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

(continued) Credit Card Agreements • 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

Credit in America