Uses of Credit PowerPoint

8.01 Evaluate various sources of credit available to the government, business, and consumers. T008.01.01 G3 Credit

Who uses Credit?
Consumer Credit
Credit used by people for personal reasons.
Commercial Credit
Credit used by businesses.
T008.01.02 G4

Types of Credit
Charge Accounts – most common type of short- term or medium-term credit.
Regular Charge Accounts
Require that you pay for purchases in full within a certain period of time.
Revolving Charge Accounts
Allows you to borrow or charge up to a certain amount of money (credit limit) and pay back a part or the entire balance each month.
Budget Charge Accounts
Allows you to pay for costly items in equal payments spread out over a period of time.
T008.01.03 G5

Credit Cards
Single-Purpose
Can only be used to buy goods or services at the business that issued the card.
Examples: JC Penney, Sears
Multipurpose
Similar to a revolving charge account.
May be used at several locations.
Examples: Visa and Master Card
Travel and Entertainment
Similar to regular charge accounts.
Must be paid in full each month.
Example: American Express
T008.01.04 G6

Banks and Other Financial Institutions
Single Payment Loan
Debtor pays off loan in one payment.
Promissory Note
Written promise to repay with interest.
Installment Loan
Repaid in regular payments.
T008.01.05 G7

Installment Loans
Types:
Student, mortgage, automobile, etc.
Secured vs. Unsecured
Secured loans are backed by collateral (help guarantee the repayment of a loan).
Closed vs. Open Ended
Closed-end credit is used for a specific purpose and involves a definite amount of money.
Open-end credit gives you a certain limit on the amount of money you can borrow.
Cosigner
Responsible for the repayment of a loan if the original party does not pay.
T008.01.06 G8

Seller-Provided Credit
Many stores provide credit to customers.
T008.01.07 G9

Consumer Finance Companies
Specialize in loans to people with poor credit ratings.
The cost of credit is higher than other institutions.
T008.01.08 G10

Payroll Advance Services
Short-term loans.
Pawnshop
Based on the value of something you own.
“Borrow Until Payday” Loan
Cost is extremely high.
T008.01.09 G11

Bonds
Bonds – written promise to repay a loan with interest on a specific date. The buyer of the bond is considered the creditor.
Corporate Bonds
Usually used to finance buildings and equipment.
Municipal Bonds
State and local governments use these to finance projects.
Savings Bonds
Sold by federal government.
T008.10.10 G12

Other Sources of Credit for Businesses
Small Business Administration
Offers a number of financial, technical, and management programs to help businesses.
T008.01.11 G13

Other Sources of Credit for Consumers
Life Insurance Plans
Cash Value Insurance
Provides both savings and death benefits.
Retirement Plans
T008.01.12 G14

8.02 Explain when and why borrowing is used for the purchase of goods and services. G23 T008-02.01 Credit

Terms
Credit
Privilege of using someone else’s money for a period of time.
Creditor
One who sells on credit or makes a loan.
Debtor
Anyone who buys on credit or receives a loan.
Obligated to pay back the loan.
G24 T008-02.02

Why Use Credit?
Convenience
Shop without carrying cash.
Immediate Possession
Allows you to have possession on the goods or services now.
Emergencies
Helps in case of a serious situation.
G25 T008-02.03

8.03 Determine the advantages and disadvantages of using credit. T008-03.01 G32 Credit

Advantages
Immediate Possession
Convenience
Buy now and pay later.
Emergencies
Saving Money
Buy an item while it is on sale.
Credit Rating
Establish a favorable credit rating.
Growth of the Economy
Buying goods will help the economy expand.
T008-03.02 G33

Disadvantages
Overbuying
Most common hazard.
Careless Buying
Comparison shopping may not be a priority
Encourages impulse buying
Higher Prices
Some stores offer discounts for cash sales.
T008-03.03 G34

Disadvantages continued
Overuse of Credit
Too much is owed – unable to pay back.
Credit Fees
Interest paid on balance
Habit Forming
T008-03.04 G35

Results of Overuse
Garnishment of Wages
Money deducted from wages for money owed.
Repossession
Loss of property because of failure to repay loan.
Bankruptcy
T008-83.05 G36

8.04 Discuss the factors on which credit is granted and the cost of credit. G42 T008-04.01 Credit

Process of Obtaining Credit
Credit Application
Documentation
Processing
Underwriting
Closing
Funding
G43 T008-04.02

Credit Application
Form on which you provide information needed by a lender to make a decision about granting credit or approving a loan.
Provide the following information:
Salary, Employer, Outstanding Credit (Debt), Assets, Credit References, Checking and Savings Accounts, Stock Portfolio, etc.
G44 T008-04.03

Documentation
Creditor will collect and verify necessary documentation for the extension of credit.
Examples: Bank statements, credit card statements, past W-2’s, etc.
G45 T008-04.04

Processing
Building of loan file.
Evaluating credit worthiness.
G46 T008-04.05

Credit Worthiness Terms (Processing)
The C’s of Credit Worthiness
Capacity
Your ability to pay (income)
Character
Earned by paying bills on time and being a trustworthy, reliable, stable person.
References – people you have borrowed from in the past.
Collateral
Security to help guarantee that the creditor will be repaid.
G47 T008-04.06

Credit Worthiness Terms (Processing) continued
Credit History
Indicates the amount of debt you have and your payment history.
Capital
How much you have beyond what you owe.
Credit Limit
Maximum amount you can borrow.
Cosigner
Responsible for a loan if you, the original debtor, do not pay.
G48 T008-04.07

Underwriting
Reviewing loan for soundness.
Consumer Reporting Agencies
Company that compiles and keeps records on consumer payment habits.
Used to evaluate creditworthiness.
Examples: Equifax, Experian, and TransUnion.
G49 T008-04.08

Closing
Representative explains terms of credit.
Debtor signs appropriate forms.
G50 T008-04.09

Funding
Creditor will issue credit/funds to the debtor.
G51 T008-04.10

Denial of Credit
Fair Credit Opportunity Act requires that credit denial cannot be based on sex, family, religion, etc.
Must be based on ability to pay back loan.
G52 T008-04.11

Cost of Credit
Interest Rates
Percentage that is applied to debt.
Principal
Amount of money borrowed.
Time Factor
Length of time for which interest will be charged.
Maturity Date
Date on which a loan must be repaid.
G53 T008-04.12

Finance Charge or Fees
Cost of credit stated in a dollar figure
Annual Percentage Rate (APR)
Indicates how much credit costs on a yearly basis.
Grace Period
Time period during which no finance charges will be added to an account.
Cash Advance
Borrow money on a credit card.
Cost of Credit continued G54 T008-04.13

Simple Interest Formula
I=PRT
I=Interest
P=Principal
R=Rate
T=Time
T008-04.14 G55

8.05 Examine bankruptcy and credit laws. G70 T008-05.01 Credit

Your Credit
Credit Bureau
An agency that collects information on how promptly people and businesses pay their bills.
Information retrieved from banks, finance companies, stores, credit card companies, and other lenders.
Building Credit
Open a checking or savings account
Apply for a local department store credit card.
Take out a small loan from your bank.
Pay all loans and credit card bills on time.
G71 T008-05.02

Handling Credit Problems
Credit Counselor
Helps consumers with credit problems.
Consolidation Loan
Combines all your debts in order to make one monthly payment on several different loans or credit cards.
G72 T008-05.03

Handling Credit Problems continued
Credit Services
Consumer Credit Counseling Service
Nonprofit organization that provides debt counseling services for families and individuals with serious financial problems.
Debt Repayment Plan
Reorganizes debt and sometimes includes renegotiating terms of debt.
Creditors will often accept such arrangements for partial payment, rather than not be repaid.
G73 T008-05.04

What if you are denied credit?
The Equal Credit Opportunity Act says:
You have the right to know the reasons.
You are entitled to know what specific information in the credit report led to your denial.
No fee will be charged if you state why you are requesting a copy of the report.
You are entitled to ask the credit bureau to investigate any inaccurate or incomplete information and correct your records.
G74 T008-05.05

Truth-in-Lending Laws
Requires that you be told the cost of a credit purchase in writing before you sign a credit agreement.
Protects consumers against unauthorized use of credit cards.
Limits your liability to $50 for unauthorized credit card purchases made prior to notification of the issuer.
G75 T008-05.06

Usury Laws
Restricts the amount of interest that can be charged.
G76 T008-05.07

Equal Credit Opportunity Act
The credit application can be judged only on the basis of financial responsibility.
Cannot discriminate based on gender, age, ethnicity, or religion.
Allows only three reasons for denying credit:
Low income
Large current debts
Poor record of making payments in the past
G77 T008-05.08

Fair Credit Billing Act
Requires creditors to correct billing mistakes brought to their attention.
Requires creditor to inform consumers of steps they need to take to get the error corrected.
G78 T008-05.09

Fair Credit Reporting Act
Gives consumers the right to know what specific information credit bureaus are providing to potential creditors, employers, and insurers.
G79 T008-05.10

Fair Debt Collection Practices Act
Protects consumers from collection agents.
Collection agents:
Must identify themselves.
Cannot tell others about the debt.
Cannot harass debtor.
G80 T008-05.11

Federal Trade Commission (FTC)
Enforces laws on credit.
G81 T008-05.12

Bankruptcy
Legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts.
G82 T008-05.13

US Bankruptcy Act of 1978
Chapter 7 (Liquidation)
Draw up a petition listing assets and liabilities.
Most of the debtor’s assets are sold to pay off creditors.
Cannot release debt on alimony, child support, taxes, fines, educational loans, and court fees.
Chapter 11 – (Reorganization) Businesses Only
Chapter 13
Propose a plan for using future earnings and assets to eliminate debts over a period of time.
G83 T008-05.14

Effects of Bankruptcy
Kept on file with credit bureau for 10 years.
Affects credit rating, future extensions of credit, loss of jobs, etc.
T008-05.15 G84

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