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  • 1. 8.01 Evaluate various sources of credit available to the government, business, and consumers. T008.01.01 G3 Credit
  • 2. Who uses Credit?
    • Consumer Credit
      • Credit used by people for personal reasons.
    • Commercial Credit
      • Credit used by businesses.
    T008.01.02 G4
  • 3. 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
  • 4. 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
  • 5. 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
  • 6. 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
  • 7. Seller-Provided Credit
    • Many stores provide credit to customers.
    T008.01.07 G9
  • 8. 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
  • 9. 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
  • 10. 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
  • 11. 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
  • 12. Other Sources of Credit for Consumers
    • Life Insurance Plans
      • Cash Value Insurance
        • Provides both savings and death benefits.
    • Retirement Plans
    T008.01.12 G14
  • 13. 8.02 Explain when and why borrowing is used for the purchase of goods and services. G23 T008-02.01 Credit
  • 14. 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
  • 15. 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
  • 16. 8.03 Determine the advantages and disadvantages of using credit. T008-03.01 G32 Credit
  • 17. 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
  • 18. 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
  • 19. 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
  • 20. 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
  • 21. 8.04 Discuss the factors on which credit is granted and the cost of credit. G42 T008-04.01 Credit
  • 22. Process of Obtaining Credit
    • Credit Application
    • Documentation
    • Processing
    • Underwriting
    • Closing
    • Funding
    G43 T008-04.02
  • 23. 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
  • 24. 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
  • 25. Processing
    • Building of loan file.
    • Evaluating credit worthiness.
    G46 T008-04.05
  • 26. 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
  • 27. 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
  • 28. 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
  • 29. Closing
    • Representative explains terms of credit.
    • Debtor signs appropriate forms.
    G50 T008-04.09
  • 30. Funding
    • Creditor will issue credit/funds to the debtor.
    G51 T008-04.10
  • 31. 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
  • 32. 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
  • 33.
    • 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
  • 34. Simple Interest Formula
    • I=PRT
      • I=Interest
      • P=Principal
      • R=Rate
      • T=Time
    T008-04.14 G55
  • 35. 8.05 Examine bankruptcy and credit laws. G70 T008-05.01 Credit
  • 36. 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
  • 37. 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
  • 38. 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
  • 39. 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
  • 40. 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
  • 41. Usury Laws
    • Restricts the amount of interest that can be charged.
    G76 T008-05.07
  • 42. 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
  • 43. 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
  • 44. 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
  • 45. 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
  • 46. Federal Trade Commission (FTC)
    • Enforces laws on credit.
    G81 T008-05.12
  • 47. 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
  • 48. 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
  • 49. 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