Credit in America

16 Credit in America 16.1 Credit: What and Why 16.2 Types and Sources of Credit

Lesson 16.1Credit: What and Why GOALS • Discuss the history of credit and the role of credit today. • Explain the advantages and disadvantages of using credit. • Chapter 16

The Need for Credit • Credit is the use of someone else’s money, borrowed now with the agreement to pay it back later. • Early forms of credit • Credit today • Chapter 16

The Use of Credit • A debtor is a person who borrows money from others. • This money, called debt, must be repaid. • A creditor is a person or business that loans money to others. • Creditors charge money for this service in the form of interest and fees. • A debtor must be qualified to receive credit. • Chapter 16

Qualifying for Credit • To qualify for credit, you must have the ability to repay the loan. • Qualification is based on three things: • Income • Financial position • Collateral • Chapter 16

Income • Sources of income include: • Job • Interest • Dividends • Alimony • Royalties • Income represents cash inflow. • When your earnings exceed your expenses, you have the capacity to take on debt. • Chapter 16

Financial Position • Capital is the value of property you possess (such as bank accounts, investments, real estate, and other assets) after deducting your debts. • Having capital tells the creditor that you have accumulated assets, which indicates responsibility. • Your debt represents cash outflow and will be compared to your cash inflow (income). • Chapter 16

Collateral • To borrow large amounts of money, creditors often want more than just your promise to repay; they want collateral. • Collateral is property pledged to assure repayment of a loan. • If you do not make your loan payments, the creditor can seize the pledged property. • Chapter 16

Making Payments • Once you have completed a credit purchase, you owe money to the creditor. • The principal (amount borrowed) plus interest for the time you have the loan is called the balance due. • The finance charge is the total dollar amount of all interest and fees you pay for the use of credit. • Chapter 16

Advantages andDisadvantages of Credit • Disadvantages • Higher costs • Finance charges • Tie up income • Overspending • Advantages • Purchasing power • Emergency funds • Convenience • Deferred billing • Proof of purchase • Safety • Chapter 16

Lesson 16.2Types and Sources of Credit GOALS • List and describe the types of credit available to consumers. • Describe and compare sources of credit. • Chapter 16

Types of Credit • Open-end credit • Closed-end credit • Service credit • Chapter 16

Open-End Credit • Open-end credit is where a borrower can use credit up to a stated limit. • Charge cards • Revolving accounts • Chapter 16

Credit Card Agreements • A credit card is a form of borrowing and usually involves interest and other charges. • The terms of the credit card agreement affect the overall cost of the credit you will be using. • Chapter 16

Credit Card Agreements • (continued) • Credit card agreement terms to consider: • Annual percentage rate (APR) • The annual percentage rate (APR) is the cost of credit expressed as a yearly percentage. • Grace period • The grace period is a timeframe within which you may pay your current balance in full and incur no interest charges. • Fees • Annual fees, transaction fees, and penalty fees • Method of calculating the finance charge • Chapter 16

Closed-End Credit • 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. • Also called installment credit • Does not allow continuous borrowing or varying payment amounts • Often used to pay for very expensive items, such as cars, furniture, or major appliances • Chapter 16

Service Credit • Service credit involves providing a service for which you will pay later. • For example, your utility services are provided for a month in advance; then you are billed. • Many businesses extend service credit. • Terms are set by individual businesses. • Chapter 16

Sources of Credit • Retail stores • Credit card companies • Banks and credit unions • Finance companies • Pawnbrokers • Private lenders • Other sources of credit • Chapter 16

Retail Stores • Examples of retail stores include department stores, discount stores, and specialty stores. • Many retail stores offer their own credit cards. • These cards are accepted only at the issuing store. • Store credit customers often receive discounts, advance notice of sales, and other privilegesnot offered to cash customers or to customers using bank credit cards. • Most retail stores also accept credit cards issued by major credit card companies. • Chapter 16

Credit Card Companies • Credit card issuers • Financial institutions • Other organizations • Chapter 16

Banks and Credit Unions • Credit cards • Closed-end loans • Chapter 16

Finance Companies • A finance company is an organization that makes high-risk consumer loans. • There are two types of finance companies: • Consumer finance companies • Sales finance companies • Loan sharks are unlicensed lenders who charge illegally high interest rates. • A usury law is a state law that sets a maximum interest rate that may be charged for consumer loans. • Chapter 16

Pawnbrokers • A pawnbroker (or pawnshop) is a legal business that makes high-interest loans based on the value of personal possessions pledged as collateral. • Possessions that are readily salable (such as guns, cameras, jewelry, radios, TVs, and collector’s coins) are usually acceptable collateral. • Chapter 16

Private Lenders • One of the most common sources of cash loans is the private lender. • Private lenders might include parents, other relatives, friends, and so on. • Private lenders may or may not charge interest or require collateral. • Chapter 16

Other Sources of Credit • Life insurance policies • Borrowing against a deposit • Borrowing against an asset • Chapter 16

Activity: • Calculating credit card fees worksheet • Research different credit cards for the best options

Credit in America