pay later • Credit Card – credit that allows you to make a purchase now and pay later

12. Cost of Credit • Finance charge – cost of credit expressed on monthly statement in $ & ¢ • See pg 97 table for calculations • Annual Percentage Rate (APR) – cost of credit expressed as a yearly %

13. Computing Finance Charges

14. Can you get credit? • Lenders determine creditworthiness by evaluating a borrower’s credit history

15. Can you get credit? • Credit Bureau: private business that investigates a person to determine the risk involved in lending to them • Credit check: investigation of a person’s income, current debts, personal life, and past history of borrowing &repaying debts • Credit rating: rating of the risk involved in lending to a specific person or business

16. Your Credit Score

17. What hurts creditworthiness?

18. 3 C’s for Creditworthiness • Capacity to pay (how much debt you have) • Character (reputation/are you reliable) • Collateral – something of value that lender can claim if you can’t pay

19. Collateral • Secured loan – loan backed by collateral • Unsecured loan – loan guaranteed only by a promise to repay it • Higher interest rate • Might lend funds with a cosigner

20. Responsibilites of Credit • Be responsible • Not paying results in.. • Higher interest rates • Bad credit rating • Keep records and notify of any fraud immediately