8.01 Evaluate various sources of credit available to the government, business, and consumers.

1. T008.01.01 Credit 8.01 Evaluate various sources of credit available to the government, business, and consumers. G3

2. T008.01.02 Who uses Credit? • Consumer Credit • Credit used by people for personal reasons. • Commercial Credit • Credit used by businesses. G4

3. T008.01.03 Types of Credit Charge Accounts – most common type of short- term or medium-term credit. • Regular Charge Accounts • Require that you pay for purchases in full within a certain period of time. • Revolving Charge Accounts • Allows you to borrow or charge up to a certain amount of money (credit limit) and pay back a part or the entire balance each month. • Budget Charge Accounts • Allows you to pay for costly items in equal payments spread out over a period of time. G5

4. T008.01.04 Credit Cards Single-Purpose • Can only be used to buy goods or services at the business that issued the card. • Examples: JC Penney, Sears Multipurpose • Similar to a revolving charge account. • May be used at several locations. • Examples: Visa and Master Card Travel and Entertainment • Similar to regular charge accounts. • Must be paid in full each month. • Example: American Express G6

5. T008.01.05 Banks and Other Financial Institutions • Single Payment Loan • Debtor pays off loan in one payment. • Promissory Note • Written promise to repay with interest. • Installment Loan • Repaid in regular payments. G7

6. T008.01.06 Installment Loans Types: • Student, mortgage, automobile, etc. • Secured vs. Unsecured • Secured loans are backed by collateral (help guarantee the repayment of a loan). • Closed vs. Open Ended • Closed-end credit is used for a specific purpose and involves a definite amount of money. • Open-end credit gives you a certain limit on the amount of money you can borrow. • Cosigner • Responsible for the repayment of a loan if the original party does not pay. G8

7. T008.01.07 Seller-Provided Credit • Many stores provide credit to customers. G9

8. T008.01.08 Consumer Finance Companies • Specialize in loans to people with poor credit ratings. • The cost of credit is higher than other institutions. G10

9. T008.01.09 Payroll Advance Services • Short-term loans. • Pawnshop • Based on the value of something you own. • “Borrow Until Payday” Loan • Cost is extremely high. G11

10. T008.10.10 Bonds Bonds – written promise to repay a loan with interest on a specific date. The buyer of the bond is considered the creditor. • Corporate Bonds • Usually used to finance buildings and equipment. • Municipal Bonds • State and local governments use these to finance projects. • Savings Bonds • Sold by federal government. G12

11. T008.01.11 Other Sources of Credit for Businesses • Small Business Administration • Offers a number of financial, technical, and management programs to help businesses. G13

12. T008.01.12 Other Sources of Credit for Consumers • Life Insurance Plans • Cash Value Insurance • Provides both savings and death benefits. • Retirement Plans G14

13. T008-02.01 Credit 8.02 Explain when and why borrowing is used for the purchase of goods and services. G23

14. T008-02.02 Terms • Credit • Privilege of using someone else’s money for a period of time. • Creditor • One who sells on credit or makes a loan. • Debtor • Anyone who buys on credit or receives a loan. • Obligated to pay back the loan. G24

15. T008-02.03 Why Use Credit? • Convenience • Shop without carrying cash. • Immediate Possession • Allows you to have possession on the goods or services now. • Emergencies • Helps in case of a serious situation. G25

16. T008-03.01 Credit 8.03 Determine the advantages and disadvantages of using credit. G32

17. T008-03.02 Advantages • Immediate Possession • Convenience • Buy now and pay later. • Emergencies • Saving Money • Buy an item while it is on sale. • Credit Rating • Establish a favorable credit rating. • Growth of the Economy • Buying goods will help the economy expand. G33

18. T008-03.03 Disadvantages • Overbuying • Most common hazard. • Careless Buying • Comparison shopping may not be a priority • Encourages impulse buying • Higher Prices • Some stores offer discounts for cash sales. G34

19. T008-03.04 Disadvantages continued • Overuse of Credit • Too much is owed – unable to pay back. • Credit Fees • Interest paid on balance • Habit Forming G35

20. T008-83.05 Results of Overuse • Garnishment of Wages • Money deducted from wages for money owed. • Repossession • Loss of property because of failure to repay loan. • Bankruptcy G36

21. T008-04.01 Credit 8.04 Discuss the factors on which credit is granted and the cost of credit. G42

22. T008-04.02 Process of Obtaining Credit • Credit Application • Documentation • Processing • Underwriting • Closing • Funding G43

23. T008-04.03 Credit Application • Form on which you provide information needed by a lender to make a decision about granting credit or approving a loan. • Provide the following information: • Salary, Employer, Outstanding Credit (Debt), Assets, Credit References, Checking and Savings Accounts, Stock Portfolio, etc. G44

24. T008-04.04 Documentation • Creditor will collect and verify necessary documentation for the extension of credit. • Examples: Bank statements, credit card statements, past W-2’s, etc. G45

25. T008-04.05 Processing • Building of loan file. • Evaluating credit worthiness. G46

26. T008-04.06 Credit Worthiness Terms (Processing) The C’s of Credit Worthiness • Capacity • Your ability to pay (income) • Character • Earned by paying bills on time and being a trustworthy, reliable, stable person. • References – people you have borrowed from in the past. • Collateral • Security to help guarantee that the creditor will be repaid. G47

27. T008-04.07 Credit Worthiness Terms (Processing)continued • Credit History • Indicates the amount of debt you have and your payment history. • Capital • How much you have beyond what you owe. • Credit Limit • Maximum amount you can borrow. • Cosigner • Responsible for a loan if you, the original debtor, do not pay. G48

28. T008-04.08 Underwriting • Reviewing loan for soundness. • Consumer Reporting Agencies • Company that compiles and keeps records on consumer payment habits. • Used to evaluate creditworthiness. • Examples: Equifax, Experian, and TransUnion. G49

29. T008-04.09 Closing • Representative explains terms of credit. • Debtor signs appropriate forms. G50

30. T008-04.10 Funding • Creditor will issue credit/funds to the debtor. G51

31. T008-04.11 Denial of Credit • Fair Credit Opportunity Act requires that credit denial cannot be based on sex, family, religion, etc. • Must be based on ability to pay back loan. G52

32. T008-04.12 Cost of Credit • Interest Rates • Percentage that is applied to debt. • Principal • Amount of money borrowed. • Time Factor • Length of time for which interest will be charged. • Maturity Date • Date on which a loan must be repaid. G53

33. T008-04.13 Cost of Credit continued • Finance Charge or Fees • Cost of credit stated in a dollar figure • Annual Percentage Rate (APR) • Indicates how much credit costs on a yearly basis. • Grace Period • Time period during which no finance charges will be added to an account. • Cash Advance • Borrow money on a credit card. G54

34. T008-04.14 Simple Interest Formula I=PRT I=Interest P=Principal R=Rate T=Time G55

35. T008-05.01 Credit 8.05 Examine bankruptcy and credit laws. G70

36. T008-05.02 Your Credit • Credit Bureau • An agency that collects information on how promptly people and businesses pay their bills. • Information retrieved from banks, finance companies, stores, credit card companies, and other lenders. • Building Credit • Open a checking or savings account • Apply for a local department store credit card. • Take out a small loan from your bank. • Pay all loans and credit card bills on time. G71

37. T008-05.03 Handling Credit Problems • Credit Counselor • Helps consumers with credit problems. • Consolidation Loan • Combines all your debts in order to make one monthly payment on several different loans or credit cards. G72

38. T008-05.04 Handling Credit Problems continued • Credit Services • Consumer Credit Counseling Service • Nonprofit organization that provides debt counseling services for families and individuals with serious financial problems. • Debt Repayment Plan • Reorganizes debt and sometimes includes renegotiating terms of debt. • Creditors will often accept such arrangements for partial payment, rather than not be repaid. G73

39. T008-05.05 What if you are denied credit? • The Equal Credit Opportunity Act says: • You have the right to know the reasons. • You are entitled to know what specific information in the credit report led to your denial. • No fee will be charged if you state why you are requesting a copy of the report. • You are entitled to ask the credit bureau to investigate any inaccurate or incomplete information and correct your records. G74

40. T008-05.06 Truth-in-Lending Laws • Requires that you be told the cost of a credit purchase in writing before you sign a credit agreement. • Protects consumers against unauthorized use of credit cards. • Limits your liability to $50 for unauthorized credit card purchases made prior to notification of the issuer. G75

41. T008-05.07 Usury Laws • Restricts the amount of interest that can be charged. G76

42. T008-05.08 Equal Credit Opportunity Act • The credit application can be judged only on the basis of financial responsibility. • Cannot discriminate based on gender, age, ethnicity, or religion. • Allows only three reasons for denying credit: • Low income • Large current debts • Poor record of making payments in the past G77

43. T008-05.09 Fair Credit Billing Act • Requires creditors to correct billing mistakes brought to their attention. • Requires creditor to inform consumers of steps they need to take to get the error corrected. G78

44. T008-05.10 Fair Credit Reporting Act • Gives consumers the right to know what specific information credit bureaus are providing to potential creditors, employers, and insurers. G79

45. T008-05.11 Fair Debt Collection Practices Act • Protects consumers from collection agents. • Collection agents: • Must identify themselves. • Cannot tell others about the debt. • Cannot harass debtor. G80

46. T008-05.12 Federal Trade Commission(FTC) • Enforces laws on credit. G81

47. T008-05.13 Bankruptcy Legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts. G82

48. T008-05.14 US Bankruptcy Act of 1978 • Chapter 7 (Liquidation) • Draw up a petition listing assets and liabilities. • Most of the debtor’s assets are sold to pay off creditors. • Cannot release debt on alimony, child support, taxes, fines, educational loans, and court fees. • Chapter 11– (Reorganization) Businesses Only • Chapter 13 • Propose a plan for using future earnings and assets to eliminate debts over a period of time. G83

49. T008-05.15 Effects of Bankruptcy • Kept on file with credit bureau for 10 years. • Affects credit rating, future extensions of credit, loss of jobs, etc. G84