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1. Today • Notes – CREDIT: Chapter 16.1 • SMG – Portfolio Updates Chapter 16

2. 16 Credit in America 16.1 Credit: What and Why 16.2 Types and Sources of Credit

3. Learning Targets • Discuss the history of credit and the role of credit today. • List and Explain advantages and disadvantages of using credit. Chapter 16

4. KEY TERMS • Credit • Debtor • Creditor • Capital • Collateral • Finance Charge • Line of Credit • Deferred Billing Chapter 16

5. The Need for Credit • Credit is the use of someone else’s money. • borrowed now with the agreement to pay it back later at a cost (typically interest) • Early forms of credit started with • Farmers • Credit today • Merchants, Retail, Wholesale, etc. Credit has become a way of life! Chapter 16

6. The Use of Credit • Adebtoris 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. • Current economic crisis is due to this practice not being followed. Chapter 16

7. 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 • Personal History Chapter 16

8. 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

9. Financial Position • Capital is the value of property you possess after deducting your debts. Capital Examples • bank accounts • Investments • Real estate • Other assets with unbiased value after deducting your debts. • Having capital = responsibility and monetary value. • Cash Outflow (Debt) will be compared to your Cash Inflow (Income). Chapter 16

10. Collateral • Collateral is property pledged to assure repayment of a loan. • To borrow large amounts of money, creditors often want more than just your promise to repay; they want collateral. • If you do not make your loan payments, the creditor can seize the pledged property. Repossession - Example • You buy a new 60in HDTV from Best Buy using a credit card. • You do not make your payments for an extended period of time. • Collection agency gets involved: • Call you at work/home trying to collect the debt. • Come and get the item you have defaulted payment on. Chapter 16

11. Making Payments • Swiping your Credit Card = you owe money! • Principal (amount borrowed) plus interest for the time you have the loan is called the Balance Due. • Finance Chargeis the total dollar amount of all interest and fees you pay for the use of credit. • Minimum Paymentis the least amount of money you have to pay per your monthly statement. • Always pay more than the minimum due amount. Chapter 16

12. Advantages Increased Purchasing Power Emergency Funds Convenience Deferred Billing Proof of Purchase (records) Safety Disadvantages Higher Costs Finance Charges Overspending Tie Up Future Income Credit Chapter 16

13. Key Terms Review pg. 362 Questions: 1 – 8 Check Your Understanding pg. 362 Question: 10 Apply Your Knowledge pg. 362 Question: 11 Assignments: Chapter 16

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

15. KEY TERMS • Open-End Credit • APR • Grace Period • Closed-End Credit • Service Credit • Finance Company • Loan Sharks • Usury Law • Pawnbroker Chapter 16

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

17. Open-End Credit • Open-end creditis where a borrower can use credit up to a stated limit. • Charge Cards • Master Card • Visa • Discover • American Express • Revolving Accounts • American Eagle • Sears • Kohl’s • Best Buy Chapter 16

18. Credit Card Agreements • the terms of the credit card agreement affect the overall cost of the credit you will be using. • APR – Annual Percentage Rate • Grace Period • Billing Cycle • Finance Charge • Fees – Processing, Transaction, Transfer, Late, Cash Advance, Currency Conversion, Over Credit Limit, etc. Chapter 16

19. Closed-End Credit • Closed-end credit (also called Installment Credit)is a loan for a specific amount that must be repaid in full, including all finance charges, by a stated due date. • Payment Booklet • Set Due Date • Interest Included in Payment Amounts • Also called Installment Credit Examples • Cars • Furniture • Major Appliances Chapter 16

20. Service Credit • Service creditinvolves providing a service for which you will pay later. Examples: • Utility services • Phone services • Cable/Satellite TV services • Examples of businesses that extend service credit: • Doctors • Lawyers • Dry Cleaners • Repair Shops • Terms are set by individual businesses. Chapter 16

21. Sources of Credit • Retail stores • Credit card companies • Banks and credit unions • Finance companies • Pawnbrokers • Private lenders • Other sources of credit Remember it is NOT FREE – consumers pay for it. Chapter 16

22. Retail Stores Examples • Department stores • Discount stores • Specialty stores. • Many retail stores offer their own credit cards. • These cards are accepted only at the issuing store. AdvantagesDisadvantages • Receive Discounts Very High Interest Rates • Advance notice of sales Can only use them there • Receive Gift Cards • Most retail stores also accept credit cards issued by major credit card companies. Chapter 16

23. Credit Card Companies • Credit Card Issuers Examples - Visa, MasterCard, Discover, Amer. Express Benefits • Accepted most places • Available cash advances • Access to Checks Chapter 16

24. Banks and Credit Unions • Credit cards • Closed-end loans • House • Car • Vacation • Home Repair Chapter 16

25. Finance Companies • A finance company is an organization that makes high-risk consumer loans – typically to those people denied by banks. • 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

26. Pawnbrokers • A pawnbroker (or pawnshop) • Legal business • High-interest loans based on the value of personal possessions pledged as collateral. • Customers typically only receive 10% - 60% value of items • Most Popular Pawned Items: • Guns • Cameras • Jewelry • Radios • TVs • Computers • Collector Items Popular Reality TV - Pawn Stars and Hard Core Pawn Chapter 16

27. Private Lenders • One of the most common sources of cash loans is from a private lender – typically they do not charge interest. Examples of Private Lenders • Parents • Relatives • Friends Chapter 16

28. Other Sources of Credit • Life insurance policies– loan doesn’t have to be repaid but interest is charged and policy coverage amount will decrease. • Borrowing against a deposit- typically has a low interest rate because of the safety of the loan. • CD • IRA • Treasury Note • Bond • Borrowing against an asset • Car – usually has to be less then 5yrs old and you owe nothing on it • House Chapter 16

29. Key Terms Review pg. 371 Questions: 1 – 6 Check Your Understanding pg. 671 Question: 7 – 8 Apply Your Knowledge pg. 362 Question: 9 Assignments: Chapter 16