Personal Finance Chapter 16 CREDIT IN AMERICA Personal Finance Chapter 16

Certain terms are commonly used to describe credit, its availability and its cost. Borrower: or debtor: When you borrow money or used credit Creditor: The person or company who loans money or extends credit to you Capital: 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

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.

FINANCE CHARGES Minimum 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 fee Late fee: charged to a balance if you do not pay within a certain time Secured loan: you agree to repay entire debt or goods will be returned at end of a time

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.

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.

Disadvantages of using credit Credit purchases may cost more than cash purchases Merchants sometimes charge more for credit purchases because they are charged a fee A finance charge of 18% a year is 1 ½ percent a month. On $1,000.00 balance the finance charge would be $15.00 a month When you use credit, you tie up future income Buying on credit can lead to overspending.

Kinds of Credit Open-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 limit Open 30 Day Account: Consumer promises to pay the full balance each month Example American Express Card Revolving Credit Account: Consumer has the option each month of paying in full or making payments

Credit Card Terms Annual Percentage Rate (APR) cost of credit expressed as a yearly percentage rate Free 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 statement Annual Fees: can range form $15.00 – $500.00 Transaction Fees and Late Fees: Method of Calculating the Finance Charge: Charges will vary

Sources of Credit Retail Stores: Credit Card Companies: Banks and Credit Unions: Finance Companies: Loan Sharks: Unlicensed lenders who charge illegally high interest rates Usury Laws: a set maximum interest rate that can be charged Pawnbrokers Private Lenders