Chapter
16
Credit in America
16.1 Credit: What and Why
16.2 Types and Sources of Credit
© 2010 South-Western, Cengage Learning
Credit: What and Why
Learning Targets
Discuss the history of credit and the role
of credit today.
List and Explain advantages and
disadvantages of using credit.
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KEY TERMS
 Credit
 Debtor
 Creditor
 Capital
 Collateral
 Finance Charge
 Line of Credit
 Deferred Billing
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The Need for Credit
 Credit is the use of someone else’s money.
borrowed now with the agreement to pay it
back later at a cost (typically interest)
 Early forms of credit
Farmers
 Credit today
Merchants, Retail, Wholesale
Credit has become a way of life!
© 2010 South-Western, Cengage Learning
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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.
 Current economic crisis is due to this practice not being followed.
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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
Personal History
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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.
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Financial Position
 Capital is the value of property you possess after
deducting your debts.
Capital Examples
 bank accounts
 Investments
 Real estate
 Other assets with unbiased value after deducting your debts.
 Having capital tells the creditor that you have
accumulated assets, which indicates responsibility and
monetary value.
 Cash Outflow (Debt) will be compared to your Cash
Inflow (Income).
© 2010 South-Western, Cengage Learning
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Collateral
 Collateral is property pledged to assure repayment of a loan.
 To borrow large amounts of money, creditors often want more than
just your promise to repay; they want collateral.
 If you do not make your loan payments, the creditor can seize the
pledged property.
Repossession - Example
 You buy a new 60in HDTV from Best Buy using a credit card.
 You do not make your payments for an extended period of time.
 Collection agency gets involved:
 Call you at work/home trying to collect the debt.
 Come and get the item you have defaulted payment on.
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Making Payments
 Once you have completed a credit purchase, you owe
money to the creditor.
 Principal (amount borrowed) plus interest for the time
you have the loan is called the Balance Due.
 Finance Charge is the total dollar amount of all interest
and fees you pay for the use of credit.
 Minimum Payment is the least amount of money you
have to pay per your monthly statement.
 Always pay more than the minimum due amount.
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Credit
 Advantages
 Disadvantages
 Increased Purchasing Power
 Emergency Funds
 Convenience
 Deferred Billing
 Proof of Purchase (records)
 Safety
 Higher Costs
 Finance Charges
 Overspending
 Tie Up Future Income
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Assignments:
 Key Terms Review pg. 362
Questions: 1 – 8
 Check Your Understanding pg. 362
Question: 10
Apply Your Knowledge pg. 362
Question: 11
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Lesson 16.2
Types and Sources of Credit
Learning Targets
List and describe the types of credit
available to consumers.
Describe and compare sources of credit.
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KEY TERMS
 Open-End Credit
 APR
 Grace Period
 Closed-End Credit
 Service Credit
 Finance Company
 Loan Sharks
 Usury Law
 Pawnbroker
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Types of Credit
Open-end credit
Closed-end credit
Service credit
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Open-End Credit
 Open-end credit is where a borrower can use credit up
to a stated limit.
 Charge Cards
 Master Card
 Visa
 Discover
 Revolving Accounts

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American Eagle
Abercrombie Finch
Kohls
Macy’s
Best Buy
© 2010 South-Western, Cengage Learning
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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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(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
© 2010 South-Western, Cengage Learning
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Closed-End Credit
 Closed-end credit (also called Installment Credit) is a loan for a
specific amount that must be repaid in full, including all finance
charges, by a stated due date.
 Payment Booklet
 Set Due Date
 Interest Included in Payment Amounts
 Also called Installment Credit
Examples
 Cars
 Furniture
 Major Appliances
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Service Credit
 Service credit involves providing a service for which you will pay
later.
Examples:
 Utility services
 Phone services
 Cable/Satellite TV services
 Examples of businesses that extend service credit:
 Doctors
 Lawyers
 Dry Cleaners
 Repair Shops
 Terms are set by individual businesses.
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Sources of Credit
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Retail stores
Credit card companies
Banks and credit unions
Finance companies
Pawnbrokers
Private lenders
Other sources of credit
Remember it is NOT FREE – consumers pay for it.
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Retail Stores
Examples
 Department stores
 Discount stores
 Specialty stores.
 Many retail stores offer their own credit cards.
 These cards are accepted only at the issuing store.
Advantages
 Receive Discounts
 Advance notice of sales
 Receive Gift Cards
Disadvantages
Very High Interest Rates
Can only use them there
 Most retail stores also accept credit cards issued by major credit card
companies.
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Credit Card Companies
Credit Card Issuers
Examples - Visa, MasterCard, Discover, Amer. Express
Benefits
Accepted most places
Available cash advances
Access to Checks
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Banks and Credit Unions
Credit cards
Closed-end loans
House
Car
Vacation
Home Repair
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Finance Companies
 A finance company is an organization that makes high-risk
consumer loans – typically to those people denied by banks.
 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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Pawnbrokers
 A pawnbroker (or pawnshop)
 Legal business
 High-interest loans based on the value of personal
possessions pledged as collateral.
 Customers typically only receive 10% - 60% value of items
 Most Popular Pawned Items:
 Guns
 Cameras
 Jewelry
 Radios
 TVs
 Computers
 Collector Items
Popular Reality TV - Pawn Stars and Hard Core Pawn
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© 2010 South-Western, Cengage Learning
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Private Lenders
One of the most common sources of
cash loans is the private lender –
typically they do not charge interest.
Examples of Private Lenders
Parents
Relatives
Friends
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Other Sources of Credit
 Life insurance policies – loan doesn’t have to be repaid but interest
is charged and policy coverage amount will decrease.
 Borrowing against a deposit - typically has a low interest rate because
of the safety of the loan.
 CD
 IRA
 Treasury Note
 Bond
 Borrowing against an asset
 Car – usually has to be less then 5yrs old and you owe nothing on it
 House
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Assignments:
 Key Terms Review pg. 371
Questions: 1 – 6
 Check Your Understanding pg. 671
Question: 7 – 8
Apply Your Knowledge pg. 362
Question: 9
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