1. Credit
Evaluate various sources of credit available to the government, business, and consumers.

2. Who uses Credit? Consumer Credit
Credit used by people for personal reasons.
Commercial Credit
Credit used by businesses.

3. Types of Credit
Charge Accounts – most common type of short- term or medium-term credit.
Regular Charge Accounts
Require that you pay for purchases in full within a certain period of time.
Revolving Charge Accounts
Allows you to borrow or charge up to a certain amount of money (credit limit) and pay back a part or the entire balance each month.
Budget Charge Accounts
Allows you to pay for costly items in equal payments spread out over a period of time.

4. Credit Cards Single-Purpose Multipurpose Travel and Entertainment
Can only be used to buy goods or services at the business that issued the card.
Examples: JC Penney, Sears
Multipurpose
Similar to a revolving charge account.
May be used at several locations.
Examples: Visa and Master Card
Travel and Entertainment
Similar to regular charge accounts.
Must be paid in full each month.
Example: American Express

5. Banks and Other Financial Institutions
Single Payment Loan
Debtor pays off loan in one payment.
Promissory Note
Written promise to repay with interest.
Installment Loan
Repaid in regular payments.

6. Installment Loans Types: Secured vs. Unsecured Closed vs. Open Ended
Student, mortgage, automobile, etc.
Secured vs. Unsecured
Secured loans are backed by collateral (help guarantee the repayment of a loan).
Closed vs. Open Ended
Closed-end credit is used for a specific purpose and involves a definite amount of money.
Open-end credit gives you a certain limit on the amount of money you can borrow.
Cosigner
Responsible for the repayment of a loan if the original party does not pay.

7. Seller-Provided Credit
Many stores provide credit to customers.

8. Consumer Finance Companies
Specialize in loans to people with poor credit ratings.
The cost of credit is higher than other institutions.

9. Payroll Advance Services
Short-term loans.
Pawnshop
Based on the value of something you own.
“Borrow Until Payday” Loan
Cost is extremely high.

10. Bonds
Bonds – written promise to repay a loan with interest on a specific date. The buyer of the bond is considered the creditor.
Corporate Bonds
Usually used to finance buildings and equipment.
Municipal Bonds
State and local governments use these to finance projects.
Savings Bonds
Sold by federal government.

11. Other Sources of Credit for Businesses
Small Business Administration
Offers a number of financial, technical, and management programs to help businesses.

12. Other Sources of Credit for Consumers
Life Insurance Plans
Cash Value Insurance
Provides both savings and death benefits.
Retirement Plans

13. Credit
Explain when and why borrowing is used for the purchase of goods and services.

14. Terms Credit Creditor Debtor
Privilege of using someone else’s money for a period of time.
Creditor
One who sells on credit or makes a loan.
Debtor
Anyone who buys on credit or receives a loan.
Obligated to pay back the loan.

15. Why Use Credit? Convenience Immediate Possession Emergencies
Shop without carrying cash.
Immediate Possession
Allows you to have possession on the goods or services now.
Emergencies
Helps in case of a serious situation.

16. Determine the advantages and disadvantages of using credit.

17. Advantages Immediate Possession Convenience Emergencies Saving Money
Buy now and pay later.
Emergencies
Saving Money
Buy an item while it is on sale.
Credit Rating
Establish a favorable credit rating.
Growth of the Economy
Buying goods will help the economy expand.

18. Disadvantages Overbuying Careless Buying Higher Prices
Most common hazard.
Careless Buying
Comparison shopping may not be a priority
Encourages impulse buying
Higher Prices
Some stores offer discounts for cash sales.

19. Disadvantages continued
Overuse of Credit
Too much is owed – unable to pay back.
Credit Fees
Interest paid on balance
Habit Forming

20. Results of Overuse Garnishment of Wages Repossession Bankruptcy
Money deducted from wages for money owed.
Repossession
Loss of property because of failure to repay loan.
Bankruptcy

21. Credit
What are the factors on which credit is granted and the cost of credit?

22. Process of Obtaining Credit
Credit Application
Documentation
Processing
Underwriting
Closing
Funding

23. 1. Credit Application
Form on which you provide information needed by a lender to make a decision about granting credit or approving a loan.
Provide the following information:
Salary, Employer, Outstanding Credit (Debt), Assets, Credit References, Checking and Savings Accounts, Stock Portfolio, etc.

24. 2. Documentation
Creditor will collect and verify necessary documentation for the extension of credit.
Examples: Bank statements, credit card statements, past W-2’s, etc.

25. 3. Processing
Building of loan file.
Evaluating credit worthiness.

26. Credit Worthiness Terms (Processing)
The C’s of Credit Worthiness
Capacity
Your ability to pay (income)
Character
Earned by paying bills on time and being a trustworthy, reliable, stable person.
References – people you have borrowed from in the past.
Collateral
Security to help guarantee that the creditor will be repaid.

27. Credit Worthiness Terms (Processing) continued
Credit History
Indicates the amount of debt you have and your payment history.
Capital
How much you have beyond what you owe.
Credit Limit
Maximum amount you can borrow.
Cosigner
Responsible for a loan if you, the original debtor, do not pay.

28. 4. Underwriting Reviewing loan for soundness.
Consumer Reporting Agencies
Company that compiles and keeps records on consumer payment habits.
Used to evaluate creditworthiness.
Examples: Equifax, Experian, and TransUnion.

29. 5. Closing Representative explains terms of credit.
Debtor signs appropriate forms.

30. 6. Funding
Creditor will issue credit/funds to the debtor.

31. Denial of Credit
Fair Credit Opportunity Act requires that credit denial cannot be based on sex, family, religion, etc.
Must be based on ability to pay back loan.

32. Cost of Credit Interest Rates Principal Time Factor Maturity Date
Percentage that is applied to debt.
Principal
Amount of money borrowed.
Time Factor
Length of time for which interest will be charged.
Maturity Date
Date on which a loan must be repaid.

33. Cost of Credit continued
Finance Charge or Fees
Cost of credit stated in a dollar figure
Annual Percentage Rate (APR)
Indicates how much credit costs on a yearly basis.
Grace Period
Time period during which no finance charges will be added to an account.
Cash Advance
Borrow money on a credit card.

34. Simple Interest Formula
I=PRT
I=Interest
P=Principal
R=Rate
T=Time

35. NEXT - Examine bankruptcy and credit laws.

36. Your Credit Credit Bureau Building Credit
An agency that collects information on how promptly people and businesses pay their bills.
Information retrieved from banks, finance companies, stores, credit card companies, and other lenders.
Building Credit
Open a checking or savings account
Apply for a local department store credit card.
Take out a small loan from your bank.
Pay all loans and credit card bills on time.

37. Handling Credit Problems
Credit Counselor
Helps consumers with credit problems.
Consolidation Loan
Combines all your debts in order to make one monthly payment on several different loans or credit cards.

38. Handling Credit Problems continued
Credit Services
Consumer Credit Counseling Service
Nonprofit organization that provides debt counseling services for families and individuals with serious financial problems.
Debt Repayment Plan
Reorganizes debt and sometimes includes renegotiating terms of debt.
Creditors will often accept such arrangements for partial payment, rather than not be repaid.

39. What if you are denied credit?
The Equal Credit Opportunity Act says:
You have the right to know the reasons.
You are entitled to know what specific information in the credit report led to your denial.
No fee will be charged if you state why you are requesting a copy of the report.
You are entitled to ask the credit bureau to investigate any inaccurate or incomplete information and correct your records.

40. Truth-in-Lending Laws
Requires that you be told the cost of a credit purchase in writing before you sign a credit agreement.
Protects consumers against unauthorized use of credit cards.
Limits your liability to $50 for unauthorized credit card purchases made prior to notification of the issuer.

41. Usury Laws
Restricts the amount of interest that can be charged.

42. Equal Credit Opportunity Act
The credit application can be judged only on the basis of financial responsibility.
Cannot discriminate based on gender, age, ethnicity, or religion.
Allows only three reasons for denying credit:
Low income
Large current debts
Poor record of making payments in the past
G77

43. Fair Credit Billing Act
Requires creditors to correct billing mistakes brought to their attention.
Requires creditor to inform consumers of steps they need to take to get the error corrected.

44. Fair Credit Reporting Act
Gives consumers the right to know what specific information credit bureaus are providing to potential creditors, employers, and insurers.

45. Fair Debt Collection Practices Act
Protects consumers from collection agents.
Collection agents:
Must identify themselves.
Cannot tell others about the debt.
Cannot harass debtor.

46. Federal Trade Commission (FTC)
Enforces laws on credit.

47. Bankruptcy
Legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts.

48. US Bankruptcy Act of 1978 Chapter 7 (Liquidation)
Draw up a petition listing assets and liabilities.
Most of the debtor’s assets are sold to pay off creditors.
Cannot release debt on alimony, child support, taxes, fines, educational loans, and court fees.
Chapter 11 – (Reorganization) Businesses Only
Chapter 13
Propose a plan for using future earnings and assets to eliminate debts over a period of time.

49. Effects of Bankruptcy Kept on file with credit bureau for 10 years.
Affects credit rating, future extensions of credit, loss of jobs, etc.