1. Chapter 4 Going Into Debt

2. Section 1 Americans and Credit

3. Credit- is the receipt of funds to either directly or indirectly to buy goods and services in the present with the promise to pay for them in the future Principal- the amount originally borrowed Interest- the amount the borrower must pay for the use of someone else’s funds

4. Debt = principal + interest

5. Installment debt is one of the most common types of debt- (pay back loan in equal installments over a specific period of time) Many durable goods (lasting more than three years) are bought on installment The longer it takes you to pay back the loan, the more interest you pay.

7. The largest form of installment debt in the United States is what people owe on mortgages (house, buildings, land)

9. People use credit because: They believe the “big ticket” products are essential and they want them immediately They can spread payments over the service life of the item

10. Benefit- able to buy and enjoy now rather than later Cost- whatever the borrower must pay in interest or lost opportunities to buy other items.

11. Section 2 Sources of Loan and Credit

12. Commercial banks- banks whose main purpose is to accept deposits, lend funds, and transfer funds among banks, individuals, and businesses

13. Savings and Loan Associations- depository institution that accepts deposits and lends funds Savings Bank- depository institution originally set up to serve small savers overlooked by commercial banks

14. Credit Union- depository institution owned and operated by its members to provide savings accounts and low- interest only to its members Finance Companies- Takes over contract for installment debts from stores and adds a fee for collecting the debt—makes loans directly to consumer at a higher rate

15. Charge Accounts Charge account- credit extended to a consumer allowing the consumer to buy goods and services from a particular company and pay for them later

16. Department stores offer three main types of charge account: Regular account- has a credit limit or a maximum amount of goods or services a person/business can buy on the promise to pay later—You must pay the amount every 30 days or interest will be due

17. Revolving account- allows you to make additional purchases from the same store even if the previous months bill is not paid in full—You are charged interest on the amount you do not pay

18. Installment account- allows you to buy expensive items and pay for them through equal payments over time—You are charged interest along the way

19. Credit card allows a person to make purchases at many kinds of businesses without paying cash A debit card allows funds to be taken directly from your account—does not provide a loan or extend credit

20. A finance charge is the cost of credit expressed monthly in dollars and cents Interest costs plus any other charges connected with credit are taken into account

21. Finance charges are computed in four different ways: Previous balance Average daily balance Adjusted balance Past due balance

22. The annual percentage rate (ARP) is the cost of credit expressed as a yearly percentage This charge also takes into account any non-interest cost of credit, such as a membership fee

23. Section 3 Applying For Credit

24. Several factors determine a person’s creditworthiness when applying for credit: You will be asked to fill out a credit application The lender will hire a credit bureau to do a credit check The credit bureau will provide the creditor with a credit rating for you

25. Creditor may also review: Your capacity to pay Your character Any collateral you may have

27. A financial institution will usually ask a borrower to provide collateral Secured loan- backed by collateral Unsecured loan- backed only by the promise to repay

28. A bank may lend funds to a person with a cosigner— person who signs a loan contract with the borrower and promises to repay the loan if the borrower does not

29. Credit carries responsibilities with it: Paying your debts on time Keeping a complete record of all charges you have made Notifying the issuer if your card has been lost or stolen

30. Section 4 Government Regulation of Credit

31. The Truth and Lending Act- this act requires creditors to keep consumers fully informed about the costs and conditions of borrowing The Equal Credit Opportunity Act- this act prohibits providers from denying credit based on race, religion, national origin, gender, marital status, or age

32. State usury laws restrict the amount of interest that can be changed for credit (usually no more than 18% a year)

33. Bankruptcy is the state of legally having been declared unable to pay off debts owed with available income When bankruptcy is approved through bankruptcy court, debtors must give up most of what they own, which is distributed to the creditors

34. By law, certain debts, such as taxes, must continue to be paid Bankruptcy proceedings remain on your credit record for ten years