Chapter 4: Going into Debt
Section 2: Sources of Loans and Credit
Two Credit Sources
Banking Institutions
 Credit Card Companies

Types of Financial Institutions

Commercial Banks: checking/saving accts.
- Loans to individuals
◦ Control the most money; offer the most
services
Savings and Loan (S&L) Associations:
- Savings Institutions primarily provide
loans for homes.
 Savings Banks: Originally served small
businesses and homes

◦ Originally did not provide Checking
Types of Financial Institutions
(Cont’d)

Credit Unions: Owned and operated by its
members
◦ Provides low interest loans to members
◦ Good consumer loans, but must join to use

Finance Companies:
◦ Institution that takes over loans from retailers
◦ Usually used with higher risk consumers

Consumer Finance Companies
◦ Offer sub-prime (High interest) loans to higher risk
companies
◦ Offer High Rate Credit Cards
◦ Use shady business practices
Crisis and Change: The 80’s

S&L Banks deregulated
◦ Could offer checking accts as well as business
loans
S&L’s make risky commercial investments
 Cost tax-payers billions in bailout money

Charge Accounts

Buy goods from a company and pay later
◦ Regular Charge Account: $500-1,000 Credit
limit in which a bill is sent monthly
 No interest, but bill must be paid immediately
◦ Revolving Charge Account: You don’t pay
entire monthly bill, interest is added
◦ Installment Charge Accounts:
 Equal payments over a period of time
 Interest is paid
Credit & Debit

Credit
◦ Can be used at many different stores
◦ Usually charge high interest

Debit: Withdrawn from Checking
account
Finance Charges (The Cost of
Credit)
Costs vary from company to company
 APR: Cost expressed by a yearly
percentage

Applying For Credit

Credit Bureau: Private Business hired
by a lending agency
◦ Run Credit Check:
 Income
 Current Debts
 Personal life details
 Ex. How you’ve repaid debts in the past
Credit Check Reveals “Credit
Rating”


Higher the number, better chance of getting
a loan
The 4 C’s of credit worthiness
1.Capacity to pay: Employment History
2.Character: Reputation
 Ex. Trustworthy, criminal history
3. Collateral: What you are worth
4. Capital: Similar to Collateral, it is personal items of
value. Example would be your investment accounts.
◦ Shows your past ability to save and accumulate

Over 700 is Good, below 600 not so good
2 types of loans
Secured: Backed by collateral
 Unsecured: Loan on reputation alone

Borrowing Responsibilities

Pay on time
◦ If you don’t, fees will be incurred

Keep financial records
Government Regulation of Credit

Equal Credit Opportunity Act(1974):
◦ Credit cannot be denied based on Race,
religion, etc.
◦ No discrimination bc.You receive govt.
benefits
◦ Women were the ones being discriminated
Usury Laws

Law restricting the amount of interest
that can be charged for credit
◦ Interest Ceilings limit the profit a bank can
make
◦ Early on, this had adverse effects on the
economy
The B-Word

Bankruptcy:
◦ Cant pay debt.
◦ Turn everything you own over to creditors

Bankruptcy is not an easy way out