Chapter 16 Credit in America 16 1 Credit

Chapter 16 Credit in America 16. 1 Credit: What and Why 16. 2 Types and Sources of Credit © 2010 South-Western, Cengage Learning

Credit: What and Why Learning Targets n Discuss the history of credit and the role of credit today. n List and Explain advantages and disadvantages of using credit. Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 2

KEY TERMS n Credit n Debtor n Creditor n Capital n Collateral n Finance Charge n Line of Credit n Deferred Billing Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 3

The Need for Credit n Credit is the use of someone else’s money. n borrowed now with the agreement to pay it back later at a cost (typically interest) n Early forms of credit n Farmers n Credit today n Merchants, Retail, Wholesale Credit has become a way of life! © 2010 South-Western, Cengage Learning Chapter 16 SLIDE 4

The Use of Credit n A debtor is a person who borrows money from others. n This money, called debt, must be repaid. n A creditor is a person or business that loans money to others. n Creditors charge money for this service in the form of interest and fees. n A debtor must be qualified to receive credit. n Current economic crisis is due to this practice not being followed. Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 5

Qualifying for Credit n To qualify for credit, you must have the ability to repay the loan. n Qualification is based on three things: n Income n Financial position n Collateral n Personal History Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 6

Income n Sources of income include: n Job n Interest n Dividends n Alimony n Royalties n Income represents cash inflow. n When your earnings exceed your expenses, you have the capacity to take on debt. © 2010 South-Western, Cengage Learning Chapter 16 SLIDE 7

Financial Position n Capital is the value of property you possess after deducting your debts. Capital Examples n bank accounts n Investments n Real estate n Other assets with unbiased value after deducting your debts. n Having capital tells the creditor that you have accumulated assets, which indicates responsibility and monetary value. n Cash Outflow (Debt) will be compared to your Cash Inflow (Income). © 2010 South-Western, Cengage Learning Chapter 16 SLIDE 8

Collateral n Collateral is property pledged to assure repayment of a loan. n To borrow large amounts of money, creditors often want more than just your promise to repay; they want collateral. n If you do not make your loan payments, the creditor can seize the pledged property. Repossession - Example n You buy a new 60 in HDTV from Best Buy using a credit card. n You do not make your payments for an extended period of time. n Collection agency gets involved: n Call you at work/home trying to collect the debt. n Come and get the item you have defaulted payment on. Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 9

Making Payments n Once you have completed a credit purchase, you owe money to the creditor. n Principal (amount borrowed) plus interest for the time you have the loan is called the Balance Due. n Finance Charge is the total dollar amount of all interest and fees you pay for the use of credit. n Minimum Payment is the least amount of money you have to pay per your monthly statement. n Always pay more than the minimum due amount. Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 10

Credit n Advantages n Disadvantages n Increased Purchasing Power n Emergency Funds n Convenience n Deferred Billing n Proof of Purchase (records) n Safety n Higher Costs n Finance Charges n Overspending n Tie Up Future Income Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 11

Assignments: n Key Terms Review pg. 362 Questions: 1 – 8 n Check Your Understanding pg. 362 Question: 10 Apply Your Knowledge pg. 362 Question: 11 Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 12

Lesson 16. 2 Types and Sources of Credit Learning Targets n List and describe the types of credit available to consumers. n Describe and compare sources of credit. Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 13

KEY TERMS n Open-End Credit n APR n Grace Period n Closed-End Credit n Service Credit n Finance Company n Loan Sharks n Usury Law n Pawnbroker Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 14

Types of Credit n Open-end credit n Closed-end credit n Service credit Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 15

Open-End Credit n Open-end credit is where a borrower can use credit up to a stated limit. n Charge Cards n Master Card n Visa n Discover n Revolving Accounts n n n American Eagle Abercrombie Finch Kohls Macy’s Best Buy © 2010 South-Western, Cengage Learning Chapter 16 SLIDE 16

Credit Card Agreements n A credit card is a form of borrowing and usually involves interest and other charges. n The terms of the credit card agreement affect the overall cost of the credit you will be using. Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 17

(continued) n Credit card agreement terms to consider: n Annual Percentage Rate (APR) n The annual percentage rate (APR) is the cost of credit expressed as a yearly percentage. n Grace Period n The grace period is a timeframe within which you may pay your current balance in full and incur no interest charges. n Fees n Annual fees, transaction fees, and penalty fees n Method of calculating the finance charge © 2010 South-Western, Cengage Learning Chapter 16 SLIDE 18

Closed-End Credit n Closed-end credit (also called Installment Credit) is a loan for a specific amount that must be repaid in full, including all finance charges, by a stated due date. n Payment Booklet n Set Due Date n Interest Included in Payment Amounts n Also called Installment Credit Examples n Cars n Furniture n Major Appliances Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 19

Service Credit n Service credit involves providing a service for which you will pay later. Examples: n Utility services n Phone services n Cable/Satellite TV services n Examples of businesses that extend service credit: n Doctors n Lawyers n Dry Cleaners n Repair Shops n Terms are set by individual businesses. Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 20

Sources of Credit n n n n Retail stores Credit card companies Banks and credit unions Finance companies Pawnbrokers Private lenders Other sources of credit Remember it is NOT FREE – consumers pay for it. Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 21

Retail Stores Examples n Department stores n Discount stores n Specialty stores. n Many retail stores offer their own credit cards. n These cards are accepted only at the issuing store. Advantages n Receive Discounts n Advance notice of sales n Receive Gift Cards Disadvantages Very High Interest Rates Can only use them there n Most retail stores also accept credit cards issued by major credit card companies. Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 22

Credit Card Companies n Credit Card Issuers Examples - Visa, Master. Card, Discover, Amer. Express Benefits n. Accepted most places n. Available cash advances n. Access to Checks Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 23

Banks and Credit Unions n Credit cards n Closed-end loans n House n Car n Vacation n Home Repair Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 24

Finance Companies n A finance company is an organization that makes high-risk consumer loans – typically to those people denied by banks. n There are two types of finance companies: n Consumer finance companies n Sales finance companies n Loan sharks are unlicensed lenders who charge illegally high interest rates. n A usury law is a state law that sets a maximum interest rate that may be charged for consumer loans. Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 25

Pawnbrokers n A pawnbroker (or pawnshop) n Legal business n High-interest loans based on the value of personal possessions pledged as collateral. n Customers typically only receive 10% - 60% value of items n Most Popular Pawned Items: n Guns n Cameras n Jewelry n Radios n TVs n Computers n Collector Items Popular Reality TV - Pawn Stars and Hard Core Pawn © 2010 South-Western, Cengage Learning Chapter 16 SLIDE 26

Private Lenders n One of the most common sources of cash loans is the private lender – typically they do not charge interest. Examples of Private Lenders n Parents n Relatives n Friends Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 27

Other Sources of Credit n Life insurance policies – loan doesn’t have to be repaid but interest is charged and policy coverage amount will decrease. n Borrowing against a deposit - typically has a low interest rate because of the safety of the loan. n CD n IRA n Treasury Note n Bond n Borrowing against an asset n Car – usually has to be less then 5 yrs old and you owe nothing on it n House Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 28

Assignments: n Key Terms Review pg. 371 Questions: 1 – 6 n Check Your Understanding pg. 671 Question: 7 – 8 Apply Your Knowledge pg. 362 Question: 9 Chapter 16 © 2010 South-Western, Cengage Learning SLIDE 29