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Today. Notes – CREDIT: Chapter 16.1 SMG – Portfolio Updates. 16. Credit in America. 16.1 Credit: What and Why 16.2 Types and Sources of Credit. 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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Today

Today

  • Notes – CREDIT: Chapter 16.1

  • SMG – Portfolio Updates

Chapter 16


Credit in america

16

Credit in America

16.1 Credit: What and Why

16.2Types and Sources of Credit


Today

Learning Targets

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

  • List and Explain advantages and disadvantages of using credit.

Chapter 16


Key terms

KEY TERMS

  • Credit

  • Debtor

  • Creditor

  • Capital

  • Collateral

  • Finance Charge

  • Line of Credit

  • Deferred Billing

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 at a cost (typically interest)

  • Early forms of credit started with

    • Farmers

  • Credit today

    • Merchants, Retail, Wholesale, etc.

      Credit has become a way of life!

Chapter 16


The use of credit

The Use of Credit

  • Adebtoris 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.

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

    • Personal History

Chapter 16


Income

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.

Chapter 16


Financial position

Financial Position

  • Capital is the value of property you possess after deducting your debts.

    Capital Examples

    • bank accounts

    • Investments

    • Real estate

    • Other 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).

Chapter 16


Collateral

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 - Example

    • You 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.

Chapter 16


Making payments

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 Chargeis the total dollar amount of all interest and fees you pay for the use of credit.

  • Minimum Paymentis the least amount of money you have to pay per your monthly statement.

    • Always pay more than the minimum due amount.

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

Credit

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

Assignments:

Chapter 16


Lesson 16 2 types and sources of credit

Lesson 16.2Types and Sources of Credit

Learning Targets

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

  • Describe and compare sources of credit.

Chapter 16


Key terms1

KEY TERMS

  • Open-End Credit

  • APR

  • Grace Period

  • Closed-End Credit

  • Service Credit

  • Finance Company

  • Loan Sharks

  • Usury Law

  • Pawnbroker

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 creditis where a borrower can use credit up to a stated limit.

  • Charge Cards

    • Master Card

    • Visa

    • Discover

    • American Express

  • Revolving Accounts

    • American Eagle

    • Sears

    • Kohl’s

    • Best Buy

Chapter 16


Credit card agreements

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.

Chapter 16


Closed end credit

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

  • Also called Installment Credit

    Examples

    • Cars

    • Furniture

    • Major Appliances

Chapter 16


Service credit

Service Credit

  • Service creditinvolves providing a service for which you will pay later.

    Examples:

    • Utility services

    • Phone services

    • Cable/Satellite TV services

  • Examples of businesses that extend service credit:

    • Doctors

    • Lawyers

    • Dry Cleaners

    • Repair Shops

  • 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

    Remember it is NOT FREE – consumers pay for it.

Chapter 16


Retail stores

Retail Stores

Examples

  • Department stores

  • Discount stores

  • Specialty stores.

  • Many retail stores offer their own credit cards.

    • These cards are accepted only at the issuing store.

      AdvantagesDisadvantages

    • Receive DiscountsVery High Interest Rates

    • Advance notice of salesCan only use them there

    • Receive Gift 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

      Examples - Visa, MasterCard, Discover, Amer. Express

      Benefits

    • Accepted most places

    • Available cash advances

    • Access to Checks

    Chapter 16


    Banks and credit unions

    Banks and Credit Unions

    • Credit cards

    • Closed-end loans

      • House

      • Car

      • Vacation

      • Home Repair

    Chapter 16


    Finance companies

    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.

    Chapter 16


    Pawnbrokers

    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:

        • Guns

        • Cameras

        • Jewelry

        • Radios

        • TVs

        • Computers

        • Collector Items

          Popular Reality TV - Pawn Stars and Hard Core Pawn

    Chapter 16


    Private lenders

    Private Lenders

    • One of the most common sources of cash loans is from a private lender – typically they do not charge interest.

      Examples of Private Lenders

      • Parents

      • Relatives

      • Friends

    Chapter 16


    Other sources of credit

    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

    Chapter 16


    Assignments1

    Key Terms Review pg. 371

    Questions: 1 – 6

    Check Your Understanding pg. 671

    Question: 7 – 8

    Apply Your Knowledge pg. 362

    Question: 9

    Assignments:

    Chapter 16


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