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. 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 Financial position Collateral

© 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 Open-End Credit Open-end credit is where a borrower can use credit up to a stated limit. Charge cards Revolving accounts

© 2010 South-Western, Cengage Learning SLIDE 8 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 9 Chapter 16 Closed-End Credit Closed-end credit is a loan for a specific amount that must be repaid in full, including all finance charges, by a stated due date. Also called installment credit Does not allow continuous borrowing or varying payment amounts Often used to pay for very expensive items, such as cars, furniture, or major appliances

© 2010 South-Western, Cengage Learning SLIDE 10 Chapter 16 Service Credit Service credit involves providing a service for which you will pay later. For example, your utility services are provided for a month in advance; then you are billed. Many businesses extend service credit. Terms are set by individual businesses.

© 2010 South-Western, Cengage Learning SLIDE 11 Chapter 16 Sources of Credit Retail stores Credit card companies Banks and credit unions Finance companies Pawnbrokers Private lenders Other sources of credit