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Ch. 16 PowerPoint Ch. 16 PowerPoint Presentation Transcript

  • Section 16-1 What is Credit? Chapter 16 Credit in America
  • Development of Credit
    • Credit- is money borrowed to by something now, with the agreement to pay for it later
      • Credit is the most commonly used method of purchase in our country
      • Over 80% of all purchases are made with credit
  • Development of Credit
    • In the Past
      • The need for credit came about when we changed from a bartering and trading society to a currency exchange economy
      • Earliest form of credit was the account at the general store
        • Stores rarely charged interest
        • Was a convenience that the owners provided customers they trusted and knew
      • Because of credit the economy grew quickly as well as the standard of living
  • Development of Credit
    • In the Past cont.
      • Between 1920 & 1990 buying on credit became the American way of life
        • No longer was credit saved for emergencies
      • In the 90’s a record number of people filled for bankruptcy
        • Because of the overuse of credit as the main reason
    • Credit Today
      • Merchants today encourage credit to buy all kinds of services and goods
      • Some transactions are difficult to make without a credit card
        • Such as reserving a hotel room or making an online purchase
      • We are no longer saying, “How can I get credit?” But, “How can I wisely manage credit?”
  • The Vocabulary of Credit
    • Terms commonly used to describe credit are availability and its cost
      • When you borrow money or use credit you are a borrower or debtor
      • The person or company loaning the money is the creditor
    • To qualify for credit you must have the ability to repay
      • A job is one of the most important qualities
      • Another is capital- is property you possess (bank accounts, investments, and other assets) that is worth more than your debts
  • The Vocabulary of Credit
    • In requests of large sums of credit, creditors want more than just a promise from you
      • Collateral- property pledged to assure repayment of a loan
      • If you do not make your payments, the creditor can seize the pledged property
        • Ex: You buy a new car on credit, the car is the collateral, and you don’t make payments, the car can be repossessed - ownership would go back to the lending institution
  • The Vocabulary of Credit
    • When the credit purchase is completed you owe money to the creditor
      • principal- (amount borrowed) plus interest for the time you have the loan is called the balance due
      • You will make monthly payments until you repay the balance due in full
        • Payments include both principal and interest
      • Finance Charge- is the total dollar amount of all interest and fees you pay for the use of credit
        • It is the price you pay for the privilege of using someone else's money
  • The Vocabulary of Credit
    • Credit statements usually specify a minimum payment- is the least amount you may pay that month under your credit agreement
    • All credit payments are due by a specific due date
      • You will be given 10 to 20 days from the date you receive a bill in which to pay
      • Failure to pay within the time allowed, you will be accessed a late fee , which is added to the balance due
    • Expensive purchases you may be asked to sign a installment agreement- which is an agreement to make regular payments for a set period of time
      • This is a secured loan- because the goods you purchased with the loan serve as collateral for the money loaned
  • Advantages of Consumer Credit
    • Advantages of Credit
      • If used correctly can greatly expand your purchasing potential and raise your standard of living
        • Ex: allows you to purchase things you can buy with cash and pay for them over time
      • Making your payments on time then helps you establish a good credit record that will help you get loans in the future
      • Credit can also provide emergency funds
        • line of credit - which is a pre-established amount that can be borrowed on demand with no collateral
        • To establish, simply fill out an application with a lender
          • Lenders examine your income and financial position and approve an amount that they believe you can repay
  • Advantages of Consumer Credit
    • Advantages Cont.
      • Credit is convenient
      • You often get better service when they make a purchase because they can withhold payment until a problem is resolved
      • Regular customers receive advance notices of sales and special offers not available to the public
      • Deferred billing- is a available to charge customers whereby purchases are not billed to the customer until later
      • The proof of purchase provided by a charge slip is usually more descriptive than a cash register receipt and helps in making adjustments when merchandise is returned
      • Carrying a credit card is safer than carrying cash
  • Disadvantages of Consumer Credit
    • Disadvantages
      • Credit purchases may cost more than cash purchases
      • Merchants must pay the credit card company for using the card in transactions, and often pass the cost onto customers in the form of higher prices
      • An item purchased on credit and paid for over a period of time costs more because of finance charges
        • Ex: finance charge of 18% is 1.5% per month and on $1000 the finance charge would be $15 per month
        • The larger the balance and the longer you take to pay it off the greater the finance charges
  • Disadvantages of Consumer Credit
    • Disadvantages Cont.
      • When you use credit you tie up future income
        • You have committed to making payments, perhaps for several years
          • This situation can put a strain on your budget
      • Buying on credit can lead to overspending
        • At the end of the month when the bills come in you may be surprised at how much you spent
      • Using credit too much can result in debts so high that you can never pay them off and lead to bankruptcy
  • Section 16-2 Types and Sources of Credit Ch. 16 Credit in America
  • Types of Credit- Open-Ended Credit
      • Open-ended credit- is an agreement to lend the borrower an amount up to a stated limit and to allow borrowing up to that limit again, whenever the balance falls below the limit
        • Borrower usually has choice of repaying the entire balance within 30 days or repaying it over a number of months or years
        • Can be used over and over again as long as the balance owed doesn’t exceed the limit
      • Open 30-day accounts- is a agreement a consumer promises to pay the full balance owed each month
        • Ex: American Express and Diner’s Club cards
          • There is no credit extended beyond the 30 days
          • Usually have high or no credit limits and are widely excepted overseas
  • Types of Credit- Open-Ended Credit Cont.
      • Revolving Credit Accounts- a consumer has the option each month of paying in full or making payments at least as high as the stated minimum
        • Min. payment is based on the amount of balance due
        • Ex: Visa, MasterCard, and Discover cards as well as retail and gas station company cards
    • Credit Card Terms
      • Before selecting a card, learn which terms and conditions apply
        • Annual Percentage Rate (APR)- is the cost of credit expressed as a yearly percentage
          • Truth-In-Lending law requires lenders to include all loan costs in the APR
          • Compare the APR of different lenders to find the best deal
          • Must be disclosed when you open an account and be noted on each bill
          • Usually a variable rate and can be high on credit cards
  • Credit Card Terms Cont.
      • Free Period or Grace Period- allows you to avoid the interest charge by paying your current balance in full before the due date shown on your billing statement
        • If no free period of 10-25 days the card issuer will impose an interest charge from the date you use your card or from the date each credit card transaction is posted
      • Annual Fees
        • The fee can range form $15 to $35 or more and you must pay it whether or not you use the card
      • Transaction Fees and Late Fees
        • Credit card also may involve other types of costs
          • Ex: if you use an access check, pay by phone, if you go over your limit, or make your payment late
  • Credit Card Terms Cont.
      • Method of Calculating the Finance Charge
        • This charge will vary, depending upon the method the card issuer used to figure your balance
        • The method used can make a difference, in how much of a finance charge you will pay
  • Types of Credit- Closed End Credit
    • Closed end credit- is a loan for a specific amount that must be repaid, in full, including all finance chares, by a stated due date
      • Typically used in purchasing expensive items, such as cars, furniture or major appliances
      • Do not allow continuous borrowing or varying payment amounts
      • Borrower takes out a closed end loan for a particular amount and then repays it with fixed payments or installments that include interest
      • Also called a installment loan
      • A contract is signed explaining amount loaned, total finance charge and amount of each payment
      • Down payment is required and item purchased is used as collateral
  • Types of Credit- Service Credit
    • Service credit- is an agreement to have a service performed now and pay for it later
      • Ex: telephone and utility services are provided for a month in advance, then you are billed
        • expect payment in full within a time limit
        • Usually offer a budget plan, that allows you to average bills to get lower monthly payments
      • Ex: doctors, lawyers, hospitals, dry cleaners, and repair shops
      • Terms are set by individual businesses
      • Some do not impose finance charges on unpaid account balances but they do expect regular payments to be made until the bill is paid in full
  • Sources of Credit- Retail Stores
    • Retail stores are stores that sell directly to consumers, such as department stores, restaurants, and most service businesses
      • Most offer their own credit cards
      • Can only use their credit cards in their stores
      • Consumers using their cards often receive discounts, advance notice of sales ,and other privileges not offered to cash customers
      • Most also accept credit cards issued by major credit card companies
      • Accepting credit cards helps retail stores attract customers, who like to buy on credit
  • Sources of Credit- Credit Card Companies.
    • Visa, MasterCard, American Express, and Discover
      • These are all purpose cards are generally accepted nationwide and even internationally
      • You can get an all purpose credit card through your financial institutions or from various organizations
      • Affinity cars- are cards sponsored by professional organizations, college alumni associations, and some members of the travel industry
        • Issuer often donates a portion of the annual fees or charges to the sponsoring organization, or qualifies you for free travel or other bonuses
      • When you have an all purpose credit card, you have an automatic line of credit up to the limit of the card
  • Sources of Credit- Credit Card Companies Cont.
    • Cash advance- is money borrowed against the credit card limit
      • You are taking out a cash loan from your line of credit rather than making a purchase with it
      • You can access this money at a teller machine, at a customer service desk in your bank, or by writing an access check against the credit card account
      • Access checks- look like regular checks that are supplied by the credit card company
        • You must then pay back the cash advance in the same way you pay for credit purchases
  • Sources of Credit- Banks and Credit Unions
    • In addition to credit cards, banks and credit unions make closed end loans to individuals and companies
      • Loan money to consumers for specific purchases such as a home car or vacation
      • Interest on closed end loans tends to be lower than on credit cards
    • Credit unions make loans to their members only
      • Interest rates are generally lower than those charged by banks because credit unions are nonprofit and are organized for the benefit of members
      • Credit union are more willing t make loans because the members who are borrowing also have a stake in the success of the credit union
  • Sources of Credit- Finance Companies
    • Often called small loan companies
    • usually charge high interest rates for the use of their money
    • Reason for the high interest rates is the willingness to loan money to people that are turned away from banks and credit unions
    • Are second only to banks in the volume of credit extended
    • Two types of finance companies
      • Consumer finance company- makes mostly consumer loans to consumers buying durables
        • Durables - items expected to last several years (cars, refrigerators, stereos)
        • Non durable goods - items consumed in a few days or months (food products)
        • Household Finance and Beneficial Finance are two examples
  • Sources of Credit- Finance Companies Cont.
      • Sales finance company- makes loans through authorized representatives
        • Manufacturer related companies
        • Ex: (GMAC) finances General Motors automobiles dealers and their customers
    • Both types of finance companies borrow money from banks and lend it to consumers at higher rates
    • Take more risks than banks and will do more to protect themselves
      • If you do not make your payments when due, you can expect a call from someone at the finance company, who will want an explanation
        • Will keep in contact with you till you make your payment
      • High interest rates also protect them
  • Sources of Credit- Finance Companies Cont.
    • Uniform Small Loan Law- permits loans of up to $5000 and allows interest rates of up to 42%
    • Growth of finance companies is due to the efforts to eliminate loan sharks
      • Loan sharks- unlicensed lenders who charge illegally high interest rates
    • Usury Laws- set max. interest rates that may be charged for loans
      • Don’t exist in all states
      • In states where they don’t exist, companies can charge as much as people will pay
      • When an emergency or other extreme need arises consumers often feel forced to pay higher rates to get the money they need
  • Sources of Credit- Pawnbrokers
    • Pawnbroker- is a legal business that makes high interest loans based on the value of personal possessions pledged as collateral
      • Accept possessions that are readily salable (guns, camera, jewelry, radios, TV’s and coins)
      • Customer brings in an item of value to be appraised, then a pawnbroker makes a loan for considerable less than the appraised value of the item
        • Some pawnshops give only 10-25% of the value of the article most give no more than 50-60%
      • You receive a receipt and certain length of time from two weeks to six months to redeem the item by paying back the loan plus interest
      • If you don’t pay it back, the pawnbroker then sells the item and keeps the proceeds
  • Sources of Credit- Private Lenders
    • Most common source of cash loans is the private lender
    • Include your parents, other relatives, and friends
    • May or may not charge interest
  • Other Sources of Consumer Credit
    • Life insurance policies can be used as an alternate source of consumer credit
      • Some policies build a cash value and policy holders can borrow at low interest rates against the value of their policy
      • The loan doesn’t have to be repaid, but interest will be charged and the reduce the value of the life insurance policy
    • Certificate of Deposit from a bank can be borrowed against
      • Which means the certificate is used as collateral and the interest rate charged is usually only 2 to 5% above the rate you are receiving on the CD
      • If you cash in the CD before maturity you incur a penalty if you borrow money using the CD as collateral you get a moderate rate of interest on the loan, and keep the CD’s full value