Going Into Debt $$$

Americans & Credit Credit allows people to own homes, improve their communities and purchase other items instead of waiting. Credit allows people to own homes, improve their communities and purchase other items instead of waiting. Homeownership is the key to the U.S. economy. Homeownership is the key to the U.S. economy. Easy credit creates a temptation to live at a higher level than one can afford. Easy credit creates a temptation to live at a higher level than one can afford.

Americans & Credit Economy depends on individuals and groups being able to borrow funds. Economy depends on individuals and groups being able to borrow funds. Governments borrow funds. Governments borrow funds. Credit – receipt of money either directly or indirectly to buy goods and services in the present with the promise to pay for them in the future Credit – receipt of money either directly or indirectly to buy goods and services in the present with the promise to pay for them in the future Consumer Debt – Figure 4.1 on page 84 Consumer Debt – Figure 4.1 on page 84

Americans & Credit Debt = Principal + Interest Debt = Principal + Interest Principal – amount of money originally borrowed in a loan Principal – amount of money originally borrowed in a loan Interest – amount of money the borrower must pay for the use of someone else’s money Interest – amount of money the borrower must pay for the use of someone else’s money

Americans & Credit Installment Debt – type of loan repaid with equal payments, or installments, over a specific period of time Installment Debt – type of loan repaid with equal payments, or installments, over a specific period of time Durable Goods – manufactured items that have a life span longer than 3 years (cars & appliances) Durable Goods – manufactured items that have a life span longer than 3 years (cars & appliances) Longer repayment period means smaller payments but more interest being paid (Figure 4.2, page 85). Longer repayment period means smaller payments but more interest being paid (Figure 4.2, page 85).

Americans and Credit Mortgage – debt owed on real property (houses, buildings and land) Mortgage – debt owed on real property (houses, buildings and land) People use credit to obtain and benefit from goods now instead of in the future. People use credit to obtain and benefit from goods now instead of in the future. People buy now and pay it off during the lifetime of the item. People buy now and pay it off during the lifetime of the item. Decision to use credit depends if the satisfaction gained is greater than the interest payments Decision to use credit depends if the satisfaction gained is greater than the interest payments

Sources of Loans & Credit Types of Financial Institutions Types of Financial Institutions Commercial Banks – bank whose main functions are to accept deposits, lend money, and transfer funds among banks, individuals and businesses Commercial Banks – bank whose main functions are to accept deposits, lend money, and transfer funds among banks, individuals and businesses Savings & Loan Associations (S&L) – depository institution that accepts deposits and lends money with typically a lower interest rate than commercial banks Savings & Loan Associations (S&L) – depository institution that accepts deposits and lends money with typically a lower interest rate than commercial banks

Sources of Loans & Credit Types of Financial Institutions Types of Financial Institutions Savings Banks – depository institution originally set up to serve small savers overlooked by commercial banks (TV commercial) Savings Banks – depository institution originally set up to serve small savers overlooked by commercial banks (TV commercial) Credit Unions – depository institution owned and operated by its members to provide savings accounts & low-interest loans only to its members Credit Unions – depository institution owned and operated by its members to provide savings accounts & low-interest loans only to its members Finance Company – company that takes over contracts for installment debts from stores and adds a fee for collecting the debt; Finance Company – company that takes over contracts for installment debts from stores and adds a fee for collecting the debt;

Sources of Loans & Credit Charge Accounts – credit extended to a consumer allowing the consumer to buy goods or services from a particular company and to pay for them later Charge Accounts – credit extended to a consumer allowing the consumer to buy goods or services from a particular company and to pay for them later Credit Card – credit device that allows a person to make purchases at many kinds of stores, restaurants, and other businesses without paying cash (Visa, MasterCard, Discover & American Express) Credit Card – credit device that allows a person to make purchases at many kinds of stores, restaurants, and other businesses without paying cash (Visa, MasterCard, Discover & American Express)

Sources of Loans & Credit Finance Charge – cost of credit expressed monthly in dollars and cents Finance Charge – cost of credit expressed monthly in dollars and cents Annual Percentage Rate (APR) – cost of credit expressed as a yearly percentage (Figure 4.9 on page 93) Annual Percentage Rate (APR) – cost of credit expressed as a yearly percentage (Figure 4.9 on page 93) Debit Cards – enable customers to transfer funds directly from their bank accounts to a store Debit Cards – enable customers to transfer funds directly from their bank accounts to a store

Applying for Credit Jason Britton - $21, Credit Cards Jason Britton - $21, Credit Cards Creditworthiness – Are you able to loan money? How much? At what cost? Creditworthiness – Are you able to loan money? How much? At what cost? Credit Application Credit Application Credit Bureau – private business that investigates a person to determine the risk involved in lending money to that person Credit Bureau – private business that investigates a person to determine the risk involved in lending money to that person Credit Check – investigation of a person’s income, current debts, personal life, and past history of borrowing and repaying debts Credit Check – investigation of a person’s income, current debts, personal life, and past history of borrowing and repaying debts

Applying for Credit Credit Rating – rating of the risk involved in lending money to a specific person or business Credit Rating – rating of the risk involved in lending money to a specific person or business Credit Score – numerical value placed on a person’s creditworthiness – 850 is the highest score Credit Score – numerical value placed on a person’s creditworthiness – 850 is the highest score Capacity to Pay – looks at income, debt & employment Capacity to Pay – looks at income, debt & employment Character – person’s reputation as a reliable and trustworthy person (education & legal issues) Character – person’s reputation as a reliable and trustworthy person (education & legal issues) Collateral – something of value that a borrower lets the lender claim if a loan is not repaid Collateral – something of value that a borrower lets the lender claim if a loan is not repaid Secured Loan – loan that is backed up by collateral Secured Loan – loan that is backed up by collateral Unsecured Loan – loan guaranteed only by a promise to repay it Unsecured Loan – loan guaranteed only by a promise to repay it

Applying for Credit Responsibilities as a Borrower Responsibilities as a Borrower Pay off your debts Pay off your debts Collection agency Collection agency Costs to other borrowers if you do not repay Costs to other borrowers if you do not repay Receiving a bad credit history limits your ability to borrow in the future Receiving a bad credit history limits your ability to borrow in the future Keep track of charges and report any problems or missing credit cards Keep track of charges and report any problems or missing credit cards Muhammad Yunus – Page 99 Muhammad Yunus – Page 99

Government Regulation of Credit Truth in Lending Act – must give APR, how fees are calculated, 3 day cooling off period, and limits losses for stolen credit cards Truth in Lending Act – must give APR, how fees are calculated, 3 day cooling off period, and limits losses for stolen credit cards Equal Credit Opportunity Act – prohibits discrimination based on sex, race, religion, marital status, age or receipt of public assistance Equal Credit Opportunity Act – prohibits discrimination based on sex, race, religion, marital status, age or receipt of public assistance

Government Regulation of Credit Fair Credit Billing Act – sets up a procedure to correct mistakes on credit accounts Fair Credit Billing Act – sets up a procedure to correct mistakes on credit accounts Fair Debt Collection Practices Act – prevents abuse by debt collectors Fair Debt Collection Practices Act – prevents abuse by debt collectors Usury Law – law restricting the amount of interest that can be charged for credit Usury Law – law restricting the amount of interest that can be charged for credit

Government Regulation of Credit Personal Bankruptcy Personal Bankruptcy Bankruptcy – the inability to pay debts based on the income received Bankruptcy – the inability to pay debts based on the income received Buying on credit is a serious consumer activity Buying on credit is a serious consumer activity During bankruptcy creditors must give up much of what they own and are still responsible to pay certain debts (taxes). During bankruptcy creditors must give up much of what they own and are still responsible to pay certain debts (taxes). Personal bankruptcy remains on your record for 10 years and makes it difficult to borrow in the future Personal bankruptcy remains on your record for 10 years and makes it difficult to borrow in the future