Credit In AmericaPay Down Those Cards

Advantages of Credit

#1 Provide Emergency Funds

Line of Credit – preestablished amount that can be borrowed on demand

#2 Budgeting and Increased Buying Power

Purchase major itemsPaying over time establishes good credit rating

#3 Convenience

Get better service Advance notice of sales/special offersDeferred billling – purchases not billed until later

#4 Proof of Purchase

#5 Safer than Cash

If credit card is lost or stolen, owner is only responsible for the first $50 of loss if reported.

Disadvantages of Credit

Blowing Your Budget

Credit cards encourage people to spend money that they don't have

High Interest Rates and Increased Debt

Rates can change at any timeTeaser rates don’t last very long

Credit Purchases Cost More Than Cash Purchases

Only if the balance is not paid off each month

Vocabulary

Balance TransferMoving an unpaid credit card debt from one issuer to another

Card issuers sometimes offer teaser rates to encourage balance transfers

Credit CardAllow you to carry over portions of your balance from month to month. If you do not pay your balance in full, you are assessed finance charges.

Principal

Actual dollar amount of the purchases you madeAlso the balance that remains on your loan or credit card account.

Prime RateWhat banks charge their best commercial customers for loans. Changes often Some financial institutions use to set the APR for credit cards.

Open Ended CreditLimit is placed on how much customer can borrow during a given period.

Partial or entire balance paid within 30 days or over time.

No finance charge if balance is paid off

Ex. Credit cards

Open 30-day accounts

Full balance must be paid each monthWidely accepted Have higher credit limitsInstant purchasing power

Ex. American Express

Revolving credit account

Option of paying in full each month or making minimum/partial paymentExample: credit cards—Visa, MasterCard, Bergners, etc.

Installment Credit

Debt is divided into equal amounts for repaymentClosed-ended creditRepaid in fixed amountsItem purchased is collateral

Installment Purchase Agreement

Contract defining the repayment of the purchase price, plus finance charges in equal regular payments

APRAnnual Percentage RateCost of credit expressed as a YEARLY rate.Can change because of missed payments, no activity, etc.

Introductory/Teaser Rate

Low rate for financingOffered for a limited timeMay only apply to certain aspects of credit, for example balance transfers or new purchases.

Co-Signer

Person who pledges to repay the debt if borrower fails to do so.

Rates…

Fixed: APR doesn’t changeVariable: may change over time because of the prime lending rate.

Service Credit

Having a service performed and paying for it laterExample: telephone/utility, doctors, lawyers, dentists, repair shops

Layaway Plans

Offered by retail businessesItem is received once all payments are made.

Down paymentService feeIf you change your mind about layaway item, portion of payment or all is kept

Sources of Credit

Retail Stores

Department stores, drugstores, clothing storesCustomer shops where they have credit

Commercial Banks and Credit Unions

Used for purchasing car or home, general cash loansOffer credit cards – Bank credit cardsCredit unions offer loans to members with only lower interest rates

Finance CompanySmall loan companiesCharges higher interest rates Willing to take risksEasier to get loan from finance companies

2 types of Finance CompaniesConsumer FinanceGeneral purpose companyLoans for expensive items

Sales Finance CompanyAuthorized representative loansExample: GMAC—finances General Motors auto dealers

Other sourcesPawnshopsPrivate lendersLife insurance policies