1. © 2010 South-Western, Cengage Learning Chapter © 2010 South-Western, Cengage Learning Credit in America 16.1 Credit: What and Why 16.2Types and Sources of Credit 16

2. © 2010 South-Western, Cengage Learning Chapter 16 2 Lesson 16.1 Credit: What and Why GOALS ■Discuss the history of credit and the role of credit today. ■Explain the advantages and disadvantages of using credit.

3. © 2010 South-Western, Cengage Learning Chapter 16 3 The Need for Credit ■Credit is the use of someone else’s money, borrowed now with the agreement to pay it back later. ■Early forms of credit ■Credit today

4. © 2010 South-Western, Cengage Learning Chapter 16 4 The Use of Credit ■A debtor is a person who borrows money from others. ■This money, called debt, must be repaid. ■A creditor is a person or business that loans money to others. ■Creditors charge money for this service in the form of interest and fees. ■A debtor must be qualified to receive credit.

5. © 2010 South-Western, Cengage Learning Chapter 16 5 Qualifying for Credit ■To qualify for credit, you must have the ability to repay the loan. ■Qualification is based on three things: ■Income ■Financial position ■Collateral

6. © 2010 South-Western, Cengage Learning Chapter 16 6 Income ■Sources of income include: ■Job ■Interest ■Dividends ■Alimony ■Royalties ■Income represents cash inflow. ■When your earnings exceed your expenses, you have the capacity to take on debt.

7. © 2010 South-Western, Cengage Learning Chapter 16 7 Financial Position ■Capital is the value of property you possess (such as bank accounts, investments, real estate, and other assets) after deducting your debts. ■Having capital tells the creditor that you have accumulated assets, which indicates responsibility. ■Your debt represents cash outflow and will be compared to your cash inflow (income).

8. © 2010 South-Western, Cengage Learning Chapter 16 8 Collateral ■To borrow large amounts of money, creditors often want more than just your promise to repay; they want collateral. ■Collateral is property pledged to assure repayment of a loan. ■If you do not make your loan payments, the creditor can seize the pledged property.

9. © 2010 South-Western, Cengage Learning Chapter 16 9 Making Payments ■Once you have completed a credit purchase, you owe money to the creditor. ■The principal (amount borrowed) plus interest for the time you have the loan is called the balance due. ■The finance charge is the total dollar amount of all interest and fees you pay for the use of credit.

10. © 2010 South-Western, Cengage Learning Chapter 16 10 Advantages and Disadvantages of Credit ■Advantages ■Purchasing power ■Emergency funds ■Convenience ■Deferred billing ■Proof of purchase ■Safety ■Disadvantages ■Higher costs ■Finance charges ■Tie up income ■Overspending

11. © 2010 South-Western, Cengage Learning Chapter 16 11 Lesson 16.2 Types and Sources of Credit GOALS ■List and describe the types of credit available to consumers. ■Describe and compare sources of credit.

12. © 2010 South-Western, Cengage Learning Chapter 16 12 Types of Credit ■Open-end credit ■Closed-end credit ■Service credit

13. © 2010 South-Western, Cengage Learning Chapter 16 13 Open-End Credit ■Open-end credit is where a borrower can use credit up to a stated limit. ■Charge cards ■Revolving accounts

14. © 2010 South-Western, Cengage Learning Chapter 16 14 Credit Card Agreements ■A credit card is a form of borrowing and usually involves interest and other charges. ■The terms of the credit card agreement affect the overall cost of the credit you will be using.

15. © 2010 South-Western, Cengage Learning Chapter 16 15 Credit Card Agreements ■Credit card agreement terms to consider: ■Annual percentage rate (APR) ■The annual percentage rate (APR) is the cost of credit expressed as a yearly percentage. ■Grace period ■The grace period is a timeframe within which you may pay your current balance in full and incur no interest charges. ■Fees ■Annual fees, transaction fees, and penalty fees ■Method of calculating the finance charge (continued)

16. © 2010 South-Western, Cengage Learning Chapter 16 16 Closed-End Credit ■Closed-end credit is a loan for a specific amount that must be repaid in full, including all finance charges, by a stated due date. ■Also called installment credit ■Does not allow continuous borrowing or varying payment amounts ■Often used to pay for very expensive items, such as cars, furniture, or major appliances

17. © 2010 South-Western, Cengage Learning Chapter 16 17 Service Credit ■Service credit involves providing a service for which you will pay later. ■For example, your utility services are provided for a month in advance; then you are billed. ■Many businesses extend service credit. ■Terms are set by individual businesses.

18. © 2010 South-Western, Cengage Learning Chapter 16 18 Sources of Credit ■Retail stores ■Credit card companies ■Banks and credit unions ■Finance companies ■Pawnbrokers ■Private lenders ■Other sources of credit

19. © 2010 South-Western, Cengage Learning Chapter 16 19 Retail Stores ■Examples of retail stores include department stores, discount stores, and specialty stores. ■Many retail stores offer their own credit cards. ■These cards are accepted only at the issuing store. ■Store credit customers often receive discounts, advance notice of sales, and other privileges not offered to cash customers or to customers using bank credit cards. ■Most retail stores also accept credit cards issued by major credit card companies.

20. © 2010 South-Western, Cengage Learning Chapter 16 20 Credit Card Companies ■Credit card issuers ■Financial institutions ■Other organizations

21. © 2010 South-Western, Cengage Learning Chapter 16 21 Banks and Credit Unions ■Credit cards ■Closed-end loans

22. © 2010 South-Western, Cengage Learning Chapter 16 22 Finance Companies ■A finance company is an organization that makes high-risk consumer loans. ■There are two types of finance companies: ■Consumer finance companies ■Sales finance companies ■Loan sharks are unlicensed lenders who charge illegally high interest rates. ■A usury law is a state law that sets a maximum interest rate that may be charged for consumer loans.

23. © 2010 South-Western, Cengage Learning Chapter 16 23 Pawnbrokers ■A pawnbroker (or pawnshop) is a legal business that makes high-interest loans based on the value of personal possessions pledged as collateral. ■Possessions that are readily salable (such as guns, cameras, jewelry, radios, TVs, and collector’s coins) are usually acceptable collateral.

24. © 2010 South-Western, Cengage Learning Chapter 16 24 Private Lenders ■One of the most common sources of cash loans is the private lender. ■Private lenders might include parents, other relatives, friends, and so on. ■Private lenders may or may not charge interest or require collateral.

25. © 2010 South-Western, Cengage Learning Chapter 16 25 Other Sources of Credit ■Life insurance policies ■Borrowing against a deposit ■Borrowing against an asset

26. © 2010 South-Western, Cengage Learning 26 Activity: ■Calculating credit card fees worksheet ■Research different credit cards for the best options