Section 22.1

Credit Protection Laws Borrowing Money and Buying on Credit Chapter 22 Section 22.1 What Is Credit? Section 22.2 Credit Protection Laws Section 22.3 Managing Your Debts

What You’ll Learn How to distinguish between the different types of credit (p. 484) How to explain the Truth in Lending Act (p. 485)

What You’ll Learn How to describe secured loans (p. 485) How to guard against credit card problems (p. 488)

Why It’s Important Knowing the laws that apply and the difficulties that can arise in using credit will help you avoid problems in your personal finances.

Legal Terms credit (p. 484) interest (p. 484) creditor (p. 484) debtor (p. 484) open-end credit (p. 484) line of credit (p. 484) closed-end credit (p. 484)

Legal Terms secured loan (p. 485) collateral (p. 485) security interest (p. 485) secured party (p. 485) repossess (p. 486) smart card (p. 490)

Section Outline The Meaning of Credit Types of Credit Open-End Credit   Types of Credit Open-End Credit Closed-End Credit

Section Outline Borrowing Money Truth in Lending Secured Loans

Section Outline Credit Cards Smart Cards Disputed Purchases Lost or Stolen Credit Cards Credit Card Blocking

Pre-Learning Question What is credit?

The Meaning of Credit Credit is an arrangement through which you may receive cash, goods, or services now and pay for them in the future. The cost of using someone else’s money is called interest.

The Meaning of Credit The party who sells the goods on credit or lends the money is called the creditor. The party who buys the goods on credit or borrows the money is called the debtor.

Pre-Learning Question What are the different types of credit?

Types of Credit There are two main kinds of credit. Open-end credit Closed-end credit

Open-End Credit Open-end credit is credit that can be increased by the debtor by continuing to purchase goods or services on credit, up to a certain limit.

Open-End Credit You are given a line of credit, or a maximum amount of money made available to you. Charge accounts and credit cards are some examples.

Closed-End Credit Closed-end credit is credit given for a specific amount of money and cannot be increased by making additional purchases. Buying a vehicle and making monthly installments is one example.

Pre-Learning Question What should you know before you borrow money?

Borrowing Money Research the questions you will be asked when you apply for a loan. Shopping for a competitive interest rate can save you a lot of money in the long run.

Truth in Lending The Truth in Lending Act requires that lenders tell you both the finance charge and the annual percentage rate (APR) of the loan, so you can compare the cost of a loan from different lenders.

Secured Loans A secured loan is one in which creditors obtain an interest in something of value, called collateral, from which they can secure payment if you do not pay.

Secured Loans The interest that is given to creditors is known as a security interest. The lender or seller who holds the security interest is known as the secured party.

Repossession If the debtor does not pay back the loan, the secured party has the right to repossess, or take back, the goods.

Repossession Repossession must be done without breaching the peace. If the debtor refuses to surrender the goods, legal process must be used to obtain them.

Cosignature Loans can also be secured by having a second person, called a cosigner or surety, sign the contract, agreeing to pay the loan, if necessary.

Fill in the blanks. The _____ is the party who sells goods on credit or lends money.

ANSWER Creditor.

The _____ is the party who buys the goods on credit or borrows money.

ANSWER Debtor.

_____ is credit that can be increased by the debtor by continuing to purchase goods or services on credit, up to a certain limit.

ANSWER Open-end credit

_____ is credit given for a specific amount of money.

ANSWER Closed-end credit

Pre-Learning Question Do you know how to choose a credit card?

Credit Cards Credit cards have become an important part of our culture, and choosing the best one for you can save you money.

Credit Cards Total amount of U.S. credit card debt in 2001— $680 billion Number of different credit cards in the average family—13

Credit Cards Outstanding credit card debt of the average credit card holder—$8,000 Percent interest paid on that outstanding debt—17 percent

Choosing a Credit Card Here are five tips for choosing the best card for you. Department stores and gasoline companies are good places to obtain your first credit card.

Choosing a Credit Card Bank credit cards are offered through banks and savings and loan associations. Annual fees and finance charges vary widely, so shop around. Shopping around can save you a lot of money.

Choosing a Credit Card If you plan on paying off your balance every month, look for a card that has a grace period and carries no annual fee or a low annual fee.

Choosing a Credit Card (continued) You might have a higher interest rate, but you plan to pay little or no interest anyway.

Choosing a Credit Card Watch out for creditors that offer low or no annual fees but instead charge a transaction fee every time you use the card. Such charges can add up quickly.

Choosing a Credit Card If you plan to carry a balance, look for a card with a low monthly finance charge. Be sure that you understand how the finance charge is calculated

Smart Cards A smart card is a new kind of card with a computer chip that can store a large amount of data. Smart cards can hold debit and credit card balances, identification information, and much more.

Disputed Purchases If you have a dispute with a credit card purchase, you: do not pay the bill for the disputed item, but notify the credit card issuer by telephone immediately

Disputed Purchases The card issuer: must put the disputed amount on hold will send you a form to fill out explaining the dispute will attempt to resolve the dispute will inform you of the results

Lost or Stolen Credit Cards You are responsible for only $50 of any unauthorized charges made before you notify the credit card issuer of the loss, theft, or unauthorized use of your card.

Lost or Stolen Credit Cards You are not responsible for any unauthorized charges made after the company has been notified.

Credit Card Blocking When you use a credit card to rent a car or to check into a hotel, the clerk usually gives an estimated bill to the credit card issuer.

Credit Card Blocking If the transaction is approved, your available credit is reduced by this amount immediately. This procedure is called a block. It is used to make sure you don’t exceed your credit.

Reviewing What You Learned Section 22.1 Assessment Reviewing What You Learned What is the difference between open-end credit and closed-end credit? Give an example of each.

Reviewing What You Learned Answer Section 22.1 Assessment Reviewing What You Learned Answer Open-end credit (credit cards) can be increased by the debtor, up to a limit set by the creditor, by continuing to purchase goods or services on credit.

Reviewing What You Learned Answer Section 22.1 Assessment Reviewing What You Learned Answer Closed-end credit (car loan) is extended only for a specific amount of money.

Reviewing What You Learned Section 22.1 Assessment Reviewing What You Learned What does the Truth-in-Lending Act require lenders to tell you?

Reviewing What You Learned Answer Section 22.1 Assessment Reviewing What You Learned Answer The finance charge and the annual percentage rate of the loan.

Reviewing What You Learned Describe a secured loan. Section 22.1 Assessment Reviewing What You Learned Describe a secured loan.

Reviewing What You Learned Answer Section 22.1 Assessment Reviewing What You Learned Answer One in which creditors obtain an interest in something of value, called collateral, from which they can be paid if you do not pay.

Reviewing What You Learned Section 22.1 Assessment Reviewing What You Learned How much does the average credit card holder have in outstanding credit card debt? What is the average interest rate he or she is paying?

Reviewing What You Learned Answer Section 22.1 Assessment Reviewing What You Learned Answer $8,000 in credit card debt; 17 percent.

Critical Thinking Activity Economics Section 22.1 Assessment Critical Thinking Activity Economics React to this statement: “America’s economic strength is in part due to the ability of people to borrow money and make purchases on credit.” Do you agree or disagree? Explain your answer.

Critical Thinking Activity Answer Economics Section 22.1 Assessment Critical Thinking Activity Answer Economics Answers will vary but could discuss that credit enables consumers to buy expensive durable goods, such as appliances, which is good for the economy.

Critical Thinking Activity Answer Economics Section 22.1 Assessment Critical Thinking Activity Answer Economics Answers can also discuss that too much credit creates too much consumer debt, which makes less money for investment, which is bad for the economy.

Legal Skills in Action Responsible Use of Credit Section 22.1 Assessment Legal Skills in Action Responsible Use of Credit Many teenagers use credit cards—either their parents’ or their own. Some teenagers use credit cards for emergencies only; others use them for everyday purchases and activities.

Legal Skills in Action Responsible Use of Credit Section 22.1 Assessment Legal Skills in Action Responsible Use of Credit With a partner, debate the role of credit in society today. Explain your philosophy on using credit. Describe how you think credit problems could be prevented.

Legal Skills in Action Answer Section 22.1 Assessment Legal Skills in Action Answer Responsible Use of Credit Debate and discussion will vary. Accept answers that are well reasoned.

End of Section 22.1