Chapter 4: Going into Debt

1. Chapter 4: Going into Debt Section 2: Sources of Loans and Credit

2. Two Credit Sources • Banking Institutions • Credit Card Companies

3. Types of Financial Institutions • Commercial Banks: checking/saving accts. - Loans to individuals • Control the most money; offer the most services • Savings and Loan (S&L) Associations: - Savings Institutions primarily provide loans for homes. • Savings Banks: Originally served small businesses and homes • Originally did not provide Checking

4. Types of Financial Institutions (Cont’d) • Credit Unions: Owned and operated by its members • Provides low interest loans to members • Good consumer loans, but must join to use • Finance Companies: • Institution that takes over loans from retailers • Usually used with higher risk consumers • Consumer Finance Companies • Offer sub-prime (High interest) loans to higher risk companies • Offer High Rate Credit Cards • Use shady business practices

5. Crisis and Change: The 80’s • S&L Banks deregulated • Could offer checking accts as well as business loans • S&L’s make risky commercial investments • Cost tax-payers billions in bailout money

6. Charge Accounts • Buy goods from a company and pay later • Regular Charge Account: $500-1,000 Credit limit in which a bill is sent monthly • No interest, but bill must be paid immediately • Revolving Charge Account: You don’t pay entire monthly bill, interest is added • Installment Charge Accounts: • Equal payments over a period of time • Interest is paid

7. Credit & Debit • Credit • Can be used at many different stores • Usually charge high interest • Debit: Withdrawn from Checking account

8. Finance Charges (The Cost of Credit) • Costs vary from company to company • APR: Cost expressed by a yearly percentage

9. Applying For Credit • Credit Bureau: Private Business hired by a lending agency • Run Credit Check: • Income • Current Debts • Personal life details • Ex. How you’ve repaid debts in the past

10. Credit Check Reveals “Credit Rating” • Higher the number, better chance of getting a loan • The 4 C’s of credit worthiness 1.Capacity to pay: Employment History 2.Character: Reputation • Ex. Trustworthy, criminal history • Collateral: What you are worth • Capital: Similar to Collateral, it is personal items of value. Example would be your investment accounts. • Shows your past ability to save and accumulate • Over 700 is Good, below 600 not so good

11. 2 types of loans • Secured: Backed by collateral • Unsecured: Loan on reputation alone

12. Borrowing Responsibilities • Pay on time • If you don’t, fees will be incurred • Keep financial records

13. Government Regulation of Credit • Equal Credit Opportunity Act(1974): • Credit cannot be denied based on Race, religion, etc. • No discrimination bc. You receive govt. benefits • Women were the ones being discriminated

14. Usury Laws • Law restricting the amount of interest that can be charged for credit • Interest Ceilings limit the profit a bank can make • Early on, this had adverse effects on the economy

15. The B-Word • Bankruptcy: • Cant pay debt. • Turn everything you own over to creditors • Bankruptcy is not an easy way out