Chapter 16
Credit in America
What Is Credit?
Types and Sources of Credit
Lesson 16.1
What Is Credit?
GOALS
Describe the history of credit in
America.
Define basic credit vocabulary.
Discuss the advantages and
disadvantages of using credit.
The History of Credit
The early years
Need arose when we established
currency economy
Around time of the Industrial Revolution
When people were no longer selfsufficient
At a general store bought “on account”
Banks lent money to farmers
High interest rates – 25 to 50%
The History of Credit
The 1900s
Lower interest rates spurred economy
People had more purchasing power –
demand for goods and services increased
Banks were more willing to lend money
1920 – 1990
Credit was way of life, not just for
emergencies
The History of Credit
The 1900s
1970s
First legislation to protect consumers
People began to misuse credit
Credit counseling first appeared
1990s
Record numbers of people declared bankruptcy
as misuse continued
Even lower rates encouraged economic growth
Began to see non-bank credit cards and
reward cards
The History of Credit
Credit today
Abundant and easy to get
Many people shop online using credit
cards
The Vocabulary of Credit
Borrower or debtor
When you borrow money or use credit
Creditor
Person or company lending you money
Capital
Property you own that is worth more
than your debts
The Vocabulary of Credit
Collateral
Property pledged towards repayment of
loan
Don’t pay your loan, they take your items
Repossessed
Ownership of item goes to bank if you
don’t pay loan
Principal
Amount borrowed (or charges)
The Vocabulary of Credit
Finance charge
Interest you pay on the amount
borrowed
Also referred to as handling charges,
services charges or carrying charges
Minimum payment
On a credit card statement, the least
you can pay
May barely cover finance charges
The Vocabulary of Credit
Due Date
Typically 10-20 days from receipt of bill
Assessed late fee if not paid by due date
Added to balance – you’ll end up paying
interest on the late fee
Installment Agreement
Make regular payments for a set period
of time
Type of “secured loan”
Goods are collateral
Advantages and Disadvantages
of Consumer Credit
Advantages
Purchasing power
Emergency funds
Convenience
Deferred billing
Safety
Disadvantages
Higher prices
Finance charges
Tie up income
Overspending
Lesson 16.2
Types and
Sources of Credit
GOALS
List and describe the kinds of
credit available to the American
consumer.
Describe and compare sources of
credit.
Kinds of Credit
Open-ended credit
Agreement to loan up to a specified amt
Credit cards
Option to pay off balance or repaying it over
many months
Referred to as “Revolving Credit Agreement”
Open 30-Day Account
Balance must be paid in full within 30 days
Usually high or no credit limits
Kinds of Credit
Closed-end credit
Loan for a specific amount of money
Auto, home, furniture, etc.
Do not allow continuous borrowing
Sometimes called “installment loan”
Kinds of Credit
Service credit
Receive service, pay for it later
Professional services
Doctor, dentist, lawyer, contractor, etc.
Electric, phone, water, etc.
May offer a budget plan
Credit Card Terms
Annual percentage rate (APR)
Free period (grace period)
Annual fees
Transaction fees and late fees
Method of calculating the finance
charge
Sources of Credit
Retail stores
Banks and credit unions
Finance companies
Loan Sharks – unlicensed, illegally high interest
rates
Usury Laws – set maximum interest rates
allowable
Finance companies charge this rate!
Pawnbrokers
Make high interest loans based on items held as
collateral
Private lenders