Section 22.1
What Is Credit?
Borrowing
Money
Section
22.1
What
Is
Credit?
Chapter 22
and Buying on Credit
Section 22.1
What Is Credit?
Section 22.2
Credit Protection Laws
Section 22.3
Managing Your Debts
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
What You’ll Learn
How to distinguish between the different
types of credit (p. 484)
How to explain the Truth in Lending Act
(p. 485)
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
What You’ll Learn
How to describe secured loans (p. 485)
How to guard against credit card
problems (p. 488)
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Why It’s Important
Knowing the laws that apply and the
difficulties that can arise in using credit will
help you avoid problems in your personal
finances.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Legal Terms
credit (p. 484)
interest (p. 484)
creditor (p. 484)
debtor (p. 484)
open-end credit (p. 484)
line of credit (p. 484)
closed-end credit (p. 484)
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Legal Terms
secured loan (p. 485)
collateral (p. 485)
security interest (p. 485)
secured party (p. 485)
repossess (p. 486)
smart card (p. 490)
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section Outline
The Meaning of Credit
Types of Credit
Open-End Credit
Closed-End Credit
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section Outline
Borrowing Money
Truth in Lending
Secured Loans
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section Outline
Credit Cards
Smart Cards
Disputed Purchases
Lost or Stolen Credit Cards
Credit Card Blocking
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Pre-Learning Question
What is credit?
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
The Meaning of Credit
Credit is an arrangement through
which you may receive cash, goods,
or services now and pay for them in
the future.
The cost of using someone else’s
money is called interest.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
The Meaning of Credit
The party who sells the goods on
credit or lends the money is called
the creditor.
The party who buys the goods on
credit or borrows the money is
called the debtor.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Pre-Learning Question
What are the different types of credit?
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Types of Credit
There are two main kinds of credit.
Open-end credit
Closed-end credit
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Open-End Credit
Open-end credit is credit that can be
increased by the debtor by continuing
to purchase goods or services on
credit, up to a certain limit.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Open-End Credit
You are given a line of credit, or a
maximum amount of money made
available to you. Charge accounts and
credit cards are some examples.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Closed-End Credit
Closed-end credit is credit given for
a specific amount of money and
cannot be increased by making
additional purchases. Buying a vehicle
and making monthly installments is
one example.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Pre-Learning Question
What should you know before you
borrow money?
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Borrowing Money
Research the questions you will be
asked when you apply for a loan.
Shopping for a competitive interest
rate can save you a lot of money in
the long run.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Truth in Lending
The Truth in Lending Act requires that
lenders tell you both the finance
charge and the annual percentage
rate (APR) of the loan, so you can
compare the cost of a loan from
different lenders.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Secured Loans
A secured loan is one in which
creditors obtain an interest in
something of value, called collateral,
from which they can secure payment if
you do not pay.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Secured Loans
The interest that is given to creditors
is known as a security interest.
The lender or seller who holds the
security interest is known as the
secured party.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Repossession
If the debtor does not pay back the
loan, the secured party has the right to
repossess, or take back, the goods.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Repossession
Repossession must be done without
breaching the peace.
If the debtor refuses to surrender the
goods, legal process must be used to
obtain them.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Cosignature
Loans can also be secured by having
a second person, called a cosigner or
surety, sign the contract, agreeing to
pay the loan, if necessary.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Fill in the blanks.
1. The _____ is the party who sells
goods on credit or lends money.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
ANSWER
Creditor.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
2. The _____ is the party who buys
the goods on credit or borrows
money.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
ANSWER
Debtor.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
3. _____ is credit that can be
increased by the debtor by
continuing to purchase goods or
services on credit, up to a certain
limit.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
ANSWER
Open-end credit
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
4. _____ is credit given for a specific
amount of money.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
ANSWER
Closed-end credit
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Pre-Learning Question
Do you know how to choose a credit
card?
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Credit Cards
Credit cards have become an
important part of our culture, and
choosing the best one for you can
save you money.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Credit Cards
Total amount of U.S. credit card
debt in 2001— $680 billion
Number of different credit cards in
the average family—13
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Credit Cards
Outstanding credit card debt of the
average credit card holder—$8,000
Percent interest paid on that
outstanding debt—17 percent
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Choosing a Credit Card
Here are five tips for choosing the
best card for you.
1. Department stores and gasoline
companies are good places to
obtain your first credit card.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Choosing a Credit Card
2. Bank credit cards are offered
through banks and savings and loan
associations. Annual fees and
finance charges vary widely, so
shop around. Shopping around can
save you a lot of money.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Choosing a Credit Card
3. If you plan on paying off your
balance every month, look for a
card that has a grace period and
carries no annual fee or a low
annual fee.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Choosing a Credit Card
3. (continued) You might have a
higher interest rate, but you plan to
pay little or no interest anyway.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Choosing a Credit Card
4. Watch out for creditors that offer low
or no annual fees but instead
charge a transaction fee every time
you use the card. Such charges can
add up quickly.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Choosing a Credit Card
5. If you plan to carry a balance, look
for a card with a low monthly
finance charge. Be sure that you
understand how the finance charge
is calculated
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Smart Cards
A smart card is a new kind of card
with a computer chip that can store a
large amount of data.
Smart cards can hold debit and credit
card balances, identification
information, and much more.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Disputed Purchases
If you have a dispute with a credit card
purchase, you:
do not pay the bill for the disputed
item, but
notify the credit card issuer by
telephone immediately
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Disputed Purchases
The card issuer:
must put the disputed amount on
hold
will send you a form to fill out
explaining the dispute
will attempt to resolve the dispute
will inform you of the results
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Lost or Stolen Credit Cards
You are responsible for only $50 of
any unauthorized charges made
before you notify the credit card issuer
of the loss, theft, or unauthorized use
of your card.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Lost or Stolen Credit Cards
You are not responsible for any
unauthorized charges made after the
company has been notified.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Credit Card Blocking
When you use a credit card to rent a
car or to check into a hotel, the clerk
usually gives an estimated bill to the
credit card issuer.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Credit Card Blocking
If the transaction is approved, your
available credit is reduced by this
amount immediately. This procedure is
called a block. It is used to make sure
you don’t exceed your credit.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section 22.1 Assessment
Reviewing What You Learned
1. What is the difference between
open-end credit and closed-end
credit? Give an example of each.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section 22.1 Assessment
Reviewing What You Learned
Answer
Open-end credit (credit cards) can be
increased by the debtor, up to a limit set by
the creditor, by continuing to purchase
goods or services on credit.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section 22.1 Assessment
Reviewing What You Learned
Answer
Closed-end credit (car loan) is extended
only for a specific amount of money.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section 22.1 Assessment
Reviewing What You Learned
2. What does the Truth-in-Lending Act
require lenders to tell you?
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section 22.1 Assessment
Reviewing What You Learned
Answer
The finance charge and the annual
percentage rate of the loan.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section 22.1 Assessment
Reviewing What You Learned
3. Describe a secured loan.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section 22.1 Assessment
Reviewing What You Learned
Answer
One in which creditors obtain an interest in
something of value, called collateral, from
which they can be paid if you do not pay.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section 22.1 Assessment
Reviewing What You Learned
4. How much does the average credit
card holder have in outstanding
credit card debt? What is the
average interest rate he or she is
paying?
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section 22.1 Assessment
Reviewing What You Learned
Answer
$8,000 in credit card debt; 17 percent.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section 22.1 Assessment
Critical Thinking Activity
Economics
React to this statement: “America’s
economic strength is in part due to the
ability of people to borrow money and
make purchases on credit.” Do you agree
or disagree? Explain your answer.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section 22.1 Assessment
Critical Thinking Activity Answer
Economics
Answers will vary but could discuss that
credit enables consumers to buy expensive
durable goods, such as appliances, which
is good for the economy.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section 22.1 Assessment
Critical Thinking Activity Answer
Economics
Answers can also discuss that too much
credit creates too much consumer debt,
which makes less money for investment,
which is bad for the economy.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section 22.1 Assessment
Legal Skills in Action
Responsible Use of Credit
Many teenagers use credit cards—either
their parents’ or their own. Some teenagers
use credit cards for emergencies only;
others use them for everyday purchases
and activities.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section 22.1 Assessment
Legal Skills in Action
Responsible Use of Credit
With a partner, debate the role of credit in
society today. Explain your philosophy on
using credit. Describe how you think credit
problems could be prevented.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
Section 22.1 What Is Credit?
Section 22.1 Assessment
Legal Skills in Action Answer
Responsible Use of Credit
Debate and discussion will vary. Accept
answers that are well reasoned.
Understanding Business and Personal Law
Borrowing Money and Buying on Credit
End of Section 22.1
What Is Credit?