Chapter 4 “going into debt” 4.1

Americans and Credit: Introduction: Americans use credit to make many purchases. The total amount of funds borrowed and lent each year is enormous. In addition to individuals borrowing funds, the federal, state and local governments all borrow funds as well. In this section, you will learn what credit is, and why people use it.

Credit and Installment Debt: Credit- is the receiving of fund either directly, or indirectly to buy goods and services now, with a promise to pay for them in the future. (Debt= amount owed) When you borrow money to buy goods and services, you must pay attention to two things. 1. Principal- the original amount borrowed 2. Interest- amount that must be paid back, in addition to the principal.

Any time you receive credit, you are borrowing funds and going into debt. - taking out loans= buying an item on credit. Most common type of debt is installment debt. -Consumers repay this type of loan with equal payments (installments) over a period of time. - Length of installment period helps determine the monthly payment amount. (longer installment period= smaller payment) -ex: cars, homes, student loans

What Type of Installment Period is Best? : Length of installment period helps determine the monthly payment amount. -(12,24,36,or 48 mo.) longer installment period= smaller payment, but more interest is paid. Shorter installment period = higher monthly payment, but less interest because the loan is paid off earlier.

Why People Use Credit: Most people use credit for big ticket items that they can’t pay for upfront. -cars, homes, appliances Others use credit to buy items, they feel are necessary, and want them immediately. This is where people get into trouble. I need the new Nike Air Jordan basketball shoes, so I will put it on my credit card.

Sources of Loans and Credit 4.2

Introduction: There are 2 main types of credit, using credit cards, and borrowing directly from a financial institution. Both charge interest on the money they lend. In this section, you will learn about financial institutions, credit cards, charge accounts, and why you should be aware of high interest rates.

Types of Financial Institutions: Chances are, you will have to take out a loan in the future, whether to pay for college, buy a car, or purchase a home. For this reason, it is important that you learn about the different types of financial institutions, and what they offer.

Commercial Banks- main functions are to accept deposits, lend funds, and transfer funds. Savings and Loans Associations- same functions of a commercial bank. However, interest on loans are slightly less. Savings Banks- Originally set up to serve the small savers that were overlooked by the big banks. Mostly deal in home mortgages.

4. Credit Unions- Union members and employees of many companies often have a credit union. Credit unions are owned and operated by its members to provide savings accounts and low-interest loans only to its members. 5. Finance Companies- Takes over contracts for installments debts. The consumer pays the fee in the forms of higher interest rates. - makes loans directly to consumers at high rates of interest. *Why would anyone use a finance company and pay a higher interest rate when there are so many other financial institutions they could use?

Charge Accounts and Credit Cards: Charge Account- allows a customer to buy goods or services from a particular store. - Macy’s charge card, Express, Target…etc. Credit Cards - differ from charge accounts because they can be used at many different stores.

Finance Charges and Annual Percentage Rates: The term finance charges and annual percentage rate (APR) tell the consumer the same thing- the cost of credit. Finance charge- the cost of credit expressed in dollars and cents. (seen on monthly bill) - calculated based on: Previous balance Adjusted balance Average daily balance Past due balance

Annual Percentage Rate (APR): Is the cost of credit expressed as a yearly percentage. - ex: 17% APR - higher the rate, the more you will pay in interest.

Words of Advice: Read the fine print: When you get a credit card, you are basically agreeing to a contract. In the terms of your contract, you will find what happens if you miss a payment, are late with a payment, or go over your balance. Pay your cards off every month: If you carry a balance from month to month, you end up paying a lot more for the item your purchased. Only buy what you can afford: Remember what you buy on credit today, you will have to pay back tomorrow.

New Credit Card Rules: http://www.federalreserve.gov/consumerinfo/wyntk_cred itcardrules.htm