Chapter
16
Credit in America
16.1 Credit: What and Why
16.2 Types and Sources of Credit
© 2010 South-Western, Cengage Learning
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.
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 2
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
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 3
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.
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 4
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
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 5
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.
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 6
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).
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 7
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.
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 8
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.
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 9
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
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 10
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.
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 11
Types of Credit
Open-end credit
Closed-end credit
Service credit
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 12
Open-End Credit
Open-end credit is where a borrower
can use credit up to a stated limit.
Charge cards
Revolving accounts
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 13
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.
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 14
(continued)
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
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 15
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
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 16
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 16
© 2010 South-Western, Cengage Learning
SLIDE 17
Sources of Credit
Retail stores
Credit card companies
Banks and credit unions
Finance companies
Pawnbrokers
Private lenders
Other sources of credit
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 18
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.
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 19
Credit Card Companies
Credit card issuers
Financial institutions
Other organizations
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 20
Banks and Credit Unions
Credit cards
Closed-end loans
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 21
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.
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 22
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.
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 23
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.
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 24
Other Sources of Credit
Life insurance policies
Borrowing against a deposit
Borrowing against an asset
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 25