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