Chapter 16 Credit in America  What Is Credit?  Types and Sources of Credit

Lesson 16.1 What Is Credit? Describe the history of credit in America. Define basic credit vocabulary. Discuss the advantages and disadvantages of using credit.

The History of Credit  The early years  Need arose when we established currency economy  Around time of the Industrial Revolution  When people were no longer self-sufficient  At a general store bought “on account”  Banks lent money to farmers  High interest rates – 25 to 50%

The History of Credit  The 1900s  Lower interest rates spurred economy  People had more purchasing power – demand for goods and services increased  Banks were more willing to lend money  1920 – 1990  Credit was way of life, not just for emergencies

The History of Credit  The 1900s  s  Credit cards were used as a form of payment as a promissory note to pay for purchases at a later time (end of month)  1970s  First legislation to protect consumers  People began to misuse credit  Credit counseling first appeared

The History of Credit  1990s  Record numbers of people declared bankruptcy as misuse continued  Even lower rates encouraged economic growth  Began to see non-bank credit cards and reward cards  2000s  American debt is up to 3 trillion dollars to credit card companies

The History of Credit  Credit today  Abundant and easy to get  Many people shop online using credit cards

The Vocabulary of Credit  Borrower or debtor  When you borrow money or use credit  Creditor  Person or company lending you money  Capital  Property you own that is worth more than your debts

The Vocabulary of Credit  Collateral  Property pledged towards repayment of loan  Don’t pay your loan, they take your items  Repossessed  Ownership of item goes to bank if you don’t pay loan  Principal  Amount borrowed (cost of items charged)

The Vocabulary of Credit  Finance charge  Interest you pay on the amount borrowed  Also referred to as handling charges, services charges or carrying charges  Minimum payment  On a credit card statement, the least you can pay  May barely cover finance charges

The Vocabulary of Credit  Due Date  Typically days from receipt of bill  Assessed late fee if not paid by due date  Added to balance – you’ll end up paying interest on the late fee  Installment Agreement  Make regular payments for a set period of time  Type of “secured loan”  Goods are collateral

Advantages and Disadvantages of Consumer Credit Advantages  Purchasing power  Emergency funds  Convenience  Deferred billing  Safety Disadvantages  Higher prices  Finance charges  Tie up income  Overspending

Lesson 16.2 Types and Sources of Credit List and describe the kinds of credit available to the American consumer. Describe and compare sources of credit.

Kinds of Credit  Closed-end credit  Loan for a specific amount of money  Auto, home, furniture, etc.  Does not allow continuous borrowing  Sometimes called “installment loan”

Kinds of Credit  Service credit  Receive service, pay for it later  Professional services  Doctor, dentist, lawyer, contractor, etc.  Electric, phone, water, etc.  May offer a budget plan

Sources of Credit  Retail stores  Banks and credit unions  Finance companies (GM and Ford have their own way to get a loan)  Loan Sharks  unlicensed, illegally high interest rates  Pawnbrokers  Make high interest loans based on items held as collateral  Private lenders

Credit Card Terms  Annual percentage rate (APR)  Free period (grace period)  Annual fees  Transaction fees and late fees  Method of calculating the finance charge

Chapter 17 Credit Records and Laws  Establishing Good Credit  Credit Ratings and Legal Protection © South-Western Educational Publishing

Lesson 17.1 Establishing Good Credit Discuss the importance of credit records and summarize how and why records are compiled. Describe the five Cs of credit. Explain how to get started using credit. © South-Western Educational Publishing

Lesson 17.2 Credit Ratings and Legal Protection Describe credit ratings and a point system for determining creditworthiness. Outline the contents of a credit report. Discuss the protections provided by the major credit laws. © South-Western Educational Publishing

Creditworthiness  Character  Capacity  Capital  Conditions  Collateral © South-Western Educational Publishing Five Cs of Credit

Getting Started with Credit  Begin with a savings account.  Open a checking account.  Open a store credit account.  Get a small loan.  Apply for a credit card. /what-is-a-credit-score/ /what-is-a-credit-score/ © South-Western Educational Publishing

Credit Records  Your credit file  How much or a credit risk  How to calculate your FICO score © South-Western Educational Publishing

Credit Ratings  FICO Score  Less then 600 hard to get a loan  Excellent – pay bills on time, more then minimum amount  Good – sometimes pays bills outside of grace period  Fair - Some late charge  Poor – not regular payments © South-Western Educational Publishing

Credit Reports  Summary of information  Public record information  Credit information  Account detail  Requests for credit history  Personal information © South-Western Educational Publishing

Credit bureau  Credit history  Credit report  Experian  TransUnion  Equifax © South-Western Educational Publishing

Why does it matter  The better your score the more money you can receive for a loan  The better your score the lower interest you will pay for your loan

Credit Laws  Consumer Credit Protection Act  Most be fully informed about cost of purchase in advance, finance charges, due dates, etc.  Fair Credit Reporting Act  Have the right to know what is on file about your credit  If denied must see explanation in 30 days © South-Western Educational Publishing

Credit Laws  Fair Credit Billing Act  Must have an itemized statement showing all charges, payments, credit to account  Equal Credit Opportunity Act – 1975  Credit CANNOT be denied based on religion, race, age, sex © South-Western Educational Publishing

Credit Laws  Fair Debt Collection Practices Act  Eliminate abusive actions in collecting debt  No threats and misleading statements © South-Western Educational Publishing

Filing Bankruptcy  Inability to pay monthly bills  Chapter 11 – do not have to pay back any debt  Chapter 13 – must make a plan to pay off debt  Chapter 7 – out of business  Chapter 12 - farm & fisheries  Chapter 10 – appointed trustee

Do not file Bankruptcy if at all possible  On credit history from 7-10 years  Hurts outlook of future loans  edge/1012/5-reasons-not-to-file-for- bankruptcy-in-your-20s.aspx