7.00 Objective Understand ways to protect personal and family resources .

1. 7.00 Objective Understand ways to protect personal and family resources. 7.02 B Students will be able to understand the types of credit available to consumers, business, and government.

2. What is credit? An agreement to obtain money, goods, or services now in exchange for a promise to pay in the future. When buying on credit, you are simply delaying the payment for an item Credit is a temporary money substitute “Buy now and Pay Later”

3. Who are Parties to Credit? • Credit involves two parties, a lender and a borrower • Lender/Creditor: • A person or business who supplies money, goods, or services to debtors • Borrower/Debtor: • A person or business who borrows money, goods, or services from creditors

4. Credit Terms • Principle- amount of money borrowed • Interest – charge for use of money • aka finance charge, loan fees • Maturity date- when payment is due • aka due date • Late fees – additional fees due if payment is not made by due date • Grace period – time between purchase and payment due when credit uses goods without payment • Credit Limit – maximum amount of credit that a lender will extend to a borrower

5. Unsecured vs. Secured Loans Unsecured loans Secured loans • Require only borrower’s signature as evidence of agreement with terms of the loan • No collateral or cosigner required • Generally available for borrowers with a good credit history • Require some form of guarantee to secure the loan agreement • Collateral: • Asset used to secure loan • Reduces lender’s risk • Can take property if the borrower does not repay • Lien-If title has lender’s name on it noting the lender has right to property • Cosigner: • Agrees to sign loan if borrower has neither collateral nor good credit • Typically has good credit • Agrees to pay if borrower fails to repay

6. Cosigner • Responsible for the repayment of a loan if the original party does not pay • Party who signs with applicant for a loan • Who might co-sign a loan for you? • A loan becomes “secure” when • 1)a cosigner guarantees payment or • 2) the lender retains collateral

7. What is Collateral? • Collateral- an asset used as security on a loan • Can be taken by creditor if loan payments are not made to creditor • Mortgage loans-real property* • *Land & permanent attachments; commercial buildings, homes, schools • Subject to Foreclosure if not paid • Personal loans- personal property* • *moveable property; car, motorcycle, boat, furniture, RV • Subject to Repossession if not paid

8. Who Uses Credit? Types of Credit *PERF class emphasis • Consumer Credit*Credit used by people for personal reasonsconsumer loans, mortgage loans, credit cards, charge cards • Commercial (Business) CreditCredit used by businessescommercial loans, corporate bonds • Government CreditCredit used by local, state, federal governmentsmunicipal bonds, treasury bonds, T-bills, T-notes

9. Options for Loan Repayment • Installment loan (closed end) • Ford Motor Credit provides money for Traci to buy a car. She pays monthly installments of $247.98 for 36 months until the loan is repaid. •  Watch out for ACCELERATION CLAUSES in contract. If debtor misses one payment, whole loan amount can be “called” in. • Single payment • Gabe borrows $4000 for his fall semester at college. The contract agreement requires one lump sum payment of the $4000 plus interest earned by May 10th of next year. • Revolving Credit (open end) • Master Card provides a $1000 credit limit to Don. He can spend up to $1000 as long as he pays the minimum payment every billing cycle. His available credit is difference between the credit limit and his current amount due. The balance constantly changes with purchases and payments.

10. Closed vs. Open Ended Credit • Closed-end credit • Used for a specific purpose • Loan of a definite amount of money • Loan balance reduced with each payment • Example: car loan for $20,000 is a specific, one time amount of money • Use String examples* • Open-end credit • Gives a credit limit - maximum $ you can borrow • Loan balance varies for purchases/payments made • Example: credit card with $500 limit. • You might spend $50 and pay $10, spend 30 and pay $25. • The loan amount “revolves” as you make purchases and pay back all or part of the loan.

11. Types of Consumer Credit Sales Credit Examples • credit to purchase goods and services from retailers • Regular charge account • Installment account • Revolving credit account • Lennox dealer MTB Inc. provides up to $15,000 credit for installation of HVAC heating or air conditioning unit. • HomeBoys Car Depot advertises financing on all vehicles sales with monthly payments guaranteed only $99 a month. • Belk provides a revolving charge card for purchases at their stores. Monthly billing cycle allows payments and additional purchases.

12. Charge Accounts Allows debtors to receive goods or services from suppliers and pay for them at a later date • Regular Charge Accounts • Require that you pay for purchases in full within a certain period of time • EX: charge account with an electrician who wired your house • 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 • EX: home equity line of credit • Budget Charge Accounts • Allows you to pay for costly items in equal payments spread out over a period of time • EX: a charge amount with Progress Energy utility company to keep bills even all year

13. Cash Credit • Money granted to use for a variety of purposes; • may be secured or unsecured; • may be installment, single-payment, or credit card/check credit loans Examples: • Car loan from bank • Home loan from mortgage company • College loan due after graduation • Furniture loan from bank • Credit card limit of $2000 for purchases of user’s choice

14. Types of Cash Credit • Installment loans • Car, mortgage • Single-payment loans • Lump sum pay back • Company or retail store credit card • Belk, Penney, BP gas card • Travel & entertainment credit cards • Diner’s Club • American Express • General-purpose credit cards • MasterCard • VISA Credit Limit: maximum amount you can borrow

15. Credit Cards *Unsecured Loans Retail store, Single Purpose – aka charge cards • Balance and payments vary • Can only be used to buy goods or services at the business that issued the card • Examples: JC Penney, Sears Multipurpose, Bank cards • Revolving credit accounts • Balance and payments vary • May be used at different locations • Examples: Visa, Master Card Travel and Entertainment • Similar to charge accounts • Must be paid in full each month • Example: American Express, Diner’s Club compare credit cards

16. Credit Card Terminology • Cash Advance • Borrow money on a credit card • Costs more than regular credit card purchases • *read your contract before signing application or taking a cash advance! • Grace Period • Time period during which no finance charges will be added to an account. From monthly statement cutoff until payment is due! • Maturity (due) date is at least 14 days from statement date. If you pay account in full by due date, you will not usually owe interest.

17. The New CARD Law • video link: CARD ACT • Consumers must be advised in contract and on each billing document of: • Major provisions affecting consumers • Increases in interest rate due to late payments, etc • Default provisions- when the entire loan can be called in • Minimum payments- lowest amount payable to keep account active • Due dates – aka maturity date- when is bill due • Over limit fees – if credit limit is exceeded, what can be charged? • Research complete list of provisions

18. Consumer Loan Example Marty found a motorcycle he wanted for $2000. He had $550 saved. He paid the seller $550 and borrowed $1450 for 1 year from First Federal Bank to buy the bike. The bank charged 8% APR. The contract requires 12 monthly payments by the 8th of the month or an additional 5% will be charged. First Federal will keep the title until the loan is paid back. • Who is the creditor? • Who is the debtor? • What is the interest rate? • What does APR stand for? • What is the principle amount? • What is the down payment amount? • What is the total sale amount? • What is the maturity date? • Which type of loan does Marty have? Revolving credit card? Installment? Single payment loan? • When does the late fee kick in? • If the borrower does not make all the payments, what is it called? • In this case, what can the lender do?

19. Brainstorm Advantages & Disadvantages

20. Advantages of Using Credit • Can be used to purchase a variety of goods and services • Frees consumers from having to carry cash to make purchases • Enables consumers to make purchases online and over the telephone • Initially expands borrower’s income • Makes recordkeeping of purchases simpler • Usually makes returning items easier • When used responsibly, helps establish good credit • Having the means to pay for emergencies provides a sense of comfort • Allows use of goods and services before or while paying for them • Allows consumers to purchase expensive items they would not otherwise be able to purchase with cash • Good credit indicates that a consumer is responsible financially • Convenient to use

21. Disadvantages of Using Credit • Typically pay more for goods and services because of finance charges (interest and fees) • Retailers increase prices to cover costs associated with accepting credit and paying bad debts • Limits current buying power as income is required to repay old debts • Must protect credit cards from unauthorized use • May lead to impulse purchases • May lead to overspending • May lose track of how much is actually being spent • If debts not repaid, merchandise may be repossessed by creditors • If debts not repaid, credit may be damaged • If credit rating becomes poor, could impact their ability to get credit in the future • Bad credit indicates that consumers are irresponsible and untrustworthy when it comes to finances • Credit not always available because some retailers don’t accept credit

22. Review: Simple Interest Formula Using information from the previous slide on Marty’s loan… • I=PRT What do the letters stand for? • I= • P= what is Marty’s P? • R= what is Marty’s R? • T= what is Marty’s T? • How much will Marty owe in interest? • How much will Marty’s monthly payment be on his motorcycle? • What will interest be if Marty pays off the loan in only 6 months?

23. JUMPSTART PRINCIPLE: • COMPARE INTEREST RATES • Why do you need to compare credit card interest rates? • Is it a fixed or variable APR? • Purchases APR – just new items • Promotional APR- teaser rate, first 6 months • Cash advance APR –usually a % of advance • Default/penalty APR

24. What else do you need to compare on a credit card application? • Rewards/rebates • Annual fee • Grace period • Minimum finance charge • Other fees • Cash advance • Overdraft protection • Over limit fees • Late payment • Balance transfer fees