Credit In America
Pay Down Those Cards
Advantages of
Credit
#1 Provide Emergency Funds
Line of Credit –
preestablished
amount that can be
borrowed on demand
#2 Budgeting and Increased
Buying Power
Purchase major items
Paying over time
establishes good credit
rating
#3 Convenience
Get better service
Advance notice of
sales/special offers
Deferred billling – purchases
not billed until later
#4 Proof of Purchase
#5 Safer than Cash
If credit card is lost or
stolen, owner is only
responsible for the first $50
of loss if reported.
Disadvantages of Credit
Blowing Your Budget
Credit cards
encourage people to
spend money that
they don't have
High Interest Rates and Increased
Debt
Rates can change at any
time
Teaser rates don’t last
very long
Credit Purchases Cost More Than
Cash Purchases
Only if the balance
is not paid off each
month
Vocabulary
Balance Transfer
Moving an unpaid credit card
debt from one issuer to another
Card issuers sometimes offer
teaser rates to encourage
balance transfers
Credit Card
Allow you to carry over
portions of your balance from
month to month.
If you do not pay your balance
in full, you are assessed
finance charges.
Principal
Actual dollar amount of the
purchases you made
Also the balance that
remains on your loan or
credit card account.
Prime Rate
What banks charge their best
commercial customers for
loans.
Changes often
Some financial institutions use
to set the APR for credit cards.
Open Ended Credit
Limit is placed on how much customer
can borrow during a given period.
Partial or entire balance paid within 30
days or over time.
No finance charge if balance is paid
off
Ex. Credit cards
Open 30-day accounts
Full balance must be paid
each month
Widely accepted
Have higher credit limits
Instant purchasing power
Ex. American Express
Revolving credit account
Option of paying in full
each month or making
minimum/partial payment
Example: credit cards—
Visa, MasterCard,
Bergners, etc.
Installment Credit
Debt is divided into equal
amounts for repayment
Closed-ended credit
Repaid in fixed amounts
Item purchased is collateral
Installment Purchase Agreement
Contract defining the
repayment of the
purchase price, plus
finance charges in equal
regular payments
APR
Annual Percentage Rate
Cost of credit expressed as a
YEARLY rate.
Can change because of
missed payments, no activity,
etc.
Introductory/Teaser Rate
Low rate for financing
Offered for a limited time
May only apply to certain
aspects of credit, for example
balance transfers or new
purchases.
Co-Signer
Person who pledges to
repay the debt if
borrower fails to do so.
Rates…
Fixed: APR doesn’t
change
Variable: may change over
time because of the prime
lending rate.
Service Credit
Having a service performed
and paying for it later
Example: telephone/utility,
doctors, lawyers, dentists,
repair shops
Layaway Plans
Offered by retail businesses
Item is received once all payments
are made.
Down payment
Service fee
If you change your mind about
layaway item, portion of payment or
all is kept
Sources of Credit
Retail Stores
Department stores,
drugstores, clothing
stores
Customer shops where
they have credit
Commercial Banks and Credit
Unions
Used for purchasing car or
home, general cash loans
Offer credit cards – Bank
credit cards
Credit unions offer loans to
members with only lower
interest rates
Finance Company
Small loan companies
Charges higher interest rates
Willing to take risks
Easier to get loan from
finance companies
2 types of Finance Companies
Consumer Finance
General purpose company
Loans for expensive items
Sales Finance Company
Authorized representative loans
Example: GMAC—finances General
Motors auto dealers
Other sources
Pawnshops
Private lenders
Life insurance policies