Chapter 16
Credit
in America
Lesson 16.1 What is Credit?
Development of Credit
A. Credit—money borrowed to buy
something now, with the agreement
to pay for it later
B. Over 80 percent of all purchases in
the U.S. are made with credit rather
than cash
C.
In the Past
1. Need for credit arose when we moved
from a bartering and trading society to a
currency exchange economy
2. Early form of credit was the account at
the general store—pay when received
paycheck or harvested the crop
3. Economy grew as credit increased
people’s ability to buy goods and
services
4. Standard of living rose as people bought
luxuries as well as necessities
5. In the 1990s, record numbers of people
filed bankruptcy
D. Credit Today
1. Credit today is a way of life
2. Credit trouble remains all too
common as well
II. The Vocabulary of Credit
A. Borrower or debtor—person who uses
credit
B. Creditor—person or company who
loans money or extends credit
C. Creditors expect you to have capital—
property you possess that is worth
more than your debts
D. Collateral—property pledged to
assure repayment of a loan (car). If
you do not repay the loan, the
collateral can be repossessed—
taken by creditor
E. Principal—the amount borrowed,
plus interest is called the balance
due. Payments include both
principal and interest.
F. Finance charge—the total dollar
amount of all interest and fees you
pay for the use of credit
G. Minimum payment—the least
amount you may pay that month
under your credit agreement
H. All credit payments are due by a
specific due date—usually 10 to 20
days from the date of the bill
I. Late fee—the amount you are
charged if you do not pay within the
time allowed
J. Installment agreement—for
expensive purchases; you agree to
make regular payments for a set
period of time
K. Secured loan—the goods you
purchase with the loan serve as
collateral
III. Advantages and Disadvantages of Consumer Credit
A.
1.
2.
3.
4.
5.
Advantages of Credit
Increases purchasing power
Increases standard of living
Provides source of emergency funds
Is convenient
Get better service, preferred status,
discounts
6. Have better receipts (proof of purchase),
more descriptive
7. Is safer than carrying cash
B. Line of Credit—pre-established amount that
can be borrowed on demand with no
collateral
C. Deferred Billing—service available to charge
customers where purchases are billed until
later (Oct purchase billed in Feb)
E. Disadvantages of Credit
1. Costs more than paying cash
2. Ties up future income, can strain budget
3. Can lead to overspending
Lesson 16.2 Types and Sources
of Credit
I. Kinds of Credit
A. Open-ended credit (credit cards)—
can be used over and over, as
long as balance owed does not
exceed limit
1. Open 30-day accounts—
consumer promised to pay the
full balance owed each month
(American Express, Diner’s
Club)
2. Revolving Credit Accounts—consumer has
the option each month of paying in full or
making at least the minimum payment (Visa,
MasterCard, Discover, also dept store and
gas cards (Macy’s, AE, BP)
3. Credit Card Terms
a. Annual Percentage Rate (APR)—the cost
of credit expressed as a yearly
percentage. Truth-in-Lending law
requires lenders to include all loan costs
in the APR, must be disclosed when you
open account and must be noted on each
bill you receive. Can shop around.
b. Free Period—(grace period) allows you to
avoid interest charges by paying your
current balance in full before the due date
c. Annual fees—many credit card issuers
charge an annual fee from $15--$35 or
more. Pay it whether or not you use the
card.
d. Transaction Fees and Late Fees—pay by
phone, go over limit, pay late
e. Method of calculating the Finance
Charge—can vary
B. Closed-End Credit
1.
2.
3.
A loan for a specific amount that
must be repaid, in full, including all
finance charges, by a stated due
date
Also called installment loan
Contract tells amount loaned, total
finance charge, amount of each
payment. Usually a down payment
is required.
C. Service Credit
1. An agreement to have a service
performed now and pay for it later.
2. Telephone, utility services,
hospitals, doctors
II. Sources of Credit
A. Retail Stores—stores that sell
directly to consumers (dept stores,
restaurants, service businesses.
Many offer their own credit cards.
Credit customers may receive
discounts, advance notice of sales,
other privileges. Many also accept
major credit cards.
B. Credit Card Companies
1. Visa, MasterCard, American Express
2. Affinity Cards—issued by major
credit card, sponsored by another
organization
3. Cash advance—money borrowed
against the credit card limit
4. Access checks—supplied by credit
card company, can be used as a
check, pay back like a cash advance
C. Banks and Credit Unions
1. Make closed-end loans
2. Interest usually lower than credit
cards
D. Finance Companies
1. Usually charge high interest rates
for the use of their money—willing
to take risks with consumers with
lower credit ratings
2. Consumer finance company—makes
mostly consumer loans to customer
buying consumer durables (cars,
appliances, stereo) Household
Finance, Beneficial Finance
3. Sales finance companies—makes
loans through representatives
(GMAC finances GM car)
4. Loan sharks—unlicensed lenders
who charge illegally high interest
5. Usury laws—set maximum interest
rates that may be charged for loans
E.
Pawnbroker—a legal business that
makes high-interest loans based on
the value of personal possessions
pledged as collateral. If you do not
pay back the loan and interest by a
certain date, the pawnbroker will sell
it.
F. Private lenders—Parents, relative,
friends, may or may not charge
interest.
G. Other Sources of Consumer Credit
1. Life Insurance Policies—borrow
against cash value
2. Borrow against Certificate of
Deposit
The End!