Credit in America
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© 2010 South-Western, Cengage Learning Chapter © 2010 South-Western, Cengage Learning Credit in America 16.1 Credit: What and Why 16.2 Types and Sources of Credit 1 6
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16. Credit in America. 16.1 Credit: What and Why 16.2 Types and Sources of Credit. Lesson 16.1 Credit: What and Why. GOALS Discuss the history of credit and the role of credit today. Explain the advantages and disadvantages of using credit. Chapter 16. The Need for Credit. - PowerPoint PPT Presentation
Transcript of Credit in America
© 2010 South-Western, Cengage Learning
Chapter
© 2010 South-Western, Cengage Learning
Credit in America
16.1 Credit: What and Why16.2 Types and Sources of Credit
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Lesson 16.1Credit: What and Why
GOALS■ Discuss the history of
credit and the role of credit today.
■ Explain the advantages and disadvantages of using credit.
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The Need for Credit
■ Credit is the use of someone else’s money, borrowed now with the agreement to pay it back later.
■ Early forms of credit■ Credit today
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The Use of Credit
■ A debtor is 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.
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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
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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.
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Financial Position
■ Capital is the value of property you possess (such as bank accounts, investments, real estate, and other assets) after deducting your debts.
■ Having capital tells the creditor that you have accumulated assets, which indicates responsibility.
■ Your debt represents cash outflow and will be compared to your cash inflow (income).
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Collateral ■ To borrow large amounts of money, creditors often want more than just your promise to repay; they want collateral.
■ Collateral is property pledged to assure repayment of a loan.
■ If you do not make your loan payments, the creditor can seize the pledged property.
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Making Payments
■ Once you have completed a credit purchase, you owe money to the creditor.
■ The principal (amount borrowed) plus interest for the time you have the loan is called the balance due.
■ The finance charge is the total dollar amount of all interest and fees you pay for the use of credit.
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Advantages andDisadvantages of Credit
■ Advantages■ Purchasing power■ Emergency funds■ Convenience■ Deferred billing■ Proof of purchase■ Safety
■ Disadvantages ■ Higher costs■ Finance charges■ Tie up income■ Overspending
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Lesson 16.2Types and Sources of Credit
GOALS■ List and describe the
types of credit available to consumers.
■ Describe and compare sources of credit.
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Types of Credit
■ Open-end credit■ Closed-end credit■ Service credit
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Open-End Credit■ Open-end credit is where a borrower
can use credit up to a stated limit. ■ Charge cards■ Revolving accounts
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Credit Card Agreements
■ A credit card is a form of borrowing and usually involves interest and other charges.
■ The terms of the credit card agreement affect the overall cost of the credit you will be using.
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Credit Card Agreements■ Credit card agreement terms to
consider:■ Annual percentage rate (APR)
■ The annual percentage rate (APR) is the cost of credit expressed as a yearly percentage.
■ Grace period■ The grace period is a timeframe within
which you may pay your current balance in full and incur no interest charges.
■ Fees■ Annual fees, transaction fees, and
penalty fees■ Method of calculating the finance
charge
(continued)
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Closed-End Credit■ Closed-end credit is a loan for a specific amount that must be
repaid in full, including all finance charges, by a stated due date.
■ Also called installment credit■ Does not allow continuous borrowing or varying payment
amounts■ Often used to pay for very expensive items, such as cars,
furniture, or major appliances
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Service Credit
■ Service credit involves providing a service for which you will pay later.
■ For example, your utility services are provided for a month in advance; then you are billed.
■ Many businesses extend service credit. ■ Terms are set by individual businesses.
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Sources of Credit
■ Retail stores■ Credit card companies■ Banks and credit unions■ Finance companies■ Pawnbrokers■ Private lenders■ Other sources of credit
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Retail Stores
■ Examples of retail stores include department stores, discount stores, and specialty stores.
■ Many retail stores offer their own credit cards. ■ These cards are accepted only at the issuing store. ■ Store credit customers often receive discounts,
advance notice of sales, and other privilegesnot offered to cash customers or to customers using bank credit cards.
■ Most retail stores also accept credit cards issued by major credit card companies.
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Credit Card Companies
■ Credit card issuers■ Financial institutions■ Other organizations
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Banks and Credit Unions
■ Credit cards■ Closed-end loans
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Finance Companies■ A finance company is an
organization that makes high-risk consumer loans.
■ 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.
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Pawnbrokers
■ A pawnbroker (or pawnshop) is a legal business that makes high-interest loans based on the value of personal possessions pledged as collateral.
■ Possessions that are readily salable (such as guns, cameras, jewelry, radios, TVs, and collector’s coins) are usually acceptable collateral.
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Private Lenders
■ One of the most common sources of cash loans is the private lender.
■ Private lenders might include parents, other relatives, friends, and so on.
■ Private lenders may or may not charge interest or require collateral.
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Other Sources of Credit
■ Life insurance policies■ Borrowing against a deposit■ Borrowing against an asset
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Activity:
■Calculating credit card fees worksheet■Research different credit cards for the best options
