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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. Chapter 16. The Need for Credit.

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Credit in america

Credit in America

16.1 Credit: What and Why

16.2 Types and Sources of Credit

Lesson 16 1 credit what and why
Lesson 16.1Credit: What and Why


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

  • Explain the advantages and disadvantages of using credit.

  • Chapter 16

The need for credit
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 credit

  • Credit today

  • Chapter 16

The use of credit
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.

  • Chapter 16

Qualifying for credit
Qualifying for Credit

  • To qualify for credit, you must have the ability to repay the loan.

  • Qualification is based on three things:

    • Income

    • Financial position

    • Collateral

  • Chapter 16


  • 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.

  • Chapter 16

Financial position
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).

  • Chapter 16


  • 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.

  • Chapter 16

Making payments
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.

  • Chapter 16

Advantages and disadvantages of credit
Advantages andDisadvantages of Credit

  • Disadvantages

    • Higher costs

    • Finance charges

    • Tie up income

    • Overspending

  • Advantages

    • Purchasing power

    • Emergency funds

    • Convenience

    • Deferred billing

    • Proof of purchase

    • Safety

  • Chapter 16

Lesson 16 2 types and sources of credit
Lesson 16.2Types and Sources of Credit


  • List and describe the types of credit available to consumers.

  • Describe and compare sources of credit.

  • Chapter 16

Types of credit
Types of Credit

  • Open-end credit

  • Closed-end credit

  • Service credit

  • Chapter 16

Open end credit
Open-End Credit

  • Open-end credit is where a borrower can use credit up to a stated limit.

  • Charge cards

  • Revolving accounts

  • Chapter 16

Credit card agreements
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.

  • Chapter 16

Credit card agreements1
Credit Card Agreements

  • (continued)

  • 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 period

      • The grace period is a timeframe within which you may pay your current balance in full and incur no interest charges.

    • Fees

      • Annual fees, transaction fees, and penalty fees

    • Method of calculating the finance charge

  • Chapter 16

Closed end credit
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

  • Chapter 16

Service credit
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.

  • Chapter 16

Sources of credit
Sources of Credit

  • Retail stores

  • Credit card companies

  • Banks and credit unions

  • Finance companies

  • Pawnbrokers

  • Private lenders

  • Other sources of credit

  • Chapter 16

Retail stores
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.

  • Chapter 16

Credit card companies
Credit Card Companies

  • Credit card issuers

  • Financial institutions

  • Other organizations

  • Chapter 16

Banks and credit unions
Banks and Credit Unions

  • Credit cards

  • Closed-end loans

  • Chapter 16

Finance companies
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.

  • Chapter 16


  • 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.

  • Chapter 16

Private lenders
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.

  • Chapter 16

Other sources of credit
Other Sources of Credit

  • Life insurance policies

  • Borrowing against a deposit

  • Borrowing against an asset

  • Chapter 16


  • Calculating credit card fees worksheet

  • Research different credit cards for the best options