1. Chapter © 2010 South-Western, Cengage Learning Credit in America 16-17

2. © 2010 South-Western, Cengage Learning SLIDE 2 Chapter 16 Do Now What is credit?

3. © 2010 South-Western, Cengage Learning SLIDE 3 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. Early in history, credit consisted of a verbal promise to pay later.

4. © 2010 South-Western, Cengage Learning SLIDE 4 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.

5. © 2010 South-Western, Cengage Learning SLIDE 5 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- is property pledged to assure repayment of a loan.

6. © 2010 South-Western, Cengage Learning SLIDE 6 Chapter 16 Making Payments 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.

7. © 2010 South-Western, Cengage Learning SLIDE 7 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

8. © 2010 South-Western, Cengage Learning SLIDE 8 Chapter 16 Types of Credit Open-end credit is where a borrower can use credit up to a stated limit. Revolving accounts (most credit cards) 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. Does not allow continuous borrowing or varying payment amounts American Express Installment payments (car loans) Service credit involves providing a service for which you will pay later. (single-payment)

9. © 2010 South-Western, Cengage Learning SLIDE 9 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 Cash Advances (money borrowed against the credit limit) (continued)

10. © 2010 South-Western, Cengage Learning SLIDE 10 Chapter 16 Sources of Credit Retail Store- Examples include department stores, discount stores, and specialty stores. Many retail stores offer their own credit cards. Credit Card Companies Banks and Credit Unions (sometimes offer lower rates) Finance company- an organization that makes high-risk consumer loans. 2 types: consumer(durable goods) & sales (cars-GM) A usury law is a state law that sets a maximum interest rate that may be charged for consumer loans. Loan sharks are unlicensed lenders who charge illegally high interest rates.

11. © 2010 South-Western, Cengage Learning Sources of Credit A pawnbroker (or pawnshop) A legal business that makes high-interest loans based on the value of personal possessions pledged as collateral. Private Lender One of the most common sources of cash loans. May include parents, other relatives, and friends, as well as financial institutions. They may or may not charge interest or require collateral. SLIDE 11 Chapter 16

12. © 2010 South-Western, Cengage Learning SLIDE 12 Chapter 17 Credit Records Before granting you credit, a creditor will check into your past credit performance (history): Did you pay your bills on time? How much total credit did you receive? How much do you owe now and how large are your payments? Credit history is the complete record of your borrowing and repayment performance.

13. © 2010 South-Western, Cengage Learning SLIDE 13 Chapter 17 Your Credit File Every person who uses credit has a credit history on file at a credit bureau (a business that gathers, stores, and sells credit information to other businesses). There are 3 National Credit Bureaus TransUnion Experian Equifax

14. © 2010 South-Western, Cengage Learning SLIDE 14 Chapter 17 Credit Report A credit report is a written statement of a consumer’s credit history, issued by a credit bureau to businesses. samplesample You can order a copy of your credit report online at the credit bureau’s web site or by writing to the bureau. When you are denied credit, you can get a free credit report if you ask within 30 days of being denied.

15. © 2010 South-Western, Cengage Learning SLIDE 15 Chapter 17 How Information Is Gathered Credit bureaus gather information from businesses, called subscribers. Each subscriber supplies information about its accounts with customers including: Names Addresses Credit balances On-time payment record Late payment Credit bureaus also gather information from many other sources.

16. © 2010 South-Western, Cengage Learning SLIDE 16 Chapter 17 How Information Is Used When you apply to a business for credit, the business (subscriber) asks the credit bureau for your credit report. Information in the credit report is then used as the basis for granting or denying credit. The subscriber wants evidence that the person is financially responsible such as: How likely are you to repay on time? How secure is your job? Do you make enough to make the payments?

17. © 2010 South-Western, Cengage Learning SLIDE 17 Chapter 17 Creditworthiness Before potential creditors will grant credit to you, they must determine whether you are a good risk—that you are creditworthy. A person who is considered creditworthy usually meets five basic qualifications, called the five Cs of credit: Character Capacity Capital Conditions Collateral

18. © 2010 South-Western, Cengage Learning 5 C’s of Credit Character is a responsible attitude toward honoring obligations, often judged on evidence in the person’s credit history. Capacity is the financial ability to repay a loan with present income. Capital refers to financial assets (bank accounts, investments, and property) you possess that are worth more than your debts. There may be “external” conditions that affect your ability to repay a debt. (job security, economy, etc) Collateral is property pledged to assure repayment of a loan, such as the house, car, or furniture being purchased. SLIDE 18 Chapter 16

19. © 2010 South-Western, Cengage Learning SLIDE 19 Chapter 17 Getting Started with Credit Begin with a savings account. Open a checking account. Open a store credit account. Many stores will allow you to open a small account with a responsible adult as a cosigner. A cosigner is someone who promises to pay if the borrower fails to pay. Get a small loan. Apply for a credit card.

20. © 2010 South-Western, Cengage Learning SLIDE 20 Chapter 17 Services Available Related to Your Credit Files Credit guard services Credit freezing services

21. © 2010 South-Western, Cengage Learning SLIDE 21 Chapter 17 Evaluating Credit Credit bureaus evaluate each consumer based on his or her credit history, amount of credit, and ability to take on additional debt. There are two major classifications used to evaluate consumers: Credit rating Credit score

22. © 2010 South-Western, Cengage Learning SLIDE 22 Chapter 17 Credit Rating Your credit rating is a measure of creditworthiness based on an analysis of your credit and financial history. This process rates consumers according to how reliably they pay back money borrowed or charged. Excellent credit rating Good credit rating Fair credit rating Poor credit rating

23. © 2010 South-Western, Cengage Learning SLIDE 23 Chapter 17 Credit Score In a point system, the credit bureau assigns points based on factors such as amount of current debt, number of late payments, number and types of open accounts, current employment, and amount of income. When your points are added up, they result in a credit score (FICO score) that tells potential creditors the likelihood that you will repay debt as agreed. The higher your score, the greater the chance you will be a good credit risk. The higher your score, the better terms and interest rates you will get.

24. © 2010 South-Western, Cengage Learning SLIDE 24 Chapter 17 Credit Reports Credit files are updated continuously. Information stays in the file for seven years. Bankruptcy information stays in the file for ten years. Credit reports are requested for credit applications, employment applications, and insurance reasons.

25. © 2010 South-Western, Cengage Learning SLIDE 25 Chapter 17 Credit Reports Formats vary, but credit reports contain sections similar to these: Summary of information Public record information Credit information Account detail Requests for credit history Personal information (continued)

26. © 2010 South-Western, Cengage Learning SLIDE 26 Chapter 17 Credit Laws Consumer Credit Protection Act It is also known as the Truth-in-Lending Law. It requires lenders to fully inform consumers about all costs of a credit purchase before an agreement is signed. Fair Credit Reporting Act It gives you the right to know what is in your file and who has seen your file.

27. © 2010 South-Western, Cengage Learning SLIDE 27 Chapter 17 Credit Laws Fair Credit Billing Act It requires creditors to resolve billing errors within a specified period of time. Equal Credit Opportunity Act It was designed to prevent discrimination in the evaluation of creditworthiness. Discrimination is treating people differently based on prejudice rather than individual merit. (continued)

28. © 2010 South-Western, Cengage Learning SLIDE 28 Chapter 17 Credit Laws Fair Debt Collection Practices Act It was designed to eliminate abusive collection practices by debt collectors. A debt collector is a person or company hired by a creditor to collect the overdue balance on an account. (continued)