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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 Credit: What and Why Learning Targets Discuss the history of credit and the role of credit today. List and Explain advantages and disadvantages of using credit.
© 2010 South-Western, Cengage Learning SLIDE 3 Chapter 16 KEY TERMS Credit Debtor Creditor Capital Collateral Finance Charge Line of Credit Deferred Billing
© 2010 South-Western, Cengage Learning SLIDE 4 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 at a cost (typically interest) Early forms of credit Farmers Credit today Merchants, Retail, Wholesale Credit has become a way of life!
© 2010 South-Western, Cengage Learning SLIDE 5 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. Current economic crisis is due to this practice not being followed.
© 2010 South-Western, Cengage Learning SLIDE 6 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 Personal History
© 2010 South-Western, Cengage Learning SLIDE 7 Chapter 16 Income Sources of income include: Job Interest Dividends Alimony Royalties Income represents cash inflow. When your earnings exceed your expenses, you have the capacity to take on debt.
© 2010 South-Western, Cengage Learning SLIDE 8 Chapter 16 Financial Position Capital is the value of property you possess after deducting your debts. Capital Examples bank accounts Investments Real estate Other assets with unbiased value after deducting your debts. Having capital tells the creditor that you have accumulated assets, which indicates responsibility and monetary value. Cash Outflow (Debt) will be compared to your Cash Inflow (Income).
© 2010 South-Western, Cengage Learning SLIDE 9 Chapter 16 Collateral Collateral is property pledged to assure repayment of a loan. To borrow large amounts of money, creditors often want more than just your promise to repay; they want collateral. If you do not make your loan payments, the creditor can seize the pledged property. Repossession - Example You buy a new 60in HDTV from Best Buy using a credit card. You do not make your payments for an extended period of time. Collection agency gets involved: Call you at work/home trying to collect the debt. Come and get the item you have defaulted payment on.
© 2010 South-Western, Cengage Learning SLIDE 10 Chapter 16 Making Payments Once you have completed a credit purchase, you owe money to the creditor. Principal (amount borrowed) plus interest for the time you have the loan is called the Balance Due. Finance Charge is the total dollar amount of all interest and fees you pay for the use of credit. Minimum Payment is the least amount of money you have to pay per your monthly statement. Always pay more than the minimum due amount.
© 2010 South-Western, Cengage Learning SLIDE 11 Chapter 16 Credit Advantages Increased Purchasing Power Emergency Funds Convenience Deferred Billing Proof of Purchase (records) Safety Disadvantages Higher Costs Finance Charges Overspending Tie Up Future Income
© 2010 South-Western, Cengage Learning SLIDE 12 Chapter 16 Assignments: Key Terms Review pg. 362 Questions: 1 – 8 Check Your Understanding pg. 362 Question: 10 Apply Your Knowledge pg. 362 Question: 11
© 2010 South-Western, Cengage Learning SLIDE 13 Chapter 16 Lesson 16.2 Types and Sources of Credit Learning Targets List and describe the types of credit available to consumers. Describe and compare sources of credit.
© 2010 South-Western, Cengage Learning SLIDE 14 Chapter 16 KEY TERMS Open-End Credit APR Grace Period Closed-End Credit Service Credit Finance Company Loan Sharks Usury Law Pawnbroker
© 2010 South-Western, Cengage Learning SLIDE 15 Chapter 16 Types of Credit Open-end credit Closed-end credit Service credit
© 2010 South-Western, Cengage Learning SLIDE 16 Chapter 16 Open-End Credit Open-end credit is where a borrower can use credit up to a stated limit. Charge Cards Master Card Visa Discover Revolving Accounts American Eagle Abercrombie Finch Kohls Macy’s Best Buy
© 2010 South-Western, Cengage Learning SLIDE 17 Chapter 16 Credit Card Agreements A credit card is a form of borrowing and usually involves interest and other charges. The terms of the credit card agreement affect the overall cost of the credit you will be using.
© 2010 South-Western, Cengage Learning SLIDE 18 Chapter 16 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 19 Chapter 16 Closed-End Credit Closed-end credit (also called Installment Credit) is a loan for a specific amount that must be repaid in full, including all finance charges, by a stated due date. Payment Booklet Set Due Date Interest Included in Payment Amounts Also called Installment Credit Examples Cars Furniture Major Appliances
© 2010 South-Western, Cengage Learning SLIDE 20 Chapter 16 Service Credit Service credit involves providing a service for which you will pay later. Examples: Utility services Phone services Cable/Satellite TV services Examples of businesses that extend service credit: Doctors Lawyers Dry Cleaners Repair Shops Terms are set by individual businesses.
© 2010 South-Western, Cengage Learning SLIDE 21 Chapter 16 Sources of Credit Retail stores Credit card companies Banks and credit unions Finance companies Pawnbrokers Private lenders Other sources of credit Remember it is NOT FREE – consumers pay for it.
© 2010 South-Western, Cengage Learning SLIDE 22 Chapter 16 Retail Stores Examples Department stores Discount stores Specialty stores. Many retail stores offer their own credit cards. These cards are accepted only at the issuing store. AdvantagesDisadvantages Receive DiscountsVery High Interest Rates Advance notice of salesCan only use them there Receive Gift Cards Most retail stores also accept credit cards issued by major credit card companies.
© 2010 South-Western, Cengage Learning SLIDE 23 Chapter 16 Credit Card Companies Credit Card Issuers Examples - Visa, MasterCard, Discover, Amer. Express Benefits Accepted most places Available cash advances Access to Checks
© 2010 South-Western, Cengage Learning SLIDE 24 Chapter 16 Banks and Credit Unions Credit cards Closed-end loans House Car Vacation Home Repair
© 2010 South-Western, Cengage Learning SLIDE 25 Chapter 16 Finance Companies A finance company is an organization that makes high-risk consumer loans – typically to those people denied by banks. There are two types of finance companies: Consumer finance companies Sales finance companies Loan sharks are unlicensed lenders who charge illegally high interest rates. A usury law is a state law that sets a maximum interest rate that may be charged for consumer loans.
© 2010 South-Western, Cengage Learning SLIDE 26 Chapter 16 Pawnbrokers A pawnbroker (or pawnshop) Legal business High-interest loans based on the value of personal possessions pledged as collateral. Customers typically only receive 10% - 60% value of items Most Popular Pawned Items: Guns Cameras Jewelry Radios TVs Computers Collector Items Popular Reality TV - Pawn Stars and Hard Core Pawn
© 2010 South-Western, Cengage Learning SLIDE 27 Chapter 16 Private Lenders One of the most common sources of cash loans is the private lender – typically they do not charge interest. Examples of Private Lenders Parents Relatives Friends
© 2010 South-Western, Cengage Learning SLIDE 28 Chapter 16 Other Sources of Credit Life insurance policies – loan doesn’t have to be repaid but interest is charged and policy coverage amount will decrease. Borrowing against a deposit - typically has a low interest rate because of the safety of the loan. CD IRA Treasury Note Bond Borrowing against an asset Car – usually has to be less then 5yrs old and you owe nothing on it House
© 2010 South-Western, Cengage Learning SLIDE 29 Chapter 16 Assignments: Key Terms Review pg. 371 Questions: 1 – 6 Check Your Understanding pg. 671 Question: 7 – 8 Apply Your Knowledge pg. 362 Question: 9
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