Credit and Debt Personal FinancePersonal Finance

What is Money? Medium of Exchange Medium of Exchange Used to determine value during the exchange Used to determine value during the exchange Unit of Account Unit of Account Ability to compare value of g/s Ability to compare value of g/s Store of Value Store of Value Holds value if saved and not spent Holds value if saved and not spent

What Backs our Money? Commodity Commodity Objects that have value in and of themselves Objects that have value in and of themselves Representative Representative Holder can exchange them for something of value Holder can exchange them for something of value Fiat Fiat An order or decree An order or decree Has value because the government stands behind it Has value because the government stands behind it FED keeps track of the money and growth of the economy FED keeps track of the money and growth of the economy

Modern Banking Federal Reserve System Federal Reserve System Not enough gold Not enough gold Central bank to lend $ to member banks Central bank to lend $ to member banks Established a board of governors Established a board of governors Control $ supply Control $ supply

Changes to Banking Great Depression Great Depression High-risk loans High-risk loans Bank runs, failure Bank runs, failure Glass-Stiegle Act Glass-Stiegle Act FDIC Bank holiday Insure deposits Fiat money

New Problems Deregulation Deregulation Relaxation of government restrictions Relaxation of government restrictions Credit Cards – 1962 Credit Cards – 1962 Repeal Glass-Stiegle Repeal Glass-Stiegle S & L Crisis (1980s) New competition High interest rates Bad loans, fraud

Issues of Today Credit Crisis (2000s) Credit Crisis (2000s) Credit default swaps Credit default swaps Cheap money Cheap money Stated Income Stated Income Community Reinvestment Act Community Reinvestment Act ARM loans ARM loans FED policy of quantitative easing FED policy of quantitative easing

HISTORY OF CREDIT Credit has been around since people first started making transactions with each other Credit has been around since people first started making transactions with each other It used to be … thought of as evil It used to be … thought of as evil Only for business and government, not individual people Only for business and government, not individual people It was … made available to a few It was … made available to a few Only for people you knew well and could trust Only for people you knew well and could trust It is now … acceptable and expected It is now … acceptable and expected For everyone, all the time, and everywhere For everyone, all the time, and everywhere

CREDIT SCORES Available through services Available through services Free once per year Free once per year Assess applicants credit risk Assess applicants credit risk Equifax, Experian, TransUnion Equifax, Experian, TransUnion “I Love Debt Score” “I Love Debt Score”

MORTGAGES Secured loan for the purchase of real property Secured loan for the purchase of real property Fixed = interest stays the same throughout life of loan Fixed = interest stays the same throughout life of loan Longer term costs more Longer term costs more Plan for budget Plan for budget Adjustable = interest rate varies with the market Adjustable = interest rate varies with the market Usually starts off lower Usually starts off lower May be capped May be capped Refinance Refinance

CAR PAYMENTS Lease Lease New cars, maintenance free, short run savings New cars, maintenance free, short run savings Limits on mileage, no ownership, expensive in long run, insurance Limits on mileage, no ownership, expensive in long run, insurance Buy New Buy New New cars, ownership New cars, ownership Depreciation, eventual maintenance, possible high interest rate, insurance Depreciation, eventual maintenance, possible high interest rate, insurance Buy Used Buy Used Least expensive, ownership, insurance savings Least expensive, ownership, insurance savings Not new, maintenance costs Not new, maintenance costs

CONSUMER PROTECTION SEC = federal agency responsible for regulating the securities industry and for enforcing federal securities law SEC = federal agency responsible for regulating the securities industry and for enforcing federal securities law FTC = promotion of consumer protection and the elimination and prevention of anticompetitive business practices FTC = promotion of consumer protection and the elimination and prevention of anticompetitive business practices BBB = nonprofit, independent, local organizations focused on advancing marketplace trust BBB = nonprofit, independent, local organizations focused on advancing marketplace trust OCC = represents households in proceedings before state and federal regulators and in the courts; also educates consumers about electric, natural gas, telephone and water issues. OCC = represents households in proceedings before state and federal regulators and in the courts; also educates consumers about electric, natural gas, telephone and water issues.