1. MYPF 16.1 Credit: What and Why 16.2 Types and Sources of Credit
1/17/2019
Credit in America
16.1 Credit: What and Why
16.2 Types and Sources of Credit
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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.
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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
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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.
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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
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6. Income Sources of income include: Income represents cash inflow.
Job
Interest
Dividends
Alimony
Royalties
Income represents cash inflow.
When your earnings exceed your expenses, you have the capacity to take on debt.
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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).
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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.
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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.
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10. Advantages and Disadvantages of Credit
Purchasing power
Emergency funds
Convenience
Deferred billing
Proof of purchase
Safety
Disadvantages
Higher costs
Finance charges
Tie up income
Overspending
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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.
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12. Types of Credit Open-end credit Closed-end credit Service credit
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13. Open-End Credit
Open-end credit is where a borrower can use credit up to a stated limit.
Charge cards
Revolving accounts
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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.
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15. 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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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
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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.
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18. Sources of Credit Retail stores Credit card companies
Banks and credit unions
Finance companies
Pawnbrokers
Private lenders
Other sources of credit
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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.
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20. Credit Card Companies Credit card issuers Financial institutions
Other organizations
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21. Banks and Credit Unions
Credit cards
Closed-end loans
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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.
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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.
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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.
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25. Other Sources of Credit
Life insurance policies
Borrowing against a deposit
Borrowing against an asset
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