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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
16Credit 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