credit in america
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16. Credit in America. 16.1 Credit: What and Why 16.2 Types and Sources of Credit. Lesson 16.1 Credit: What and Why. GOALS Discuss the history of credit and the role of credit today. Explain the advantages and disadvantages of using credit. The Need for Credit. - PowerPoint PPT PresentationTRANSCRIPT
Chapter
© 2010 South-Western, Cengage Learning
Credit in America
16.116.1 Credit: What and Why
16.216.2 Types and Sources of Credit
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© 2010 South-Western, Cengage Learning
Lesson 16.1
Credit: What and Why
GOALSDiscuss the history of credit and the role
of credit today.Explain the advantages and
disadvantages of using credit.
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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.
Early forms of creditCredit today
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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.
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Qualifying for Credit
To qualify for credit, you must have the ability to repay the loan.
Qualification is based on three things: IncomeFinancial positionCollateral
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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 (such as bank accounts, investments, real estate, and other assets) after deducting your debts.
Having capital tells the creditor that you have accumulated assets, which indicates responsibility.
Your debt represents cash outflow and will be compared to your cash inflow (income).
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Collateral
To borrow large amounts of money, creditors often want more than just your promise to repay; they want collateral.
Collateral is property pledged to assure repayment of a loan.
If you do not make your loan payments, the creditor can seize the pledged property.
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Making Payments
Once you have completed a credit purchase, you owe money to the creditor.
The principal (amount borrowed) plus interest for the time you have the loan is called the balance due.
The finance charge is the total dollar amount of all interest and fees you pay for the use of credit.
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Advantages andDisadvantages of Credit
Advantages Purchasing power Emergency funds Convenience Deferred billing Proof of purchase Safety
Disadvantages Higher costs Finance charges Tie up income Overspending
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Lesson 16.2
Types and Sources of Credit
GOALSList and describe the types of credit
available to consumers.Describe and compare sources of credit.
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Types of Credit
Open-end creditClosed-end creditService credit
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Open-End Credit
Open-end credit is where a borrower can use credit up to a stated limit.
Charge cardsRevolving accounts
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Credit Card Agreements
A credit card is a form of borrowing and usually involves interest and other charges.
The terms of the credit card agreement affect the overall cost of the credit you will be using.
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Credit Card Agreements
Credit card agreement terms to consider: Annual percentage rate (APR)
The annual percentage rate (APR) is the cost of credit expressed as a yearly percentage.
Grace periodThe grace period is a timeframe within which you may pay
your current balance in full and incur no interest charges.
FeesAnnual fees, transaction fees, and penalty fees
Method of calculating the finance charge
(continued)
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Closed-End Credit
Closed-end credit is a loan for a specific amount that must be repaid in full, including all finance charges, by a stated due date.
Also called installment credit Does not allow continuous borrowing or
varying payment amounts Often used to pay for very expensive items,
such as cars, furniture, or major appliances
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Service Credit
Service credit involves providing a service for which you will pay later.
For example, your utility services are provided for a month in advance; then you are billed.
Many businesses extend service credit. Terms are set by individual businesses.
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Sources of Credit
Retail storesCredit card companiesBanks and credit unionsFinance companiesPawnbrokersPrivate lendersOther sources of credit
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Retail Stores
Examples of retail stores include department stores, discount stores, and specialty stores.
Many retail stores offer their own credit cards. These cards are accepted only at the issuing store. Store credit customers often receive discounts,
advance notice of sales, and other privilegesnot offered to cash customers or to customers using bank credit cards.
Most retail stores also accept credit cards issued by major credit card companies.
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Credit Card Companies
Credit card issuersFinancial institutionsOther organizations
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Banks and Credit Unions
Credit cardsClosed-end loans
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Finance Companies
A finance company is an organization that makes high-risk consumer loans.
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) is a legal business that makes high-interest loans based on the value of personal possessions pledged as collateral.
Possessions that are readily salable (such as guns, cameras, jewelry, radios, TVs, and collector’s coins) are usually acceptable collateral.
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Private Lenders
One of the most common sources of cash loans is the private lender.
Private lenders might include parents, other relatives, friends, and so on.
Private lenders may or may not charge interest or require collateral.
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Other Sources of Credit
Life insurance policiesBorrowing against a depositBorrowing against an asset