Chapter 16 Credit in America MYPF CHAPTER 16 13-SEPT-2001 Chapter 16 Credit in America What Is Credit? Types and Sources of Credit

Describe the history of credit in America. 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 1970s 1990s First legislation to protect consumers People began to misuse credit Credit counseling first appeared 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

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 (or charges)

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 10-20 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 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 Open-ended credit Agreement to loan up to a specified amt Credit cards Option to pay off balance or repaying it over many months Referred to as “Revolving Credit Agreement” Open 30-Day Account Balance must be paid in full within 30 days Usually high or no credit limits

Kinds of Credit Closed-end credit Loan for a specific amount of money Auto, home, furniture, etc. Do 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

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

Sources of Credit Retail stores Banks and credit unions Finance companies Loan Sharks – unlicensed, illegally high interest rates Usury Laws – set maximum interest rates allowable Finance companies charge this rate! Pawnbrokers Make high interest loans based on items held as collateral Private lenders