Chapter 16 Credit in America

What is Credit?  Money borrowed to buy something now, with the agreement to pay for it later  Over 80% of all purchases are made with credit

Credit in the Past  U.S. grew from bartering/trading economy to currency exchange economy  Earliest form of credit was general store  Interest was rarely charged  Use of credit caused the economy to grow rapidly  1990s – record number of people filed for bankruptcy due to enormous credit card debt

Credit Today  Merchants encourage customers to use credit  Forms of credit: Credit cards Loans Lines of credit Short-term financing (furniture, appliances, etc.) Long-term financing (houses, cars, college education, etc.)

Credit Vocabulary  Borrower = Debtor  Lender = Creditor  Capital = property you own (bank accounts, investments, real estate, etc.)  Collateral = property pledged to assure repayment of a loan (cars, houses, etc.)  Repossession = lender takes ownership of collateral if borrower defaults on payments

Credit Vocabulary  Principal = amount borrowed  Interest = charged on amount borrowed  Balance due = principal plus interest  Finance charge = total interest and fees paid by the borrower to the lender  Installment agreement = agreement to make regular payments for a set period of time

Advantages of Credit  Allows you to purchase expensive items now  Provides emergency funds Lines of credit = pre-established amount that can be borrowed on demand  Provides convenience Don’t have to carry cash Proof of purchase

Disadvantages of Credit  May be more costly than cash transactions  Finance charges add to the cost of items paid for over time  Ties up future income  Can lead to overspending

Lesson 16.2 Types and Sources of Credit

Kinds of Credit  Open-ended credit  Closed-end credit  Service credit

Open-Ended Credit  Agreement to lend money up to a stated limit  No maturity date  Open 30-day accounts Balance paid in full each month American Express, Diner’s Club  Revolving credit accounts Option to pay balance in full each month or a minimum monthly payment Visa, MasterCard, Discover Department stores, gasoline companies

Credit Card Terms  Annual percentage rate = the cost of credit as a yearly percentage  Grace period = avoid interest charges by paying balance in full by a specified date  Annual fees = fee charged for having the card

Credit Cards Terms  Other fees: Access checks – use checks to access credit card Over-the-limit fee – balance exceeds pre- set limit Late fee – payment is made after due date  Finance charge = method creditor uses to calculate amount of finance charge (interest)

Closed-End Credit (Installment Loans)  Loan for a specific amount repaid in full by a stated due date  Does not permit continuous borrowing  Repaid in fixed payments (installments)  Product purchased usually serves as collateral to assure payment (car, house)

Service Credit  Agreement to have service performed now and pay for it later  Utility bills (telephone, electric, etc.)  Doctors, lawyers, hospitals, dry cleaners

Sources of Credit  Retail stores  Credit card companies  Banks and credit unions  Finance companies  Pawnbrokers  Private lenders  Other sources

Retail Stores  Departments stores, restaurants, etc.  Customers receive discounts, advance notice of sales, etc.

Credit Card Companies  Visa, MasterCard, Discover, American Express, etc.  Generally accepted nationwide/internationally  Cash advance – taking out a cash loan against your credit card  Access check – write a check against your credit card

Banks and Credit Unions  Extend credit to individuals and businesses  Finance specific purchases (cars, houses, etc.)  Credit unions: Non-profit organizations Lend money to members only

Finance Companies  Charge high interest rates on loans  Take more risk than banks/credit unions  Borrow money from banks and lend to consumers at higher rates  Two types: Consumer finance company – lends money to consumers to buy durables (furniture, appliances)  Household Finance, Beneficial Sales finance company – lends money through authorized representatives  GMAC

Pawnbrokers  A legal business making high-interest loans on personal possessions used as collateral  Guns, cameras, TVs, jewelry, etc.  Lend between 10% and 60% of the items value  Pawnbroker takes physical possession of item

Private Lenders  May or may not charge interest  Usually includes parents, other relatives, and friends

Other Sources  Loans against life insurance policies Do not have to be repaid Charge low interest rates Reduce the cash value of the policy  Certificate of Deposits Borrow against the value of the CD Pay interest between 2% - 5% higher than the CD rate

Credit Card Traps  Low introductory rate – rate is subject to change without notice and may rise significantly if a payment is late  Fixed percentage rate – rate is subject to change without notice and can be adjusted  Closed account rate – rate charged on remaining balance if you close your account  Late fees – incurred if payment is late; also may be subject to a higher interest rate  Over-the-limit fees – incurred if balance exceeds credit limit; also may be subject to a higher interest rate