Chapter 16

Credit in America

What Is Credit?Types and Sources of Credit

GOALSGOALS

Lesson 16.1

What Is Credit?

Describe the history of credit in America.Define basic credit vocabulary.Discuss the advantages and disadvantages of using credit.

The History of Credit

The early yearsNeed arose when we established currency economy

Around time of the Industrial Revolution

When people were no longer self-sufficientAt a general store bought “on account”Banks lent money to farmers

High interest rates – 25 to 50%

The History of Credit

The 1900sLower interest rates spurred economy

People had more purchasing power – demand for goods and services increased

Banks were more willing to lend money1920 – 1990

Credit was way of life, not just for emergencies

The History of Credit

The 1900s1970s

First legislation to protect consumersPeople began to misuse credit

Credit counseling first appeared

1990sRecord numbers of people declared bankruptcy as misuse continuedEven lower rates encouraged economic growthBegan to see non-bank credit cards and reward cards

The History of Credit

Credit todayAbundant and easy to getMany people shop online using credit cards

The Vocabulary of Credit

Borrower or debtorWhen you borrow money or use credit

CreditorPerson or company lending you money

CapitalProperty you own that is worth more than your debts

The Vocabulary of Credit

CollateralProperty pledged towards repayment of loan

Don’t pay your loan, they take your items

RepossessedOwnership of item goes to bank if you don’t pay loan

PrincipalAmount borrowed (or charges)

The Vocabulary of Credit

Finance chargeInterest you pay on the amount borrowedAlso referred to as handling charges, services charges or carrying charges

Minimum paymentOn a credit card statement, the least you can payMay barely cover finance charges

The Vocabulary of Credit

Due DateTypically 10-20 days from receipt of billAssessed late fee if not paid by due date

Added to balance – you’ll end up paying interest on the late fee

Installment AgreementMake regular payments for a set period of timeType of “secured loan”

Goods are collateral

Advantages and Disadvantages of Consumer Credit

AdvantagesPurchasing powerEmergency fundsConvenienceDeferred billingSafety

Disadvantages Higher pricesFinance chargesTie up incomeOverspending

GOALSGOALS

Lesson 16.2

Types and Sources of Credit

List and describe the kinds of credit available to the American consumer.Describe and compare sources of credit.

Kinds of Credit

Open-ended creditAgreement to loan up to a specified amtCredit cards

Option to pay off balance or repaying it over many months

Referred to as “Revolving Credit Agreement”

Open 30-Day AccountBalance must be paid in full within 30 daysUsually high or no credit limits

Kinds of Credit

Closed-end creditLoan for a specific amount of money

Auto, home, furniture, etc.

Do not allow continuous borrowingSometimes called “installment loan”

Kinds of Credit

Service creditReceive service, pay for it later

Professional servicesDoctor, dentist, lawyer, contractor, etc.

Electric, phone, water, etc.May offer a budget plan

Credit Card Terms

Annual percentage rate (APR)Free period (grace period)Annual feesTransaction fees and late feesMethod of calculating the finance charge

Sources of Credit

Retail storesBanks and credit unionsFinance companies

Loan Sharks – unlicensed, illegally high interest ratesUsury Laws – set maximum interest rates allowable

Finance companies charge this rate!

PawnbrokersMake high interest loans based on items held as collateral

Private lenders