© 2010 South-Western, Cengage Learning

Today

Notes – CREDIT: Chapter 16.1

SMG – Portfolio Updates

SLIDE 1

Chapter 16

Chapter

© 2010 South-Western, Cengage Learning

Credit in America

16.116.1 Credit: What and Why

16.216.2 Types and Sources of Credit

16

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Chapter 16

Learning Targets

Discuss the history of credit and the role of credit today.

List and Explain advantages and disadvantages of using credit.

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KEY TERMS Credit Debtor Creditor Capital Collateral Finance Charge Line of Credit Deferred Billing

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The Need for Credit Credit is the use of someone else’s money.

borrowed now with the agreement to pay it back later at a cost (typically interest)

Early forms of credit started withFarmers

Credit todayMerchants, Retail, Wholesale, etc.

Credit has become a way of life!

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Chapter 16

The Use of Credit A debtor is a person who borrows money from others.

This money, called debt, must be repaid.

A creditor is a person or business that loans money to others.

Creditors charge money for this service in the form of interest and fees.

A debtor must be qualified to receive credit. Current economic crisis is due to this practice not being

followed.

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Qualifying for CreditTo qualify for credit, you must have the ability

to repay the loan.

Qualification is typically based on four things: IncomeFinancial positionCollateralPersonal History

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Income Sources of income include:

Job Interest Dividends Alimony Royalties

Income represents cash inflow.

When your earnings exceed your expenses, you have the capacity to take on debt.

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Financial Position Capital is the value of property you possess after

deducting your debts.

Capital ExamplesBank AccountsInvestmentsReal estateOther assets with unbiased value after deducting your debts.

Having capital = responsibility and monetary value.

Cash Outflow (Debt) will be compared to your Cash Inflow (Income).

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Collateral Collateral is property pledged to assure repayment of a loan.

To borrow large amounts of money, creditors often want more than just your promise to repay; they want collateral.

If you do not make your loan payments, the creditor can seize the pledged property.

Repossession - ExampleYou buy a new 60in HDTV from Best Buy using a credit card.You do not make your payments for an extended period of time.Collection agency gets involved:

Call you at work/home trying to collect the debt. Come and get the item you have defaulted payment on.

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Making Payments Swiping your Credit Card = you owe money!

Principal (amount borrowed) plus interest for the time you have the loan is called the Balance Due.

Finance Charge is the total dollar amount of all interest and fees you pay for the use of credit.

Minimum Payment is the least amount of money you have to pay per your monthly statement. Always pay more than the minimum due amount.

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Chapter 16

Credit

Advantages Increased Purchasing Power Emergency Funds Convenience Deferred Billing Proof of Purchase (records) Safety

Disadvantages Higher Costs Finance Charges Overspending Tie Up Future Income

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Chapter 16

Assignments:

Key Terms Review pg. 362

Questions: 1 – 8

Check Your Understanding pg. 362

Question: 10

Apply Your Knowledge pg. 362

Question: 11

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Monday, Dec. 1st Transaction Register – Week 3

Drake – missing week 2 Dre – missing week 2

Basketball Game Scheduling: Sign-Up (must be done today) Get Camera, Chargers and Tripods

Tomorrow Notes – Types and Sources of Credit

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Chapter 16

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Types and Sources of Credit

Learning TargetsList and describe the types of credit

available to consumers.

Describe and compare sources of credit.

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KEY TERMS

Open-End Credit APR Grace Period Closed-End Credit Service Credit Finance Company Loan Sharks Usury Law Pawnbroker

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Types of Credit

Open-end credit

Closed-end credit

Service credit

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Open-End Credit Open-end credit is where a borrower can use credit up

to a stated limit.

Charge Cards Master Card Visa Discover American Express American Eagle Sears Kohl’s Best Buy

NOTE – Charge Cards are types of “Revolving Credit”

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Credit Card Agreements the terms of the credit card agreement affect the

overall cost of the credit you will be using.

APR – Annual Percentage Rate Grace Period Billing Cycle Finance Charge Fees – Processing, Transaction, Transfer, Late, Cash

Advance, Currency Conversion, Over Credit Limit, etc.

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Closed-End Credit 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. Payment Booklet Set Due Date Interest Included in Payment Amounts

Examples Cars Furniture Major Appliances Home Mortgages

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Service Credit Service credit involves providing a service for which you will pay later.

Examples:Utility services Phone servicesCable/Satellite TV services

Examples of businesses that extend service credit:DoctorsDentistsLawyersDry CleanersAuto Repair Shops

Terms are set by individual businesses.

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Sources of Credit

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.

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Retail StoresExamples

Department stores Discount stores Specialty stores.

Many retail stores offer their own credit cards. These cards are accepted only at the issuing store.

Advantages Disadvantages Receive Discounts Very High Interest Rates Advance notice of sales Can only use them there Receive Gift Cards

Most retail stores also accept credit cards issued by major credit card companies.

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Credit Card CompaniesCredit Card IssuersExamples - Visa, MasterCard, Discover, Amer. Express

BenefitsAccepted most placesAvailable cash advancesAccess to Checks

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Banks and Credit Unions

Credit cards

Closed-end loansHouseCarVacationHome Repair

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Finance Companies A finance company is an organization that makes high-risk

consumer loans – typically to those people denied by banks. There are two types of finance companies:

Consumer finance companies Sales finance companies

Loan sharks are unlicensed lenders who charge illegally high interest rates.

A usury law is a state law that sets a maximum interest rate that may be charged for consumer loans.

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Pawnbrokers A pawnbroker (or pawnshop)

Legal business High-interest loans based on the value of personal

possessions pledged as collateral. Customers typically only receive 10% - 60% value of items Most Popular Pawned Items:

GunsCamerasJewelryRadiosTVsComputersCollector Items

Popular Reality TV - Pawn Stars and Hard Core Pawn

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Private LendersOne of the most common sources of

cash loans is from a private lender – typically they do not charge interest.

Examples of Private LendersParentsRelativesFriends

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Other Sources of Credit Life insurance policies – loan doesn’t have to be repaid but interest

is charged and policy coverage amount will decrease.

Borrowing against a deposit - typically has a low interest rate because of the safety of the loan. CD IRA Treasury Note Bond

Borrowing against an asset Car – usually has to be less then 5yrs old and you owe nothing on it House

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Chapter 16

Assignments:

Key Terms Review pg. 371

Questions: 1 – 6

Check Your Understanding pg. 671

Question: 7 – 8

Apply Your Knowledge pg. 362

Question: 9