Presentation on theme: "Personal Finance Chapter 16"— Presentation transcript:
1 Personal Finance Chapter 16 CREDIT IN AMERICAPersonal FinanceChapter 16
2 Certain terms are commonly used to describe credit, its availability and its cost. Borrower: or debtor: When you borrow money or used creditCreditor: The person or company who loans money or extends credit to youCapital: is property you possess(bank accounts, investments, other assets)Collateral: is property pledged to assure repayment of a loan.Line of Credit: Pre-established amount that can be borrowed without collateral
3 Once you have completed the credit purchase, you owe money to the creditor. Principal: amount borrowed Balanced due: is the amount borrowed plus interest for the time you have the loan Finance Charge: total dollar amount of interest and fees you pay for the use of credit.
4 FINANCE CHARGESMinimum payment: the least amount you may pay that month under your credit agreement.Due Date: credit payments are due on a specific date or you will be charged a late feeLate fee: charged to a balance if you do not pay within a certain timeSecured loan: you agree to repay entire debt or goods will be returned at end of a time
5 ADVANTAGES AND DISADVANTAGES OF CONSUMER CREDIT Used correctly, credit can greatly expand your purchasing potential and raise your standard of living. Ex: credit allows you to purchase expensive item that you do not currently have the chance to buy, but can make payments over a time period.
6 Is Credit convenient?Emergency funding: pre- established amount that can be borrowed on demand with no collateral.Deferred billing: you do not get charged until a later date.
7 Disadvantages of using credit Credit purchases may cost more than cash purchasesMerchants sometimes charge more for credit purchases because they are charged a feeA finance charge of 18% a year is 1 ½ percent a month. On $1, balance the finance charge would be $15.00 a monthWhen you use credit, you tie up future incomeBuying on credit can lead to overspending.
8 Kinds of CreditOpen-Ended credit: Credit cards are usually open ended, an amount with a limit and then back up to that limit once the amount falls below the limitOpen 30 Day Account: Consumer promises to pay the full balance each month Example American Express CardRevolving Credit Account: Consumer has the option each month of paying in full or making payments
9 Credit Card TermsAnnual Percentage Rate (APR) cost of credit expressed as a yearly percentage rateFree Period: (also called a grace period) Allows you to avoid the interest charge by paying your current balance in full before the due date shown on your statementAnnual Fees: can range form $15.00 – $500.00Transaction Fees and Late Fees:Method of Calculating the Finance Charge: Charges will vary
10 Sources of Credit Retail Stores: Credit Card Companies: Banks and Credit Unions:Finance Companies:Loan Sharks: Unlicensed lenders who charge illegally high interest ratesUsury Laws: a set maximum interest rate that can be chargedPawnbrokersPrivate Lenders