Chapter © 2010 South-Western, Cengage Learning Credit in America Credit: What and Why Types and Sources of Credit 16

© 2010 South-Western, Cengage Learning SLIDE 2 Chapter 16 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

© 2010 South-Western, Cengage Learning SLIDE 3 Chapter 16 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.

© 2010 South-Western, Cengage Learning SLIDE 4 Chapter 16 Qualifying for Credit To qualify for credit, you must have the ability to repay the loan. Qualification is based on three things: Income – earnings exceed expenses Financial position – capital Collateral – property pledged

© 2010 South-Western, Cengage Learning SLIDE 5 Chapter 16 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.

© 2010 South-Western, Cengage Learning SLIDE 6 Chapter 16 Advantages and Disadvantages of Credit Advantages Purchasing power Emergency funds Convenience Deferred billing Proof of purchase Safety Disadvantages Higher costs Finance charges Tie up income Overspending

© 2010 South-Western, Cengage Learning SLIDE 7 Chapter 16 Types of Credit Open-end credit Credit cards – stated limit Closed-end credit – load for a specific amount (car/home) Service credit – utilities (used before you pay for service)

© 2010 South-Western, Cengage Learning SLIDE 8 Chapter 16 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.

© 2010 South-Western, Cengage Learning SLIDE 9 Chapter 16 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 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 (continued)

© 2010 South-Western, Cengage Learning SLIDE 10 Chapter 16 Sources of Credit Retail stores Credit card companies Banks and credit unions Finance companies * Pawnbrokers Private lenders Other sources of credit*

© 2010 South-Western, Cengage Learning SLIDE 11 Chapter 16 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.

© 2010 South-Western, Cengage Learning Other Sources of Credit Life insurance policies Borrowing against a deposit Borrowing against an asset SLIDE 12 Chapter 16