Money, Banking, Credit & Consumer Rights Ch. 20

Money Currency – Paper and coin money Replaced the barter system in traditional economies Functions of money Medium of Exchange Used to trade/purchase goods/services Store of Value Ability to store or save Medium/Measure of Value Can be divisible Each one must be equal to the other Not easy to counterfeit

Different types of Money

Banking Brings savers (sellers) & borrowers (buyers) together in the market Savers = deposits Borrowers = loans Banks are a business and have profit motive Make money off of fees and interest on loans Reserve Requirements – Amount of money banks are required to keep. Banks want more deposits so they can loan more money

Types of Banks Commercial Banks – full service to individuals & businesses (Most common) Credit Unions – non-profit – sponsored by large businesses, labor unions or government institutions – offer full services at usually lower prices Savings & Loan Associations – traditionally loaned money to people buying homes & issued only savings accounts

Commercial Banks

Credit Unions

FDIC Federal Deposit Insurance Corporation Insures deposited money in the bank up to $250,000 Most banks are FDIC insured

Types of Deposit Accounts Checking Account Allows customers to write checks, use debit cards or withdraw money from an ATM (Automated Teller Machine) Money transactions are quick and efficient Money does not stay in the account for long Depositor usually receives no interest Transfer of funds electronically

Checking Accounts

Types of Deposit Accounts cont. 2. Savings Account Banks pay interest to customers based on how much money is deposited Money remains untouched for longer periods of time so money grows larger the longer it is there.

Sample Bank Book

Types of Deposit Accounts cont. 3. Certificate of Deposit (CDs) Customers loan a certain amount to the bank for a certain amount of time Ex. I bought a $1,000 CD for 1 year at 4% Higher rates of interest than savings Customers can’t withdraw their money without a penalty

What US event caused the formation of the FDIC? 9/11 Bombing of Pearl Harbor The stock market crash and bank runs during the Great Depression

Loans Agreement for borrowing money with repayment plus interest Used to make expensive purchases Banks make money on the interest paid for a loan and fees In order to make loans, banks have to have money To have the money, banks must attract deposit customers Can increase the supply of money in the economy Principle – amount borrowed Interest Rate – rate of cost to borrow Interest – cost of borrowing

Types of Loans 1. Unsecured loans – loan based on reputation. No collateral used. 2. Secured loans – have collateral to back up the loan. Ex. You need something of equal value to cover the cost of the loan the bank can take if you default on the loan (don’t pay) Interest on the loan can be - Fixed – interest is set & can’t be changed Variable – Changes when interest rates change

How do bank loans increase the supply of money in the economy?

Charge Accounts Buy goods & services at individual stores & pay for them later Credit limit: maximum amount a person can buy with the promise of payment

Types of Charge Accounts Installment Account Repaid with equal payments over a certain period of time Part of the payment goes towards interest & part towards the principle Car loan or mortgage Regular Account No interest is charged if entire bill is paid on time – If you do not pay the entire bill on time, then you must pay interest on the entire loan amount. Account can’t be used again until the balance is paid Furniture Stores usually do this. Pay by 2020, certain amount each month, but with no interest.

Types of Charge Accounts cont 3. Revolving Account Billing cycles where a bill is sent at the end Interest charged on portion not paid Account can still be used until credit limit is reached Example: Credit Cards

Credit Cards Make purchases without having the money Charge high interest rates Lower interest rates if the customer is reliable (Makes payments on time!!!) Finance Charges – Cost of credit (interest) expressed in dollars Annual Percentage Rate – Cost of credit (interest) expressed as a percentage

Applying for Credit Fill out application Credit Bureau does a credit check Creditor may ask for references Credit checks show your income, debt and ability to pay past debts Applying for Credit

Credit Rating Rating of risk: Excellent, Good, Average or Poor Ratings have a number associated with them 3 Credit Bureaus: Experian, Transunion & Equifax Gives lenders an idea of reliability when issuing loans Higher Credit Score = less interest you are charged on a loan = saving money

Credit Bureaus

Government Regulations Equal Credit Opportunity Act: a person can’t be denied credit because of race, religion, national origin, gender, marital status or age Usury Laws: Restrict the amount of interest companies, not banks, can charge

Bankruptcy Debts are so large they can’t be paid back Most of what a debtor owns is sold or given to creditors Takes about10 years to reestablish credit States can become bankrupt too

Types of Income Disposable Income – money after taxes taken out. Money to pay for house, car, etc. Discretionary Income – money remaining after paying for necessities Either save or spend it

Consumer Rights Consumerism – a movement to educate buyers on purchases and to make sure products are safe Congressional laws – Pure Food and Drug Act in 1906 Private groups – Better Business Bureau (BBB) Consumer Bill of Rights Consumers have… Right to a safe product Right to be informed Right to choose Right to be heard Right to redress (to remedy or set right a wrong/grievance)

Consumer Responsibilities Smart Buying Strategies Get info on products Watch out for advertising Comparison shopping – find out prices on product from different stores/internet Brand Name vs. Generic When product fails Report it Check the warranty Keep a copy of the receipt Be calm Make Fair complaints