1. Lesson 7.2 Credit: Types and Sources
Learning Objectives
LO 2-1 List and describe the types of credit available to consumers.
LO 2-2 Describe and compare sources of credit.
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2. Types of Credit Open-end credit Closed-end credit Service credit
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3. Open-End Credit
Open-end credit enables a borrower to use credit up to a stated limit.
Charge cards – Must pay balance in FULL each month. If not, fess will occur.
Revolving accounts – What most credit cards are
Credit card agreements
Annual Percentage Rate – Usually variable.
Grace Period – Time to pay without finance charges (interest)
Annual Fees – Fees charged just for having your account
Transaction Fees – Fees for certain transactions
Penalty Fees – Over your limit, late fee
Method of calculating the finance charge – varies from card to card (talk about calculation in chapter 9)
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4. 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 costs of the credit you will be using.
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5. Credit Card Agreements
(continued)
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
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6. 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 specified due date.
This credit is 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 where the product purchased with the loan becomes collateral to assure repayment.
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7. 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.
Chapter 7
© 2016 South-Western, Cengage Learning