CHAPTER 4 Resource Manager CHAPTER 4 Resource Managersleconomics.weebly.com/uploads/1/2/4/2/12428029/chap04.pdf · Spanish Vocabulary Activity 4 Spanish Reteaching Activity 4 Spanish

Assessment and Evaluation

Spanish Economic Concepts Transparency 6

Spanish Vocabulary Activity 4

Spanish Reteaching Activity 4

Spanish Section Quizzes for Chapter 4

Spanish Chapter 4 Audio Program, Activity, and Test

Spanish ResourcesReading for the Student

Solomon, Michael R. Consumer Behavior: Buying, Having,and Being, 4th ed. New York: Prentice Hall, 1998. A detaileddiscussion of the buying behavior of consumers.

Multimedia MaterialUser Friendly Budgeting, 1998. Learning Seed, 330 Telser

Road, Lake Zurich, IL 60047. VHS. Newly graduated stu-dents show that independent living requires budgeting.

Additional Resources

Vocabulary PuzzleMaker Software

Interactive Tutor Self-Assessment Software

ExamView® Pro Testmaker

NBR Economics & You Video Program (English/Spanish)

Presentation Plus!

Glencoe Skillbuilder Interactive Workbook CD-ROM,Level 2

Interactive Lesson Planner

MindJogger Videoquiz

Interactive Economics! CD-ROM

Audio Program (English or Spanish)

Technology and Multimedia


PROCEDURE

1. Organize the class into groups of five or less.

2. Ask each group to research a financial institution, such as a commercial bank, a savings and loan, a credit union, a finance company, or a consumer finance company to find the following information:

a. monthly charge for checks (checking institutions)b. cost of checks (checking institutions)c. cost of a returned check (checking institutions)d. holding time for out-of-town checks (checking institutions)e. policy on two-party checks (checking institutions)f. ATM fees

g. APR rates for credit cards, annual fees, and late fees

3. Ask each group to get information on charge accounts at major department stores in the area. Students mightcheck nationally known stores such as Sears, J.C. Penney, Montgomery Ward, or choose one of the regionallyprominent stores where they live.

4. Distribute to each group one or more credit card offers. The offers should include pertinent information aboutinterest charges, the terms of credit, and the name of the institution. NOTE: If these are offers that were sent to individuals, be certain that the name and addresses of the people to whom they were sent are blocked out.

5. Each group will inquire about loan information from a variety of financial lending institutions. Information solicited should include what types of loans are available (purpose for the loan), how much can be borrowed in each category, the interest rates for various types of loans, the repayment schedules, and penalties for early or late payment.

6. Invite a guest speaker to explain credit ratings, credit rating systems, credit bureaus, and the significance ofchecking your credit rating periodically.

7. As an enrichment activity, you may wish to have students create cartoons for a bulletin board display to stimulateinterest concerning uses of credit.

Assessment

1. Each group will prepare a graph showing interest rates charged for credit cards.

2. Each group will write and present a three-minute skit showing the use/misuse of borrowing or the use/misuse ofcredit card purchasing

▼ BACKGROUND

Many students will receive an invitation to usea credit card after they graduate from highschool. Oil companies know students use cars,and credit card companies know they needcredit. Students may also inquire about borrowing from different financial institutions,setting up charge accounts, and checking ontheir credit ratings. Students need to learn tomake rational economic choices about creditand its uses in their personal lives and understand the importance of living withintheir means.

▼ MATERIALS

Teacher-collected copies of various creditoffers, forms for credit, credit cards

▼ OBJECTIVES

After completing this activity, students will beable to• Discuss the types of credit available and the

institutions offering this credit.• Understand the importance of consumer

credit in the economy and their personal lives.

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C REDIT

Name Date Class

RUBRICSgraphs, skits,cartoons, surveys

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Performance AssessmentActivity 10

14. A usury law

a. restricts the amount of credit a financial institution can offer.b. sets maximum interest rates consumers can be charged.c. defines lending practices for state financial institutions.d. allocates credit based on need.

15. Credit cards were first introduced in the United States

a. in the 1950s. b. just after World War II.c. in the 1920s. d. in the early twentieth century.

CRITICAL THINKING QUESTIONS

Directions: Answer each of the following sets of questions on a separate sheet of paper.

16. Finding the Main Idea Why do many college students find themselves over their heads in credit card debt?

17. Understanding Cause and Effect Why do you think credit cards are more popular today than they were40 years ago?

APPLYING SKILLS

Understanding Percentages

18. How much interest would Premium First charge you for a year on an unpaid balance of $3,500?

19. How much more interest would you have paid a year if your credit card had been issued by Federal Savings?

20. Why might you be willing to pay the high annual fee that Premium First charges?

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Name Date Class

4, B

Credit Card Issuer Annual Fee Annual Interest Rate

First National Bank No fee 9.5%

Premium First $50 7.5%

Federal Savings $35 10.0%

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G OING INTO DEBT

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RECALLING FACTS AND IDEAS

Multiple Choice: In the blank at the left, write the letter of the choice that best completesthe statement or answers the question.

11. A financial institution that is owned and operated by members to provide savings accounts and lowinterest loans is a

a. savings and loan. b. credit union.c. commercial bank. d. savings bank.

12. Which of the following is an example of a durable good?

a. washing machine b. hairbrushc. blouse d. gasoline

13. Some credit companies lure people into signing up by

a. offering low initial APRs. b. offering debit and credit cards.c. linking up with commercial banks d. engaging in heavy advertising.

SCORE

4, B

A1. finance charge

2. commercial bank

3. principal

4. credit

5. mortgage

6. interest

7. credit bureau

8. secured loan

9. collateral

10. credit check

USING KEY TERMS

Matching: Match each item in Column A with the items in Column B. Write the correctletters in the blanks.

Ba. amount of money a borrower must pay for the use of some-

one else’s money

b. receipt of money to buy goods or services in the present withthe promise to pay for them in the future

c. cost of credit expressed monthly in dollars and cents

d. bank whose main functions are to accept deposits, lendmoney, and transfer funds among banks, individuals, andbusinesses

e. private business that investigates a person to determine therisk involved in lending money to that person

f. something of value that a borrower lets the lender claim if aloan is not repaid

g. installment debt owed on houses, buildings, or land

h. investigation of a person’s income, current debts, personallife, and past history of borrowing and repaying debts

i. amount of money originally borrowed

j. loan backed up by collateral

14. A finance charge is the

a. amount of money originally borrowed in a loan.b. cost of credit expressed monthly in dollars and cents.c. fee charged to a savings account.d. cost of credit expressed as a yearly percentage.

15. Credit cards such as Visa and MasterCard are issued by

a. banks. b. finance companies.c. credit card companies. d. mortgage companies.

CRITICAL THINKING QUESTIONS

Directions: Answer each of the following sets of questions on a separate sheet of paper.

16. Making Predictions Why is a bank more likely to make a first-time borrower a secured loan rather than anunsecured loan?

17. Making Comparisons What are the advantages and disadvantages of using debit and credit cards?

APPLYING SKILLS

Understanding Percentages

18. How much annual interest would First National Bank charge you for a year on an unpaid balance of $1,500?

19. How much less interest would you have paid a year if your credit card had been issued by Premium First?

20. For which kind of credit card user would First National Bank’s card make the most sense?

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Name Date Class

4, A

Credit Card Issuer Annual Fee Annual Interest Rate

First National Bank No fee 9.5%

Premium First $50 7.5%

Federal Savings $35 10.0%

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RECALLING FACTS AND IDEAS

Multiple Choice: In the blank at the left, write the letter of the choice that best completesthe statement or answers the question.

11. Interest rates for all types of credit are

a. set by the state government. b. set by the federal government.c. set by the commercial banks. d. regulated by state and federal laws.

12. Mortgages are offered by

a. commercial banks. b. savings and loan associations.c. savings banks. d. consumer finance companies.

13. Consumers can transfer money electronically from their bank accounts to the bank accounts of stores orrestaurants by using

a. credit cards. b. debit cards.c. American Express cards. d. credit union share drafts.

SCORE

4, A

A1. principal

2. finance charge

3. durable goods

4. annual percentage rate

5. interest

6. installment debt

7. finance company

8. mortgage

9. unsecured loan

10. collateral

USING KEY TERMS

Matching: Match each item in Column A with the items in Column B. Write the correctletters in the blanks.

Ba. installment debt owed on houses, buildings, or land

b. something of value used to secure a loan

c. financial institution that takes over contracts for installmentdebts from retailers and receives a fee for collecting the debt

d. cost of credit expressed in dollars and cents

e. amount of money originally borrowed

f. amount of money a borrower must pay for the use of some-one else’s money

g. cost of credit expressed as a yearly percentage

h. loan guaranteed only by a promise to repay it

i. manufactured items intended to last more than three years

j. debt that is repaid in equal payments over a fixed period oftime

82B

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

Resource ManagerCHAPTER 4

You and your students can visit ett.glencoe.com—the Web site companion to Economics Today andTomorrow. This innovative integration of electronic andprint media offers your students a wealth of opportuni-ties. The student text directs students to the Web site forthe following options:

• Chapter Overviews • Student Web Activities

• Self-Check Quizzes • Textbook Updates

Answers are provided for you in the Web ActivityLesson Plan. Additional Web resources and InteractivePuzzles are also available.

Use the Glencoe Web site for additional resources. All essential content is covered in the Student Edition.

ECONOMICS

Application and Enrichment

OING INTO DEBT

EASY CREDIT

Directions: Credit is so easy to obtain that offers of unsecured loans, or loans requiring no collateral, oftencome through the mail. Borrowers may think the monthly payments seem manageable. However, buyersshould look at a table like the one below and calculate the actual cost of the loan. Such a table is called anamortization table.

1. What is the total interest paid for a $5,000 loan over a 24-month period?

2. The total interest paid is what percentage of $5,000?

3. What is the total interest paid for a $7,500 loan over a 48-month period?

4. The total interest paid is what percentage of $7,500?

5. The monthly payment for a $10,000 loan over 60 months is only $228. What is the total interest you would pay

over five years?

6. Which is more costly to the borrower, a $10,000 loan paid back over 24 months or the same amount over 60months?

Explain.

7. What can you conclude about the cost of long-term loans with low monthly payments?

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Name Date Class

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SAMPLE MONTHLY LOAN PAYMENTS12.99% fixed APR (annual percentage rate)

LOAN 24 MONTHS 36 MONTHS 48 MONTHS 60 MONTHS

$ 3,000 $143 $101 (not available) (not available)

$ 5,000 $238 $168 (not available) (not available)

$ 7,500 $357 $253 $201 (not available)

$10,000 $475 $337 $268 $228

$15,000 $713 $505 $402 $341

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Enrichment Activity 4

Teaching Transparency

Application and Enrichment

Review and Reinforcement

C HAPTER 4 GOING INTO DEBTDirections: Use the following clues to fill in vocabulary terms on the grid below.

ACROSS

2. A loan that is backed by collateral (two words)

4. Manufactured items that people use for a long timebefore replacing (two words)

7. Something of value that a borrower can use as apromise to repay a loan

8. Receiving money to buy goods and services withthe promise to repay in the future

9. The cost of credit expressed as a yearly percentage(three words)

10. The amount the borrower pays for using someoneelse’s money

DOWN

1. Payment on a loan is divided into equal paymentsover a set period of time (two words).

3. The cost of credit expressed in dollars and cents(two words)

5. Person who signs the loan contract with the borrower and promises to repay if the borrowerdoes not

6. Installment debt owed on houses, buildings, or land

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Economic VocabularyActivity 4

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U SING A DATABASE

An electronic database is a collection of facts or statistics that are stored in a file on a computer. The information is organized into categories, called fields. For example, a fieldcould contain the names or street addresses of your clients. It could also include the amount ofmoney each client spent in the past year. A set of related fields is known as a record. Together,all of the records make up the database.

To create a database, think about what information you want to include. Then follow theinstructions in your computer program to set up fields. Be sure to enter each item in the cor-rect field. Then determine how you want to organize or sort the information in the database(chronologically, alphabetically, by zip code, or some other way).

Directions: Survey at least 10 of your classmates or other people you know on their shopping preferences.Then use a database program to create fields and records that include each person’s name, address, andfavorite retail clothing store. Be sure to place each piece of information in a separate field.

1. Which retail store was preferred by the largest number of people?

2. How many people who preferred the retail store in Question 1 live in the same zip code?

3. Print out an alphabetical list of all people in your database.

4. Print out an alphabetical list of all of the retail stores that appear in your database.

5. If you were about to open a clothing store in your area, how would you use the information in this database?

6. What other information might you want to include in the database?

A B CWorkbook

1

2

3

4

Field 1 Field 2

3.5

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Name Date Class

C ATEGORIZING CONSUMER CREDIT PROTECTIONCategorizing information can help when you have a credit problem. The items below areproblems consumers face when using credit.

Directions: On the following chart, write the number of the problem next to the government regulationthat covers the situation.

1. Beth’s latest billing statement shows an error of$100, and Beth wants the credit company to cor-rect it.

2. A collection agency repeatedly calls Bob at work toask when he will make his overdue car payments.

3. The bank refuses to loan Jane money, so she asksthe bank representative for the name of the creditbureau that issued her credit report.

4. Jamal refuses to give his national origin on a loanapplication for an automobile.

5. Tim’s credit card company raised the annual per-centage rate on its cards without notifying itscustomers.

6. Keela withholds payment for a color television setthat she charged, because the TV set doesn’t workright.

7. Barry wants to cancel a magazine subscription theday after he orders it.

1010

Name of Law Credit Problem

Truth in Lending Act

Fair Credit Reporting Act

Equal Credit Opportunity Act

Fair Credit Billing Act

Fair Debt Collection Practices Act

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Name Date Class

G OING INTO DEBTDirections: Three major sources of credit are financial institutions, such as savings banks; charge accounts;and credit cards. Use the following abbreviations to indicate the most likely source of each loan describedbelow:

FI—financial institution CA—charge account CC—credit card

1. It took Judy’s mom 36 months of equal installments to pay for the piano.

2. It will take Celine three years to get out of debt if she pays only the minimum each month.

3. The collateral for Ms. Swanson’s business loan was her company van.

4. With his father’s help, Rashad paid off what he owed at Big Man’s store.

Directions: Write the letter of the item in Column B that correctly describes the services of the financialinstitution listed in Column A.

44

Column A

5. commercial bank

6. savings and loan

7. savings bank

8. credit union

9. finance company

Column B

a. only accepts deposits and lends money

b. originally set up to serve small saversoverlooked by commercial banks

c. owned and operated by its members toprovide savings accounts and low-interestloans to its members

d. takes over contracts for installment debtsand adds a fee for collecting debts

e. main functions are to accept deposits,lend money, and transfer funds amongbanks, individuals, and businesses

10. The three factors that decide a person’s personal credit rating are capacity to pay, character, and collateral.Rachel applied for a loan to buy a car, but she lost her job, and she was denied the loan. Which of those threefactors most likely accounted for her inability to obtain a loan? Explain.

Critical Thinking Activity 10 Reteaching Activity 4

Reinforcing Economic Skills 23

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U SING CREDITMillions of teenagers have credit cards or charge cards at local stores. However, having access to credit carries responsibilities. To avoid abusing credit and running into financial difficulties, a card user should understand what credit can cost. The situations below can helpyou to understand what your responsibilities are.

Directions: Read each situation and complete the exercises about it.

1. Hector is trying to decide which credit card to apply for. Card A gives him a $2,000 limit. It also charges anannual fee of $25 and has an 18% yearly interest rate on amounts not paid within 20 days. Card B gives Hectora $1,000 limit. It charges only 15% interest on amounts not paid within 30 days and has no annual fee. Hewants a credit card to make purchases that he will pay off over several months.

a. Which credit card will be easier to abuse and more difficult to pay off? Explain your answer.

b. Which credit card should Hector apply for? Why?

2. Kayla wants to get a charge card for one of two department stores in her town. Both stores charge the sameinterest rate for unpaid balances, but the method for calculating the principal that is used is different.

• Store A calculates its principal using the average daily balance method; that is, the principal is the average daily balance of all unpaid charges.

• Store B uses the past due balance method; that is, the principal is the amount left unpaid from the last month.

Kayla expects that she will make payments every month, but that she will have an unpaid balance in some months.

a. Which method will result in a greater principal in some months? Explain.

b. To which store should Kayla apply for a charge card? Why?

c. Assume that the annual finance charge at Store B is 2% more than at Store A but that Kayla likes the merchandise better at Store A. For which store should she get a charge card? Why?

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G OING INTO DEBTOne of the most important questions to ask when borrowing money is “Can I afford the payments?”

Directions: With this in mind, read the following case study. Then complete the exercises.

Grace has the chance to work as a window dresser at an out-of-town department store for $300 a week, but sheneeds a car to get to the new job. Grace lives at home and her only fixed expense is $350 per month in rent to herparents. She has just enough savings to pay her tuition at night school for the next two years and, therefore, does notwant to use the money as a down payment on a car. The dealer has offered her the purchase options below.

• pay $16,000 with no interest over 18 months in monthly payments of (1) or

• get a rebate of $1,000 and pay off the balance at 9% interest in monthly payments for 1 to 5 years.

1. Use the amortization table to find the total cost of the car when paying it off in the given number of years.

2. Which option is best for Grace? Explain your choice.

1 year 2 years 3 years 4 years 5 years

Monthly $1,311.78 $685.28 $477.00 $373.28 $311.38paymentat 9%Total cost

(a) ___________ (b) ___________ (c) ___________ (d) ___________ (e) ___________of car

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10

Economic Concepts 6

E XCHANGE, MONEY, AND INTERDEPENDENCEThe drawing represents an average community with a number of single-family and multiple-family dwellings andvarious private sector and public sector economic units.

66

Economic Concepts Transparency 6

Consumer ApplicationsActivity 10

Free Enterprise Activity 10

Previous Balance

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F IGURING FINANCE CHARGES

Directions: Use the above table to calculate and compare the amount of interest paid.

Suppose that you spent $200 on clothes and paid with a credit card. Your credit card company’s monthly interest rateis 1.6 percent, and you paid $100 of your bill halfway through the month. Figure out the finance charge for the firsttwo methods.

(1) Previous Balance (2) Adjusted Balance

Now figure the finance charge with the average daily balance method. Provide the amount of the average dailybalance and the finance charge.

(3) Average Daily Balance Finance Charge

Most credit card companies advertise their APR. APR stands for annual percentage rate. In general, the monthlyinterest rate is found by dividing the APR by 12. Give the monthly interest rates for each of the following APRs.

(4) 14.4% 19.2% 10.8%

Finally, see how much the clothes you charged will cost you in the end if you pay $50 a month. Use the 1.6 percent monthly rate again and the previous balance method to fill in the chart. (5)

** Add this amount to the $200 you have paid to see what the clothes actually cost you.

Actual cost of clothes � (6)

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Different credit card companies use different interest rates to calculate finance charges. Theyalso use different methods of calculation. Each method applies the monthly interest rate to anaccount’s balance at a different point during the month. Consider these three methods.

Finance charge � Amount owed at beginning of the month � monthly interest rate

Adjusted Balance

Finance charge � Amount owed at end of the month � monthly interest rate (To calculate the amount owed at the end of the month, subtract any payments made from the amount owed at the beginning of the month.)

Average Daily Balance

Finance charge � Average daily balance � monthly interest rate (To calculate the average daily balance, add the amounts owed each day and divide by the number of days in the month or billing period.)

January February March April May

Previous Balance 200.00 153.20

Finance charge � 3.20 � � � �

TOTAL � 203.20 � � � � **

Payment � 50.00 � 50.00 � 50.00 � 50.00 �

New Balance � 153.20 � � �

EXAMINING THE CARTOON

Multiple Choice

1. What is the most shocking information in the woman’s statement?

a. that the mail is on time b. that there is so little mailc. that the credit limit is so high d. that there are only two bills

2. Why did the cartoonist not put an exclamation point after the ridiculously high credit limit?

a. to convey the idea that high credit limits are becoming customaryb. to show that the woman does not understand creditc. to raise doubts about this couple’s credit

d. to support the idea of high credit limits

Critical Thinking

3. Analyzing the Cartoon How does the cartoonist use exaggeration to make the point?

�

NATION ON CREDITAt the close of the twentieth century, credit card use in the United States reached an all-timehigh. Millions of people, whose parents and grandparents believed in “living within yourmeans” and “paying as you go,” made a different economic choice: to “buy now and pay (withinterest) later.” These people were often enticed by credit card companies, who made it easy toget a credit card with a high credit limit (the amount of money one can charge to a card).

Directions: Study the cartoon below. Then answer the questions that follow.

Name Date Class

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JEFF STAHLER reprinted by permission of Newspaper Enterprise Association, Inc.

But the reality for many school districts is that there isno money for personal-finance materials. Instead, manyare using free handouts provided by credit-card issuers,banks, investment houses, publishers, and insurance

companies. The materials are rarely objective, and manywe saw gave bad advice to students. . . .

“Future Debtors of America.” Consumer Reports, December 1997.

20 Primary and Secondary Source Readings

ANALYZING THE READING

1. What happened to Stephanie Carlson and many young people her age?

2. Discuss the ways in which young people are unprepared for easy credit temptation.

3. What is the consumer power of young people today? How do advertisers feel about that spending power?

4. What is one reason young people are so uninformed about consumer issues?

5. Do you believe personal finance and credit management should be given to school-aged students? Explain youranswer.

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Cooperative Learning Simulations and Problems 10

Primary and Secondary Source Reading 10

Math Practice for Economics Activity 10

Economic Cartoons Activity 10

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C REDIT CARDS

GROUP PROJECT

Credit cards provide a convenient method of borrowing money to purchase a wide variety ofproducts. It is important to consider the charges and understand the process of buying oncredit. In the activity below you will apply for a credit card and practice making credit cardpurchases. Finally, your group will compare offers from various credit card companies to determine which is the best card to use.

▼MATERIALS:

Copies of credit card application forms

1. Individual Work Stage 1: Students work individually. Suppose that you are working in yourfirst full- or part-time job after graduating fromhigh school or college. Fill out an application for acredit card using information from this imaginaryjob. Estimate your annual salary and include anydebt you might have.

2. Paired Work Stage 2: Students work in pairs.Evaluate each other’s application for credit. Whatthree factors should be considered in a creditcheck? Does your partner’s application meet these criteria?

3. Group Work Stage 3: Students work in groups ofthree. Assign group members the following roles:consumer, business owner, and credit card companyrepresentative. Act out a business transaction usinga credit card. What responsibility and costs doeseach participant carry in this transaction? Recordyour answers.

4. Group Work/Analysis Stage 4: Students work in groups of four. Using information from the text-book, each member should study the table aboveand choose the card they believe is the best deal.As a group, evaluate the cards based on their interest and fees. Rank the cards from 1 to 4 inorder of best to worst. Next, consider how the different methods of computing finance chargesaffect these rankings. If you paid off your balanceeach month, which offer would be the best?

Group Process QuestionsDid the group agree on the assignment of tasks?

Did members work well together?

Did you find this a helpful way to study? Why or why not?

What is the most important thing you learned?

COOPERATIVE GROUP PROCESS:

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A $500 20% $0 20% previous balance

B $500 15% $10 17% adjusted balance

C $500 12% $10 14% average daily balance

D $500 9% $50 19% past due balance

SampleCredit Card Charge Interest Annual How FinanceCompany Amount Rate Membership Fee APR Charge Is Computed Ranking

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■


tephanie Carlson is barely out of high school, andalready she’s a credit risk. It took the 19-year-old from SaltLake City only five months of buying clothes, jewelry,makeup, groceries, and gasoline to run up $7000 in credit card debt and unpaid tuition. She’s now in creditcounseling and learning to live plastic-free. But she wishes she’d learned more about credit cards before thebinge began.

“I know people just like me,” she says. “I’m tellingthem not to get started. Once you get started, you can’tstop.”

A new generation of young people is starting out lifeunprepared for temptations like easy credit. New research,including a national survey for CONSUMER REPORTS of689 12-year-olds from various economic backgrounds,shows significant gaps in children’s personal-financeknowledge. This season of “buying” only accentuates theproblems.

In our survey, only 7.2 percent knew that credit cardsare a form of borrowing. Four in 10 didn’t know thatbanks charge interest on loans. Guess who’s providingschools with free personal-finance curricula? Visa,MasterCard and other financial institutions, whose mes-sages often promote bad money habits. High schoolseniors are particularly uninformed about savings andinvestment. . . .

Compounding the problem is the fact that kids willmake more consumer decisions than previous genera-tions. By the time today’s kids turn 20, they will have seenor heard 360,000 30-second TV commercials . . . And theywill have received more than $33,000 in income andmoney gifts, according to separate studies by the RandYouth Poll and James U. McNeal, professor of marketingat Texas A&M University.

That’s not lost on advertisers salivating over a marketthat grows at 20 percent a year, McNeal says. Kids ages 5 to 14 spent $24.4 billion in 1996, and directly influ-enced another $117 billion spent on their behalf. . . .

Moreover, credit is easier to come by than everbefore. Sixty-four percent of college students have a credit card in their name, and 20 percent have four ormore cards, says the Roper College Track Financial Servicessurvey. Since employers are increasingly checking jobapplicants’ credit records, kids with a bad record may findit hard to obtain work to pay back their debts. At theConsumer Credit Counseling Service of Los Angeles, col-lege students make up 10 to 15 percent of those seekingmoney-management help, says executive director GaryStroth.

A new generation of young people

is starting out life unprepared for

temptations like easy credit.

Later in life, this generation may need to be morefinancially disciplined and self-reliant than their babyboomer parents. . . .

Our survey of 12-year-olds polled a slightly highersocioeconomic sample in a different test situation, andquestions were geared to a younger grade level, so resultsaren’t entirely comparable. On the bright side, nearly allkids knew that a bank loan is a form of borrowing. Butone-third couldn’t calculate simple interest. . . .

One reason kids are so uninformed is that personalfinance isn’t taught systematically in the schools. Unlike inJapan, where such a curriculum is mandatory, the subjectis approached in the U.S. through a patchwork of publicand private initiatives. . . .

In most states, whether to teach consumer and per-sonal finance is decided by school districts, schools, andteachers. The results range from entire courses to just afew hours in an economics or math class. . . .

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Primary and Secondary Source Readings 19

Name Date Class

F UTURE DEBTORS OF AMERICAAmerica is a country living on credit. Our consumer culture entices us to buy more goodsthan our budgets can actually afford. Many experts are alarmed at this phenomenon. In particular, they note how younger Americans are increasingly in over their heads incredit card debt, are establishing bad spending habits, and are uninformed about thelong-term financial consequences of their spending behavior. Think about your ownfinancial habits as you read the excerpt below from Consumer Reports. Then answer the questions that follow.

10

S

http://ett.glencoe.com

Block Schedule

Hal KraynekValley High SchoolSanta Ana, California

Buying a HomeIn this activity, students research to find out what is

involved in purchasing a home. They need to contact alocal title agency or real estate agent, or use the Internet,to find information about the following:

Students may work with a partner and present their find-ings in an oral report to the class.

ACTIVITYFrom the Classroom ofACTIVITYFrom the Classroom of

Activities that are particularly suited to use within the blockscheduling framework are identified throughout this chapterby the following designation: BLOCK SCHEDULING

Block Schedule

Use Glencoe’s Presentation Plus!,a Microsoft PowerPoint® application, to teach Going Into Debt. With thismultimedia teacher tool, you can cus-

tomize ready-made presentations. At your fingertips areinteractive transparencies, on-screen lecture notes, audio-visual presentations, and links to the Internet and to otherGlencoe multimedia.

Interactive Lesson PlannerPlanning has never been easier! Organize your week, month, semester, or year with all the lesson helps you need to make teaching

creative, timely, and relevant—the way it is meant to be.The Interactive Lesson Planner opens Glencoe’s Chapter 4resources, helps you build your schedule, and tracks yourprogress.

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■


Teaching strategies have been coded for varying learning styles and abilities.L1 BASIC activities for all studentsL2 AVERAGE activities for average to above-average

studentsL3 CHALLENGING activities for above-average students

ENGLISH LANGUAGE LEARNER activitiesELL

Key to Ability Levels

Voluntary Standards Emphasized in Chapter 4Content Standard 12 Students will understand thatinterest rates, adjusted for inflation, rise and fall to balancethe amount saved with the amount borrowed, thus affectingthe allocation of scarce resources between present andfuture uses.

Content Standard 10 Students will understand thatinstitutions evolve in market economies to help individualsand groups accomplish their goals

Resources Available from NCEE• Capstone: The Nation’s High School Economics Course• Personal Decision Making: Focus on Economics• Personal Finance Economics: Wallet Wisdom• MCG—Economics and Entrepreneurship

To order these materials, or to contact your StateCouncil on Economic Education about workshops andprograms, call 1-800-338-1192 or visit the NCEE Web siteat http://www.nationalcouncil.org

Easy Planning and Preparation!

82D

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■


82C

Blackline Master

Transparency

Software

CD-ROMVideodisc

Audiocassette

Videocassette

Reading Objectives Reproducible Resources Technology/Multimedia Resources

Section 1Americans and Credit• What are the advantages of repaying

installment debt over a long period?• Why do people go into debt?• What factors should you consider when

deciding whether or not to use credit?

Section 2Sources of Loans and Credit• What are six types of financial

institutions?• What three kinds of charge accounts

are available from stores?• How are credit cards used?• How do a finance charge and an annual

percentage rate differ?

Section 3Applying for Credit• What four factors determine a person’s

credit rating?• What are your responsibilities as a

borrower?

Section 4Government Regulation of Credit• How has the Equal Credit Opportunity

Act affected consumer credit?• What are state usury laws?• Why might a person declare personal

bankruptcy?

Reproducible Lesson Plan 4-1Daily Lecture Notes 4-1Guided Reading Activity 4-1Reading Essentials and Study Guide 4-1Daily Focus Activity 30Section Quiz 4-1*

Reproducible Lesson Plan 4-2Daily Lecture Notes 4-2Guided Reading Activity 4-2Reading Essentials and Study Guide 4-2Daily Focus Activity 31Section Quiz 4-2*Reinforcing Economic Skills 23



Daily Focus Transparency 30Vocabulary PuzzleMakerInteractive Tutor Self-Assessment SoftwareMindJogger VideoquizPresentation Plus!


Daily Focus Transparency 31

Economic Concepts Transparency 6Vocabulary PuzzleMakerInteractive Tutor Self-Assessment SoftwareMindJogger Videoquiz

NBR's Economics & You*Presentation Plus!






*Also available in Spanish

Section Resources

• Time spent in escrow• Fees and charges• Interest rates for 15-, 20-,

and 30-year mortgages• Payment rates• Types of homeowners’

insurance

• Buying a new versus aused home

• Landscape expenditures• Repair expenditures• Location near schools

and shopping

http://www.nationalcouncil.org

83

83Going In to Debt

Terms to Know• credit• principal• interest• installment debt• durable goods• mortgage

Reading Objectives1. What are the advantages of

repaying installment debtover a long period?

2. Why do people go intodebt?

3. What factors should youconsider when decidingwhether or not to usecredit?

READER’S GUIDE

A mericans use credit to make many purchases. The totalamount of funds borrowed and lent each year is enor-mous. In addition to individuals borrowing funds, the

federal, state, and local governments all borrow funds, too. Thenation’s economy, in fact, depends on individuals and groupsbeing able to buy and borrow on credit. In this section, you’lllearn what credit is and why people use it.

What Is Credit?Credit is the receiving of funds either directly or indirectly to

buy goods and services today with the promise to pay for them inthe future. The amount owed—the debt—is equal to the principal

1

credit: receipt of money eitherdirectly or indirectly to buy goodsand services in the present withthe promise to pay for them in thefuture

THE WASHINGTON POST, MAY 10, 1999

Debt is not itself a bad thing. Used properly, creditallows young families to buy their own homes and acquireother trappings of middle-class life without waiting untilmiddle age. Homeownership, in turn, gives these families

a stake in their communities and encourages them totake an active role inkeeping it a good placeto live.

But easy credit—andplainly credit is very easy

today—creates a temptationto push the envelope, to live at a higher level than

the borrower can safely afford.

CHAPTER 4SECTION 1, Pages 83–87


Reproducible MastersReproducible Lesson Plan 4–1Reading Essentials and Study Guide 4–1Guided Reading Activity 4–1Section Quiz 4–1Daily Focus Activity 30Daily Lecture Notes 4–1

MultimediaDaily Focus Transparency 30Vocabulary PuzzleMakerInteractive Tutor Self-Assessment Software

ExamView® Pro TestmakerMindJogger Videoquiz

Presentation Plus!

SECTION 1 RESOURCE MANAGER

OverviewSection 1 explains or describes

the importance and uses of con-sumer credit and loans in the econ-omy, the advantages of repayingloans over the long term, and whyand how consumers decide to usecredit.

Answers to the Reading Objectivesquestions are on page 87.

Preteaching VocabularyHave students write sentences

using the Terms to Know—oneterm per sentence. Then havethem rewrite the sentences on aseparate sheet of paper, replacingthe terms with blanks. Pair stu-dents and have partners exchangeand complete the sentence sheets.

Vocabulary PuzzleMaker

READER’S GUIDE

82

Why It’s ImportantHow do credit cards work?What happens if you can’t pay back the amount ofcredit you’ve borrowed? Thischapter will explain what you need to know before applying for credit and going into debt, and how to use credit wisely.

Chapter Overview Visit the Economics Today and Tomorrow Web site at ett.glencoe.com and click on Chapter 4—Chapter Overviewsto preview chapter information.

To learn moreabout usingcredit, view theEconomics

& You Chapter 10 video lesson: Going Into Debt

IntroducingCHAPTER4

82

Chapter OverviewChapter 4 explains the advan-

tages of buying items on credit andwhy people decide to use credit; sixtypes of lending institutions; howcredit ratings are determined; andborrowers’ responsibilities.

CHAPTER LAUNCH ACTIVITY

IntroducingCHAPTER4

Use MindJoggerVideoquiz VHS to previewChapter 4 content.

Introduce students to chaptercontent and key terms by havingthem access Chapter 4—ChapterOverviews at ett.glencoe.com

Offer students the following scenario: Two friends have offered to lend you $1,000 tobuy whatever you want. The first friend would like you to refund the money within theyear, but for every month that goes by without repayment, he or she will charge you$10 interest. The second friend places no time limit on repayment, but will charge you$5 interest for every month that goes by without repayment. Ask students, from whichfriend, if either, they would borrow the $1,000. Steer students toward such topics as thefinancial cost and opportunity cost of borrowing money. Close the discussion by point-ing out that in Chapter 4 they will learn about credit and debt.

ECONOMICS & YOU

Going Into Debt

!8$.4" Chapter 10 Disc 1, Side 1

ASK: What is the differencebetween a secured and anunsecured loan? A secured loanis backed with collateral. If theloan is not paid back, the bankcan claim the collateral. An unse-cured loan is issued on the basisof a person’s reputation and doesnot require collateral.

Also available in VHS.

Project Daily FocusTransparency 30 and have students answer the questions.

This activity is also availableas a blackline master.

Daily Focus Transparencies

U SING CREDIT

1. What type of credit is offered in this advertisement?

2. What important consumer information is supplied in this advertisement?

3030

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BELLRINGERMotivational Activity



85

considered durable goods. People can also borrow cashand pay it back in installments. Figure 4.1 shows howinstallment debt owed each year in the United States hassteadily increased.

The length of the installment period is important indetermining the size of the borrower’s monthly paymentsand the total amount of interest he or she must pay. Alonger repayment period results in a smaller monthly pay-ment. For example, Figure 4.2 shows that if the repaymentof a loan is spread over three years, the monthly paymentswill be smaller than if the loan were repaid in two years. Thereis a trade-off, however. The longer it takes to repay an installmentloan, the greater the total interest the lender charges.

The largest form of installment debt in this country is themoney people owe on mortgages. A mortgage is an installmentdebt owed on real property—houses, buildings, or land. SeeFigure 4.3. Interestingly, most people who owe a mortgage ontheir home do not consider themselves deeply in debt. Becausepeople must have housing, they think of a mortgage as being anecessary monthly payment not similar to other kinds of debt.A mortgage is a debt, however, because somebody has providedthe owner with funds to purchase property. In return, theowner must repay the loan with interest in installments over anumber of years.

C04-02C

Installment Debt Mortgagesmake up the largest form of install-ment debt in the country. Mostmortgages are repaid in monthlyinstallments for 15 to 30 years.

4.34.3

85Going In to Debt

Pay Now or Pay Later? Yourmonthly payment is lower if you choosethe 36-month loan. How much moreinterest will you pay, however, if youspread the loan payment over 36months rather than 24 months?

Term of Loan

Monthly Payments

Total Interest

Total Payments

24 Months

$45.69

$96.56

$1,096.56

36 Months

$31.80

$114.80

$1,144.80

$1,000 Installment Loan at 9% Interest$1,000 Installment Loan at 9% Interest

FIGURE 4.2FIGURE 4.2

mortgage: installment debt owedon houses, buildings, or land





principal: amount of moneyoriginally borrowed in a loan

interest: amount of money theborrower must pay for the use of someone else’s money

installment debt: type of loanrepaid with equal payments, orinstallments, over a specificperiod of time

durable goods: manufactureditems that have a life span longerthan three years

plus interest. The principal is the amount originally borrowed.The interest is the amount the borrower must pay for the use ofsomeone else’s money. That “someone else” may be a bank, acredit card company, or a store.

Any time you receive credit, you are borrowing funds andgoing into debt. Taking out a loan is the same as buying an itemon credit. In both cases, you must pay interest for the use ofsomeone else’s purchasing power.

Installment DebtOne of the most common types of debt is installment debt.

Consumers repay this type of loan with equal payments, or install-ments, over a period of time; for example, 36 equal payments over36 months. Many people buy durable goods, or manufactureditems that last longer than three years, on an installment plan.Automobiles, refrigerators, washers, and other appliances areB

illi

on

s o

f D

oll

ars

Years

$1,350

’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 2000’99

$1,200

$1,050

$900

$750

$600

$450

$300

$150

0

Consumer Debt

Source: Standard & Poor’s

Increase in Borrowing More and more Americans are choosing to buy durablegoods on credit. By how much did consumer debt increase between 1990 and 2000?

For an online update of this graph, visit ett.glencoe.com and click on Textbook Updates—Chapter 4.


84 CHAPTER 4

84

Guided PracticeL2 Applying Ideas Help studentsunderstand the importance of creditin the economy by asking them todiscuss what life would be like if allpurchases had to be paid for withcash. Begin the discussion by listingon the board purchases people oftenmake with credit—houses, automo-biles, home improvement, collegetuition, and vacations, for example.Have students use the point devel-oped in the discussion to write abrief essay titled “Life WithoutCredit.”

Answer: by about $550 billion

L ECTURE LAUNCHERIn 1998, 55 to 60 million American households owed more than $7,000 in credit card debt.What is a credit card? What kinds of things might you purchase with a credit card?

I. What is Credit?

A. To receive funds for services or goods with the intent of paying back those funds in thefuture.

B. Principle is the amount originally borrowed, and interest is the amount added on forthe privilege of borrowing.

• Discussion Question

Why do lenders such as banks charge interest? (They must pay interest to their deposi-tors or investors as well as finance the services of the bank.)

II. Installment Debt

A. A loan paid back in equal payments over time

B. Used for purchase of durable goods or manufactured products that last over threeyears

C Longer payback periods have lower payments but higher total interest

4-1

PAGES 83–84

PAGES 84–85

Daily Lecture Notes 4–1

Reading Disability Students with reading or organizational difficulties may not readilycomprehend that installment debt can be both a benefit and a liability. Discuss the materialin this section to show students how installment debt can be a liability if the value of thepurchased item goes down over the term of the loan. Then point out that, in contrast, aninstallment debt can be a benefit if the monthly payments match more closely the value ofthe consumer’s use of the item.

Refer to Inclusion for the Social Studies Classroom Strategies and Activities forstudents with different learning styles.

Meeting Special Needs

Answer: $18.24

Organize students into small groups. Tell groups to imagine that they work for an adver-tising agency and have been asked to work on a radio campaign designed to inform peopleabout the questions they should ask before buying on credit. Direct groups to write five jin-gles for the campaign—one for each of the questions listed in Figure 4.5 on page 87. Callon groups to “broadcast” their jingles for the rest of the class. BLOCK SCHEDULING

Cooperative Learning

For Use with textbook pages 83–87

MERICANS AND CREDIT

RECALLING THE FACTS

Directions: Use the information in your textbook to answer the questions.

1. What is credit?

2. What are the principal and interest of debt?

a. __________________________principal

b. __________________________interest

3. How does an individual repay installment debt?

4. What types of durable goods do people often pay off using installments?

5. Why is the length of an installment period important?

6. What is a mortgage?

Name Date Class

4-1

A

Guided Reading Activity 4–1

The Federal National MortgageAssociation, or Fannie Mae, is thenation’s largest provider of fundsfor home mortgages. Fannie Maedoes not lend money directly tohome buyers. Rather, it purchasesmortgages from lending institu-tions. These lenders then use themoney to provide mortgages tohome buyers. Since it became aprivate company in 1968, FannieMae has helped more than 30 mil-lion American families to buyhomes.


8787

87Going In to Debt

FIGURE 4.5FIGURE 4.5 Checklist for Buying on Credit

No hard-and-fast rules can tell you whether or not to buy on credit. The following list ofquestions, however, can help you determine if you are making a wise decision.

1. Do I really require this item? Can I postpone purchasing the item until later?

2. If I pay cash, what will I be giving up that I could buy with this money? This is an opportunitycost.

3. If I borrow or use credit, will the satisfaction I get from the item I buy be greater than theinterest I must pay? This is also an opportunity cost.

4. Have I done comparison shopping for credit? In other words, after you have determined thatyou are not going to pay cash for something, you should look for the best loan or credit deal,including the lowest interest rate and other conditions of repayment.

5. Can I afford to borrow or use credit now?

Understanding Key Terms1. Define credit, principal, interest, installment

debt, durable goods, mortgage.

Reviewing Objectives2. What are the advantages of repaying install-

ment debt over a long period?

3. Why do people go into debt?

4. Graphic Organizer Create a diagram like theone below to list the factors you should considerwhen deciding whether to use credit.

Applying Economic Concepts5. Opportunity Cost Think of an item that

you have been saving for. How long will it take you to save the funds needed to pur-chase this item? What are you giving up buying in the meantime?

6. Synthesizing Information Imagine thatyou are shopping for a used car. If you bor-row $10,000 to buy a used car, and the simpleinterest rate on the loan is 11 percent, whatwill your total payment be at the end of 24months? At the end of 36 months? For helpin understanding interest rates, see page xxiiin the Economic Handbook.

Critical Thinking Activity

Decision toUse Credit

Practice and assesskey skills with

Skillbuilder InteractiveWorkbook, Level 2.

1



ReteachHave students write a summary

outlining the main points ofSection 1. Encourage students toshare and compare their summaries.

1. All definitions can be found in the Glossary.2. It allows people to buy and use durable goods,

paying in small monthly payments rather thanwith a large lump sum that they may not have.Also, it allows people to borrow cash for immedi-ate needs and pay back the debt in installments.

3. They feel they must purchase certain itemsright away, to spread the payments over the lifeof the item being purchased.

4. Answers will vary but may include: Do I reallyrequire this item? If I pay cash, what will I begiving up that I could buy with this money? Willthe satisfaction I get from the item I buy begreater than the interest I must pay? Have Idone comparison shopping for credit? Can Iafford to borrow or use credit now?

5. Answers will vary.6. $12,200; $13,300

Tell students that they have beeninvited to write an article, titled“How I Make Wise Credit Choices,”for a consumer magazine. Then askstudents to develop an outline forthis article.

Name Date Class

4, 1

credit Receipt of money either directly or indirectly to buy goods and services in the present with thepromise to pay for them in the future (page 83)

principal Amount of money originally borrowed in a loan (page 83)

interest Amount of money the borrower must pay for the use of someone else’s money (page 84)

installment debt Type of loan repaid with equal payments, or installments, over a specific period of time(page 84)

durable goods Manufactured items that have a life span longer than three years (page 84)

For use with textbook pages 83–87

A MERICANS AND CREDIT

DRAWING FROM EXPERIENCE

Are you saving money to buy an item such as a stereo or a computer? How long will it take you tosave the money you need? Suppose you did not have enough money to pay for the item rightaway. Would you be willing to give up some future earnings for the item if you could have it now?

This section explains how credit works, how Americans use credit and borrow money, and whatcan happen if you do not use credit wisely.

ORGANIZING YOUR THOUGHTS

Use this chart to help you take notes as you read the summaries that follow. As you read, consid-er what items would be appropriate to buy using credit

KEY TERMS

Reading Essentials and Study Guide 4–1


CHAPTER 4SECTION 1, Pages 83–87 Why People Use Credit

In a sense, people feel forced to buy items on credit becausethey believe they require these items immediately. They do notwant to wait. Of course, consumers are not really “forced” to buymost goods and services on credit. They could decide instead tosave the funds needed to make their purchases.

Some might say that you would be better off saving and wait-ing to buy a pickup truck. During the years you are saving for

the truck, however, you forgo the pleasureof driving it. Many people do not want topostpone purchasing an importantdurable good. They would rather buy oncredit and enjoy the use of the item nowrather than later. See Figure 4.4.

Another reason for going into debt is tospread the payments over the life of theitem being purchased. For example, peopledo not buy a truck or car to have it sit in thegarage. What they buy is the availability ofthe vehicle each day, week, month, and yearthat they own it.

Suppose you buy the pickup truck for $15,000 andplan to keep it for five years. At the end of that time, it willbe worth only $5,000. Over that five-year period, however,you will get approximately $2,000 worth of use per year,or $166 per month. By buying on the installment plan, aperson makes monthly payments that more or less corre-spond to the value of the use he or she receives from theproduct.

Deciding to Use CreditThe decision to borrow or use credit involves whether the

satisfaction the borrower gets from the purchases is greaterthan the interest payments. It is basically a question of com-paring costs and benefits. The benefit of borrowing is beingable to buy and enjoy the good or service now rather thanlater. The cost is whatever the borrower must pay in interestor lost opportunities to buy other items.

The benefit of borrowing is something only you candecide for yourself. You and every other borrower, however,should be aware of the costs involved. Figure 4.5 can helpyou decide when to use credit. It can also help you avoid theimproper use of credit by overspending.

Spreading PaymentsSuppose you want to buy a pickuptruck that costs $15,000. You have achoice. You could borrow $15,000right now and buy the truck, but youwould have to make interest pay-ments on the borrowed funds forthree to five years. However, you canalso enjoy using it at the same timeyou are paying for it. Alternatively,you could start saving now, earninterest on your savings, and paycash for the truck in several years.

4.44.4

86 CHAPTER 4

86

IndependentPracticeL1 Illustrating Ideas Have studentswork in small groups to collect news-paper and magazine advertisements,flyers, and direct mailings promotingvarious forms of credit in the UnitedStates. Direct groups to use the mate-rials they collected to create a collagetitled “Credit and Americans.”Encourage groups to display theircollages around the classroom.

BLOCK SCHEDULINGELL

Have students read the captionof Figure 4.4. Then call on volun-teers to answer the following:What choice would you make andwhy?

Name Date Class

4, 1

A MERICANS AND CREDIT

Multiple Choice: In the blank at the left, write the letter of the choice that best com-pletes the statement or answers the question. (10 points each)

6. Anytime you receive credit, you are

a. going into debt. b. earning interest on borrowed money.c. lowering the cost of an item. d. increasing the value of an item.

7. Which of the following are durable goods?

a. groceries. b. refrigerators.c. cosmetics. d. concert tickets.

8 The largest installment debt in the United States is money people owe

SCORE

A1. credit

2. principal

3. interest

4. durable goods

5. mortgage

Ba. manufactured items that have a life span longer

than three years

b. amount of money a borrower must pay for the useof someone else’s money

c. installment debt owed on houses, buildings, or land

d. amount of money originally borrowed in a loan

e. receipt of money to buy goods and services in thepresent with the promise to pay for them in thefuture

Matching: Place a letter from Column B in the blank in Column A. (10 points each)

Section Quiz 4–1

Meeting LessonObjectives

Assign Section 1 Assessment ashomework or an in-class activity.

Use Interactive Tutor Self-Assessment Software to review Section 1.

Remind students that just as financial institutions do not necessarily pay savers thesame rate of interest, neither do they charge the same rate of interest on loans. Organizestudents into groups, and have them use library resources and the Internet to researchmortgage rates charged by banks, savings and loan associations, and other financial insti-tutions that provide mortgages. Have groups present their findings in chart form. In a follow-up discussion, ask students to suggest why mortgage rates might differ amonglenders. BLOCK SCHEDULING

Free Enterprise Activity

89

commercial bank: bank whosemain functions are to acceptdeposits, lend money, and trans-fer funds among banks, individu-als, and businesses

savings and loan association(S&L): depository institution thataccepts deposits and lendsmoney

savings bank: depository institu-tion originally set up to servesmall savers overlooked by com-mercial banks

credit union: depository institu-tion owned and operated by itsmembers to provide savingsaccounts and low-interest loansonly to its members

Commercial Banks The first place you might think to go fora loan is a commercial bank. Commercial banks today controlthe largest amount of money and offer the widest range of ser-vices. These services include offering checking and savingsaccounts and loans to individuals. They also transfer fundsamong banks, individuals, and businesses.

Savings and Loan Associations A savings and loanassociation (S&L), like a commercial bank, accepts depositsand lends funds. S&Ls make many single-family and multi-familymortgage loans. They also finance commercial mortgages andauto loans. Their interest rates for loans are often slightly lessthan those for commercial banks.

Savings Banks Saving banks were first set up to serve thesmall savers who were overlooked by the large commercial banks.Most savings banks, like S&Ls, lend funds for home mortgages,although they do make personal and auto loans. Since 1980, sav-ings banks, like commercial banks, have also been able to offerservices similar to checking accounts.

Credit Unions Union members and employees of many com-panies often have a credit union. A credit union is owned andoperated by its members to provide savings accounts and low-interest loans only to its members. Credit unions primarily makepersonal, auto, and home improvement loans, although larger

Financial Institutions Financial institutions differin several factors, including differences in interest ratesand loan repayment terms.

4.64.6

B FinanceCompany C Commercial Bank

A Savings Bank



Guided PracticeL1 Making Comparisons Ask stu-dents to create two tables—one titled“Financial Institutions” and theother titled “Charge Accounts.” Inthe former, have students compareand contrast the services offered bythe different types of financial insti-tutions. In the latter, have studentscompare and contrast the three typesof charge accounts. Encourage stu-dents to display and discuss theirtables.




MultimediaDaily Focus Transparency 31Economic Concepts Transparency 6Vocabulary PuzzleMakerInteractive Tutor Self-Assessment Software


NBR’s Economics & YouPresentation Plus!


88 CHAPTER 4

Terms to Know• commercial bank• savings and loan association• savings bank• credit union• finance company• charge account• credit card• finance charge• annual percentage rate

(APR)

Reading Objectives1. What are six types of finan-

cial institutions?

2. What three kinds of chargeaccounts are available fromstores?

3. How are credit cards used?

4. How do a finance chargeand an annual percentagerate differ?

READER’S GUIDE

T here are two major types of credit—using credit cards andborrowing money directly from a financial institution.Although lending institutions differ in their services, they

all charge interest on the funds they lend. In this section, you’lllearn what those financial institutions are. You’ll also learn aboutcharge accounts and credit cards—and why you should be awareof the high interest rates they charge.

Types of Financial InstitutionsYou should comparison shop when you have decided to apply

for a loan. See Figure 4.6. To gather information, check variouslending agencies in person, over the phone, or at their Web sites.

KIPLINGER’S PERSONAL FINANCE MAGAZINE, DECEMBER 1998

Capital One and First USA deserve high marks forhelping credit card customers jump off the teaser-ratemerry-go-round. Both issuers began offering a platinumVisa with a 9.9% fixed interest rate and no annual fee.

But First USA loses points for jumping on the spank-the-cardholder bandwagon. The bargain rate jumps to 19.99% if you miss the payment-due date twice in six months. And in its fine print, Capital One reserves the right to change the rate if your credit rating slips.

2

88

OverviewSection 2 describes the credit

choices available to consumers, andhow to calculate annual percentagerates and finance charges.


Preteaching VocabularyProvide pairs of students with

18 index cards. One partnerwrites each of the Terms to Knowon a card. The other partnerwrites each definition on a card.Have the first player lay down aterm card and the second playerdefine the term by laying the cor-rect definition card.


READER’S GUIDE

After students have viewedFigure 4.6, point out that the dif-ferences among financial institu-tions in terms of servicesprovided have lessened since the1980s. Financial experts predictthis trend to continue in the nextfew years.

L ECTURE LAUNCHERIn January 1995, Eli Broad bought a cartoon painting at Sotheby’s for $2.5 million, payingwith his American Express card. He even got the frequent flyer miles for the purchase—a totalof 25 first-class trips cross-country. In what other way might Eli Broad have paid for the paint-ing? Do you think the average person can charge $2.5 million on a credit card?

I. Types of Financial Institutions

A. Commercial Banks offer the widest range of services.

B. Savings and Loan Associations often have lower interest rates than commercial banks.

C. Savings Banks were created to serve small savers who weren’t being served by largercommercial banks.

D. Credit Unions are owned and operated by their members; generally have higher inter-est rates for savings and lower rates for loans.

E. Finance Companies collect debt for stores’ installment loans; generally have very highinterest for loans.


Compare two of the types of financial institutions. Which would offer better servicefor a corporation? a young student who is trying to save money? (The corporationwould do best with the Commercial Banks; a young student would do best with a Savingsand Loan Association or a Savings Bank.)

4-2

PAGES 88–90


Poor Math Skills Calculating interest and finance charges can be difficult for studentswhose math skills are below average. Ensure that students know how to use the formulasfor determining the cost of credit. Have them work through an exercise in which theyintend to make an imaginary credit purchase and must calculate and compare the costsunder different charge accounts. Explain that knowing how to find the best credit bargaincan save hundreds—even thousands—of dollars.






F INANCIAL INSTITUTIONS

1. What is the most common type of financial institution listed inthe table?

2. What conclusions can you draw from the table?

3131

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Source: Statistical Abstract of the United States

Financial Institutions in the United States(selected types)

Number of Establishments(in thousands)Type

Commercial banks 65.8

15.1

16.8

Credit unions

Consumer financeinstitutions

20.1Mortgage financeinstitutions

Savings institutions 17.9



91

month—one-fifth of the amount due, for example. Interest ischarged on the amount you do not pay. Of course, if you payeverything you owe each month, no interest is charged. This type of account also has a credit limit.

Installment Charge Accounts Major items such as sofas,televisions, and refrigerators are often purchased through aninstallment charge account. The items are purchased and paid for through equal payments spread over a period of time. Part of the amount paid each month is applied to the interest,and part is applied to the principal. At the end of thepayment period, the borrower owns the item he or shehas made payments on.

Credit CardsA credit card, like a charge account, allows a person to

make purchases without paying cash. The difference isthat credit cards can be used at many kinds of stores,restaurants, hotels, and other businesses throughout theUnited States and even foreign countries. As shown inFigure 4.8, Visa, MasterCard, and others issue cardsthrough banks. These cards can be used to purchase itemsin stores that accept them, or they may be used to borrowfunds up to a certain limit. This gives consumersaccess to loans at all times without having to applyfor them.

Finance Charges and AnnualPercentage Rates

The terms finance charge and annual percentage rate tellthe consumer the same thing—the cost of credit. Each,however, is expressed in a different way.

credit card: credit device thatallows a person to make pur-chases at many kinds of stores,restaurants, and other businesseswithout paying cash

91

Charge Accounts Many stores issue their own chargecards, which consumers may use to purchase goods in theirstores. What is a credit limit?

4.74.7

Credit Card Trade-OffAlthough using credit cards is conven-ient, it is also costly. Stores must pay acertain percentage of credit purchasesto the company that issued the card.The stores include this cost in theprices they charge customers, makingprices higher for everyone. What isthe difference between a creditcard and a charge account?

4.84.8

Going In to Debt



IndependentPracticeL2 Conducting a Survey Organizestudents into groups to conduct asurvey on attitudes about consumercredit and debt. Suggest that groupsdevelop a short questionnaire onthese issues. Encourage groups toconduct the survey at various loca-tions to obtain as varied a samplingas possible. Suggest that groupspresent their survey results in tablesor charts accompanied by any neces-sary explanatory notes. Discussresults of the survey with the class.

BLOCK SCHEDULING



90 CHAPTER 4

finance company: company thattakes over contracts for install-ment debts from stores and addsa fee for collecting the debt; aconsumer finance companymakes loans directly to con-sumers at high rates of interest

credit unions offer home mortgages as well. In general, creditunions offer higher interest rates on savings and charge lowerinterest rates on loans than other financial institutions.

Finance Companies A finance company takes over contractsfor installment debts from stores and adds a fee for collecting thedebt. The consumer pays the fee in the form of slightly higher inter-est than he or she would pay to the retailer. Retailers use this methodto avoid the risks involved in lending money to consumers.

A consumer finance company makes loansdirectly to consumers at relatively high rates ofinterest—often more than 20 percent a year. Thepeople who use consumer finance companiesare usually unable to borrow from other sourceswith lower rates because they have not repaidloans in the past or have an uneven employ-ment record.

Charge AccountsA second major type of credit is extended

directly to an individual, without that personhaving to borrow money first. This creditmay be in the form of a charge account or a credit card. As shown in Figure 4.7, acharge account allows a customer to buygoods or services from a particular companyand pay for them later. Department stores,for example, offer three types of chargeaccounts: regular, revolving, or installment.

Regular Charge Accounts A regular charge account, alsoknown as a 30-day charge, has a credit limit such as $500 or$1,000. A credit limit is the maximum amount of goods orservices a person or business can buy on the promise to pay inthe future. At the end of every 30-day period, the store sends abill for the entire amount. No interest is charged, but the entirebill must be paid at that time. If it is not, interest is charged onthe unpaid amount.

Revolving Charge Accounts A revolving charge accountallows you to make additional purchases from the same storeeven if you have not paid the previous month’s bill in full.Usually you must pay a certain portion of your balance each

Job Description■ Analyze loan

applications

■ Make decisions

regarding theextension ofcredit

Qualifications■ Bachelor’s

degree infinance, eco-nomics, or arelated field

—Occupational Outlook Handbook, 1998–99

Salary: $28,900–$48,000

Job Outlook: Above average

CAREERS

Consumer LoanOfficer

charge account: credit extendedto a consumer allowing the con-sumer to buy goods or servicesfrom a particular company and topay for them later

90

Project Economic ConceptsTransparency 6 and have studentsdiscuss the accompanying questions.

L2 Practicing Skills Give studentspractice in computing finance chargesby adjusting the monthly interest ratein the example in Figure 4.9 on page93. Give students the following threemonthly interest rates: 0.5, 1.0, and2.0. For each of these interest rates,have students calculate the financecharge and the balance for all fourcomputing methods. Encourage stu-dents to compare their results.

Name Date Class


S OURCES OF LOANS AND CREDIT

FILLING IN THE BLANKS

Directions: Use your textbook to fill in the blanks using the words in the box. Some words may be usedmore than once.

commercial banks savings banks creditcredit union finance companies charge accountregular annual percentage rate revolvingpast due balance previous balance debit cardinstallments loans credit cardinterest rate finance charges

Introduction/ Types of Financial InstitutionsThere are two main types of 1 __________________________—using credit cards and borrowing money from financial

institutions. 2 __________________________ control the largest amount of money and offer the widest range of

financial services. Savings and loans make many mortgages and typically offer a lower 3 __________________________

than larger banks. 4 __________________________ were established to serve small savers who were overlooked by

commercial banks. Members of unions and company employees often can borrow money from a

5 __________________________. Retailers use 6 __________________________ to avoid the risks of lending money

directly to consumers.

Charge Accounts/Debit Cards

4-2


Organize students into several small groups. Ask groups to create some form of visualadvertisement that encourages people to borrow from one of the financial institutions dis-cussed in this section. Inform groups that their advertisements might take the form ofposters, billboards, bumper stickers, buttons, or T-shirt designs. Have groups use their fin-ished products to create an “advertisement corner” in the classroom.

BLOCK SCHEDULINGELL


Answer: the maximum dollarvalue of goods or services a personor business can buy on the promiseto pay in the future

Answer: A credit card can be usedat many kinds of stores, restaurants,hotels, and other businesses. Chargeaccounts allow people to buy oncredit only at a particular company.

Savings and Loan Associations Most of the early savings and loan associations werewhat is known as “terminating institutions.” Such institutions were set up with one aim inmind—to enable members to buy a home. Members made regular monthly deposits and,in turn, took out loans to buy homes. Members then paid off their mortgages in monthlyinstallments. Once all members had purchased homes and paid off their loans, the sav-ings and loan association was terminated.

Extending the Content

Economic Connectionto... HistoryEconomic Connectionto...

Savings and Loans OxfordProvident Building Association,founded in Frankfort, Pennsyl-vania, in 1831, was the first sav-ings and loan association in theU.S. At that time, American com-mercial banks, for the most part,dealt only with businesses.Oxford Provident, however, pro-vided a place for ordinary individ-uals to invest and borrow.

93

93

Different Methods ofComputing Finance Charges

Example (Based on opening balance of$300, $150 paid halfway through month,monthly interest rate � 1.5%)

• Amount on which interest is due:$300, despite payment

• Calculation: $300 � .015 � $4.50• Finance charge: $4.50• Balance due: $154.50

• Amount on which interest is due:$150, balance on last day of billing period

• Calculation: $150 � .015 � $2.25• Finance charge: $2.25• Balance due: $152.25

• Amount on which interest is due: $225• Calculation:

15 days � $300 � $4,50015 days�$150 � $2,25030 days total � $6,750$6750�30 � $225$225� .015 � $3.38

• Finance charge: $3.38• Balance due: $153.38

• Amount on which interest is due: $0• Calculation: $150 � 0 � 0• Finance charge: $0• Balance due: $150.00

(Finance charge of $2.25 (.015 � $150) will be added to next month’s bill)


How Finance Charge Is Computed

Charge is computed on the month’sopening balance, even if the bill hasbeen paid in full by the time the financecharge is figured. There is no benefit inpaying off a debt early with this method.

Payments made during the month arededucted from the opening balance.Charge is then computed on the balancedue the last day of the month. With thismethod you can save the most money ifyou pay your bill as soon as possible.

Charge is applied to the sum of theactual amounts owed each day duringthe billing period, divided by the numberof days in that period. Payments andcredits—return of goods—are subtractedon the exact date of payment. With thismethod you can save the most money ifyou pay your bill as soon as possible.

No finance charge is applied if full pay-ment is received within a certain period,usually within 25 days after the date ofthe last billing statement. If full paymentis not received, then a finance charge forthe unpaid amount is added to the nextmonth’s bill.

Type of Method

Previous Balance

Adjusted Balance

Average Daily Balance

Past Due Balance







CHAPTER 4SECTION 2, Pages 88–94 finance charge: cost of credit

expressed monthly in dollars andcents

annual percentage rate (APR):cost of credit expressed as ayearly percentage

Finance Charges The finance charge is the cost of creditexpressed in dollars and cents. It must take into account interestcosts plus any other charges connected with credit. For example,yearly membership fees for the use of a credit card are includedin the finance charge.

The way finance charges are computed is an important factorin determining the cost of credit. Store charge accounts andcredit cards use one of four methods to determine how muchpeople will pay for credit: previous balance, average daily bal-ance, adjusted balance, or past due balance. Each method appliesthe interest rate to an account’s balance at a different point dur-ing the month. The different methods can result in widely vary-ing finance charges. See Figure 4.9.

Annual Percentage Rates The annual percentage rate(APR) is the cost of credit expressed as a yearly percentage. Likethe finance charge, the APR must take into account any noninter-est costs of credit such as a membership fee. Figure 4.10 onpage 94 shows how a sample APR affects the cost of credit.

Knowing which creditor is charging the most for credit wouldbe very difficult without some guide for comparison. The APR pro-vides that guide by allowing consumers to compare costs regard-less of the dollar amount of those costs or the length of the creditagreement. Suppose creditor A is charging an APR of 16 percent,while creditor B is charging 17 percent, and creditor C is charging181/2 percent. On a yearly basis, creditor C is charging the most forcredit and creditor A the least.

In 1958 the Bank of America mailed60,000 BankAmericards to customers in

Fresno, California. Each card had a creditline of $300 to $500 and could be used at300 stores in the area. The next year, thebank mailed out 2 million cards and per-suaded 20,000 stores to accept them.

Initially, BankAmericard proved a financialdisaster. Unpaid accounts ran above 20 per-cent, and credit-card fraud was rampant. Byearly 1960, the losses on BankAmericardapproached $9 million. The bank quicklyaddressed these problems, and within ayear BankAmericard was turning a profit. ■

Economic Connection to... HistoryEconomic Connection to...

92 CHAPTER 4

The First Credit CardThe First Credit Card

92

L2 Conducting Research Have stu-dents conduct research into regula-tions established by their stategovernment regarding fees and inter-est rates charged by credit card com-panies. Ask students to present theirfindings in a written report thatexplains why these regulations wereoriginally enacted.

Many credit card issuers try toattract customers by offering affin-ity cards. These are regular creditcards that are issued under thename of an organization—a char-ity, educational institution, or pro-fessional body, for example. Theissuing companies assume thatpeople with ties to—or an affinitywith—these organizations will takeone of the cards. In return, theissuing companies make smalldonations to the organizationswhenever the cards are used fortransactions.

Have students work in groups to create a board game titled “Credit Crunch!”. Indicatethat the object of the game is to go into debt and then pay it off. Point out that luckybreaks (a pay raise or a contest cash prize, for example) and bad breaks (rising energycosts or unexpected repair bills, for example) might advance or stall a player’s progress.Note that the first player to retire his or her debt wins the game. Suggest that groupsresearch various board games to help them create their own. BLOCK SCHEDULING


S OURCES OF LOAN AND CREDIT

Multiple Choice: In the blank at the left, write the letter of the choice that best com-pletes the sentence or answers the question. (10 points each)

6. Which of the following types of financial institutions controls the most money and offers the widest rangeof services?

a. savings and loan b. finance companyc. commercial bank d. savings bank

7. Which type of financial institution is owned and operated by its members?

a. credit union b. consumer finance companyc. savings and loan d. commercial bank

8 Th i f d d i b h i i h f i h

SCORE

A1. savings and loan

2. charge account

3. credit card

4. finance charge

5. annual percentage rate

Ba. credit device that allows a person to make

purchases without paying cash

b. cost of credit expressed monthly in dollars and cents

c. depository institution that accepts deposits andlends money

d. cost of credit expressed as a yearly percentage

e. credit from a particular company allowing consumers to buy goods and pay for them later


Name Date Class

4, 2

Section Quiz 4–2

Payday Loans The payday loan service is one of the fastest-growing segments of theconsumer credit industry, totaling about $1 billion in business a year. Payday lendersadvance cash against a borrower’s next paycheck. In the typical payday loan transaction,the borrower writes a postdated check for the amount plus a loan fee. The lender thendeposits the check on the posted date, normally the day the borrower gets paid. Paydayloans are quite small—usually between $100 and $200—and short term—rarely more thantwo weeks. However, when the fees charged on the loans are translated into APRs, theyrun anywhere from 250 to 800 percent!

Relevant Issues in Economics

ECONOMICS & YOU

Going Into Debt


ASK: How does a credit cardwork? When a credit card is usedfor a purchase, the owner receivesa monthly statement. If the entirebill is paid immediately, no interestis charged. If the bill is not paid infull, interest charges begin toaccumulate on the balance.

Also available in VHS.

TechnologySkills

95

95Going In to Debt

A computerized database program can help you organize and manage a large amount of information.After entering data in a database table, you can quickly locate the information according to keywords.

Technology Skills

Using a Database

Learning the SkillAn electronic database is a collection of facts that are

stored in a file on the computer. The information isorganized into categories called fields. For example, onefield may be the names of your clients. Another field maybe the street addresses of your clients. All the relatedfields make up a record. Together, all the records make upthe database.

A database can be organized and reorganized in anyway that is useful to you. By using a database manage-ment system (DBMS)—or special software developed forrecord keeping—you can easily add, delete, change, orupdate information. When you want to retrieve infor-mation, the computer searches through the files, findsthe information, and displays it on the screen.

Practicing the SkillFollow the steps listed on the left to build a data-

base that organizes information about your friends.

Application ActivityResearch and build a database on types and services of

financial institutions. Explain why the database is orga-nized the way it is and how it might be used in this class.

1. Determine what facts youwant to include in yourdatabase—names,addresses, and phonenumbers, for example—and research to collectthat information.

2. Follow the instructions in the DBMS that you’reusing to set up fields.Then enter each item ofdata in its assigned field.

3. Determine how you wantto organize the facts inthe database—chronolog-ically by the date, alpha-betically, or by someother category.

4. Follow the instructions inyour computer programto sort the information inorder of importance.

5. Evaluate that all the infor-mation in your databaseis correct. If necessary,add, delete, or changeinformation or fields.

Using a database canhelp organize populationstatistics, clients’ namesand addresses, and evenbaseball card collections.

Using a DatabaseIn discussing the construction of

a database, give some examples offields—the year that an event tookplace, the name of the event, orpeople connected with the event,for example. Then point out that allof the data fields related to thesame subject make up a record, andthat a collection of records is a datafile. Finally, if possible, show stu-dents examples of a database man-agement system, data files, records,and fields on a computer.

Answers to Practicing the Skill

Databases will vary. Ask students to explain why they chose their particular method oforganizing information.

Application Activity Databases will vary. Have students compare their databases tonote similarities and differences.

Glencoe SkillbuilderInteractive Workbook,Level 2

This interactive CD-ROM rein-forces student mastery of essen-tial social studies skills.

U SING A DATABASE

An electronic database is a collection of facts or statistics that are stored in a file on a computer. The information is organized into categories, called fields. For example, a fieldcould contain the names or street addresses of your clients. It could also include the amount ofmoney each client spent in the past year. A set of related fields is known as a record. Together,all of the records make up the database.

To create a database, think about what information you want to include. Then follow theinstructions in your computer program to set up fields. Be sure to enter each item in the cor-rect field. Then determine how you want to organize or sort the information in the database(chronologically, alphabetically, by zip code, or some other way).

Directions: Survey at least 10 of your classmates or other people you know on their shopping preferences.Then use a database program to create fields and records that include each person’s name, address, andfavorite retail clothing store. Be sure to place each piece of information in a separate field.

1. Which retail store was preferred by the largest number of people?

A B CWorkbook

1

2

3

4

Field 1 Field 2

3.5

Name Date Class

23

Reinforcing Economic Skills 23



94 CHAPTER 4

Understanding Key Terms1. Define commercial bank, savings and loan

association, savings bank, credit union, financecompany, charge account, credit card, financecharge, annual percentage rate (APR).

Reviewing Objectives2. Graphic Organizer Create a diagram like the

one below to list the six types of financial insti-tutions and describe their main services.

3. What three kinds of charge accounts are avail-able from stores?

4. How are credit cards used?

5. How do a finance charge and an annual per-centage rate differ?

Applying Economic Concepts6. Annual Percentage Rates What would be

the APR if you charged $1,000 on a credit cardwhose interest rate was 20 percent with anannual fee of $30?


2

7. Making Generalizations Poll five adultfamily members. Ask: (1) Do you own acredit card? (2) Have you used an install-ment charge account? (3) Do you own adebit card? Tally your results, then write ageneralization about the use of credit.

Financial Institutions

Type

Services

Computing APR Suppose that you charge $200worth of clothes. The interest rate charged to you, let’s say,is 10 percent, but the annual fee for the credit card is $5.Your APR will be $20 of interest plus the $5 fee, or 121⁄2percent. The APR is normally larger than the interest ratebecause it includes the noninterest cost of extending credit.

4.104.10



Debit CardsYou may have heard about a method of payment known as a

debit card. A debit card does not provide a loan. Instead, it makescashless purchases easier by enabling customers to transfer fundselectronically from their bank accounts directly to the store orrestaurant where they purchased goods. Debit cards were firstavailable in the 1970s but did not catch on with the public until the 1990s. At that time, banks combined credit cards with their debit cards.

94

ReteachAsk students to write 5 to 10

questions on the content ofSection 2. Pair students and havepartners exchange and answer theirquestions.

1. All definitions can be found in the Glossary.2. Commercial bank—checking, savings and

loans, transfers funds. S&L—accepts depositsand lends funds, finances mortgages and autoloans. Savings bank—home mortgages, per-sonal and auto loans, checking accounts. Creditunion—savings accounts and low-interest loansonly to members. Finance company—takesover contracts for installment debts from stores.Consumer finance company—high-interestloans directly to consumers.

3. regular, revolving, and installment chargeaccounts

4. They allow a person to make purchases atmany kinds of businesses without paying cash.

5. finance charge is cost of credit expressed indollars and cents; APR is cost of creditexpressed as a yearly percentage

6. 23 percent7. Generalizations will vary.

Lead students in a discussion ofthe importance of having a choiceof lending institutions and knowingthe cost of credit.

Name Date Class

4, 2

commercial bank Bank whose main functions are to accept deposits, lend money, and transfer fundsamong banks, individuals, and businesses (page 89)

savings and loan association (S&L) Depository institution that accepts deposits and lends money (page 89)

savings bank Depository institution originally set up to serve small savers overlooked by commercial banks(page 89)

credit union Depository institution owned and operated by its members to provide savings accounts andlow-interest loans only to its members (page 89)

finance company Company that takes over contracts for installment debts from stores and adds a fee forcollecting the debt; consumer finance company makes loans directly to consumers at high rates of interest(page 90)

charge account Credit extended to a consumer allowing the consumer to buy goods or services from aparticular company and to pay for them later (page 90)

credit card Credit device that allows a person to make purchases at many kinds of stores, restaurants, andother businesses without paying cash (page 91)

finance charge Cost of credit expressed monthly in dollars and cents (page 92)

annual percentage rate (APR) Cost of credit expressed as a yearly percentage (page 92)


S OURCES OF LOANS AND CREDIT


Does your family use a bank? Do you use the bank to help save money? Does your family borrow

KEY TERMS


There are nearly 68 milliondebit card holders in the UnitedStates. Debit card transactionstotal about $100 billion a year.

97

credit rating: rating of the riskinvolved in lending money to aspecific person or business

reveal your income, any current debts, details about your per-sonal life, and how well you have repaid debts in the past.

The Credit RatingThe information supplied by the credit bureau provides the cred-

itor with a credit rating for you. This is a rating of the risk—good,average, or poor—involved in lending funds to a specific person orbusiness. If you have a history of poor credit use—usually late inpaying debts—you will receive a poor credit rating. The creditorreviewing the credit check will be less willing to lend you money.

Though past history of credit use is important in deciding aperson’s creditworthiness, the creditor also looks at three otherfactors that a credit check reveals. These are your capacity to pay,your character, and any collateral you may have. See Figure 4.11.

Capacity to Pay Capacity to pay is related to income and debt.If your employment has been spotty, your capacity to pay will beconsidered questionable. The amount of debt that you are alreadycarrying is also a factor. If your debts are large, creditors will bereluctant to loan you more.

Capacity to Pay

Creditworthiness When a creditor looks at your creditwor-thiness, three factors are considered: your ability to hold a steady job,your character, and any collateral you have that may secure a loan.

4.114.11

CollateralGoodCharacter

97



Guided PracticeL1 Understanding Ideas On theboard, draw a table with “Capacityto Pay,” “Character,” and “Collateral”as horizontal column headings, and“Good Risk” and “Bad Risk” as verti-cal column headings. Call on stu-dents to come to the board and enterexamples of good risks and badrisks in the appropriate spaces.






Presentation Plus!


96 CHAPTER 4

credit bureau: private businessthat investigates a person todetermine the risk involved inlending money to that person

credit check: investigation of aperson’s income, current debts,personal life, and past history ofborrowing and repaying debts

READER’S GUIDE

3

Terms to Know• credit bureau• credit check• credit rating• collateral• secured loan• unsecured loan

Reading Objectives1. What four factors determine

a person’s credit rating?

2. What are yourresponsibilities as a borrower?

How can you obtain credit? Perhaps more important, howcan you dig yourself out of debt if you’ve spent more thanyou can handle? In this section, you’ll learn what makes a

person a good risk for credit. You’ll also learn ways to handleyour debts before they get out of control.

CreditworthinessSeveral factors determine a person’s creditworthi-

ness. When you apply for credit, you usually will beasked to fill out a credit application. After you havefilled out the application, the store, bank, or otherlending agency will hire a credit bureau, a privatebusiness, to do a credit check. This investigation will

BUSINESS WEEK, MARCH 15, 1999

Jason Britton, now 21 and a senior atGeorgetown University in Washington,racked up $21,000 in debt over four yearson 16 [credit] cards. “When I first started,my attitude was: ‘I’ll get a job after college to

pay off all my debt,’ ” he says. He realized he dug himself into a hole when he couldn’t meet the minimummonthly payments. Now, he works three part-time jobs. His parents are helping pay his tuition and loans.

96

OverviewSection 3 explains or describes

the factors that establish a person’scredit rating, the difference betweena secured loan and an unsecuredloan, and the responsibilities a bor-rower assumes on taking out a loan.


Preteaching VocabularyAsk students to write two notes

to a friend. In the first note theyshould explain how the termscredit bureau, credit check, andcredit rating are related. In the sec-ond note, they should explain thedifference between secured loansand unsecured loans.


READER’S GUIDE

For Use with textbook pages 96–100

PPLYING FOR CREDIT

RECALLING THE FACTS

Directions: Use the information in your textbook to answer the questions.

1. What is a credit check?

2. How does a credit rating rank individuals?

3. What factors besides past credit history does a creditor use to determine a person’s creditworthiness?

4. What factors contribute to an individual’s capacity to pay a loan?

5. What is collateral?

6. What is a secured loan?

Name Date Class

4-3

A


L ECTURE LAUNCHERWhen Robert Townsend needed to finance his first movie, Hollywood Shuffle, he raised mostof the funds by using his credit cards. Unlike other loans, when applying for a credit card youare not asked how you will spend the money. How do you think credit card applicants areevaluated?

I. Creditworthiness

A. Fill out an application.

B. The agency, store, or bank hires a credit bureau to do a credit check.


Do you think that banks, stores, and other money lending institutions should havethe right to do a credit check on someone seeking funds? Why or why not? (Answerswill vary, but students should discuss risks involved in not doing the checks, and if they thinka credit check invades a person’s privacy.)

II. The Credit Rating

A. Tells how risky it is for a bank to lend someone money

B. Considers a person’s income, debt, character, and personal wealth

4-3

PAGES 96–97

PAGES 97–98


Analyzing Cause and Effect Some students may not fully appreciate how actions takentoday can have an impact on creditworthiness. To help students see the connection, pro-vide the following example. If a person is chronically late with payments, defaults on acredit card account, or fails to fulfill other credit obligations, such facts will be reported onhis or her credit history. Several years later, potential lenders may read this history andturn down that person’s request for a loan or a credit card. Then ask students to offerideas on how the person in the example might have kept his or her credit history sound.

Refer to Inclusion for the Social Studies Classroom Strategies and Activities.





C REDIT RATING

Are You Using Too Much Credit?

1. Is it likely that the person in the cartoon has a good credit rating?Why?

2. What changes should she make to improve her credit rating?

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9999

99Going In to Debt

lending institution has to write it offand take a loss. These costs are passedon to all consumers in the form ofhigher interest rates charged.

Another negative thing happenswhen you do not pay your debts: youget a bad credit history. You may thenhave a difficult or impossible timewhen you really need credit for some-thing else—to purchase a house, forexample.

Another responsibility as a borroweris to keep a complete record of all thecharges you have made. You also mustnotify the credit-card issuer immediatelyif your card is lost or stolen.

What if you’ve lost control of yourdebt? Financial planners advise you tomake a list of everything you owe, whatthe interest rate is, and what the pay-ments are. Concentrate on paying the high-interest credit cardsfirst, and pay more than the minimum payment, or it will takeyou years to reduce the debt.

Understanding Key Terms1. Define credit bureau, credit check, credit rat-

ing, collateral, secured loan, unsecured loan.

Reviewing Objectives2. Graphic Organizer Create a diagram like the

one below to describe the four factors thatdetermine a person’s credit rating.

3. What are your responsibilities as a borrower?

Applying Economic Concepts4. Creditworthiness Which of the four factors

determining a person’s credit rating do you thinkis most important in deciding whether a personis creditworthy? Explain.

5. Finding the Main Idea What is the mainidea of the following excerpt?

Banks now assign point values to eachitem on a credit application, such as howmuch debt you owe, how much credit youhave available, your repayment history, andyour age. Your total score will determinewhether you’re approved.




3

In the mid-1970s, Muhammad Yunus, an economicsprofessor, took a trip through Bangladesh. He saw awoman weaving bamboo chairs but earning only a fewpennies a day, most of which went to pay the high inter-est rates on loans she took out to buy raw materials.

Yunus realized that if the woman could get loans atreasonable interest rates, she could make a livingwage. So, Yunus started his own bank, the Grameen—or “Village”—Bank. Today, with more than 1,000 branchoffices throughout Bangladesh, it has lent money tomore than 2 million people, most of whom are women.Each loan averages $160, and 97 percent of these loanshave been repaid on time. ■

Loans for the Poor

Good CreditRating



ReteachAsk students to outline

Section 3, using section subhead-ings as main ideas.

1. All definitions can be found in the Glossary.2. The following should appear in the outer ovals:

Credit History, Capacity to Pay, Character,Collateral.

3. to pay debts on time, to keep complete recordsof all credit charges made, and to notify cardissuers immediately if cards are lost or stolen

4. Answers will vary. Ensure that students offer afull explanation of their response.

5. Today it is more likely that a computer, ratherthan a human, will establish a borrower’s creditrating.

Ask students to suggest a sloganfor a campaign encouraging con-sumers to be responsible borrowers.

Name Date Class

KEY TERMS

4,

credit bureau Private business that investigates a person to determine the risk involved in lending moneyto that person (page 96)

credit check Investigation of a person’s income, current debts, personal life, and past history of borrowingand repaying debts (page 96)

credit rating Rating of the risk involved in lending money to a specific person or business (page 97)

collateral Something of value that a borrower lets the lender claim if a loan is not repaid (page 98)

secured loan Loan that is backed up by collateral (page 98)

unsecured loan Loan guaranteed only by a promise to repay it (page 98)

KEY TERMS


A PPLYING FOR CREDIT


How can you obtain credit? How do lending institutions decide who is creditworthy and who isnot? Are there actions you can take to make sure you will be a responsible borrower?

This section explains what happens when a person applies for credit. It also focuses on theresponsibilities of borrowers once they have secured credit or a loan.


Use this chart to help you take notes as you read the summaries that follow. As you read, thinkabout how you can be considered creditworthy by lending institutions and credit card companies

3




98 CHAPTER 4

collateral: something of valuethat a borrower lets the lenderclaim if a loan is not repaid

secured loan: loan that isbacked up by collateral

unsecured loan: loan guaran-teed only by a promise to repay it

Character Character refers to a person’s rep-utation as a reliable and trustworthy person.The creditor may look at your educationalbackground, whether or not you have had anyproblems with the law, and any other factorsthat might indicate your strength of character.

Collateral Lenders also considercollateral, or the size of your capital orpersonal wealth. Collateral is importantbecause it indicates your past ability to saveand accumulate. It also indicates your pres-ent ability to pay off a loan, even if you lose

your job, because you could sell some of your belongings inorder to make the payments.

Secured Loans Usually when a financial institution makes aloan, it will ask for collateral from the borrower. The collateralmay be the item purchased with the loan money, such as a houseor car. It may be something of value the borrower already owns.The borrower then signs a legal agreement allowing the lender toclaim the collateral if the loan is not repaid. A loan that is backedup with collateral in this way is called a secured loan.

Unsecured Loans Usually a young adult will have little tooffer as collateral. When dealing with a trusted customer, finan-cial institutions will sometimes lend funds on the person’s repu-tation alone. Such a loan is called an unsecured loan. It is notguaranteed by anything other than a promise to repay it.

A bank will sometimes lend funds to a person without a finan-cial reputation if he or she has a cosigner. As shown in Figure 4.12,a cosigner is a person who signs a loan contract along with theborrower and promises to repay the loan if the borrower does not.

Responsibilitiesas a Borrower

After you have applied for credit and obtained it, you havetaken on certain responsibilities. After all, the businesses thatgave you credit expect to earn a profit.

If you do not pay your debts on time, the business that lendsyou funds may have to hire a collection agency to help get backthe money loaned to you. If you never pay off your debt, the

Cosigning a LoanIf someone you know asks youto cosign a loan, think carefully.If he or she does not make pay-ments, you are responsible forthe debt. When is a cosignerneeded?

4.124.12

98

IndependentPracticeL2 Applying Ideas Ask students to imagine they have been asked tocosign a loan. Have them list reasons why they would or wouldnot be willing to be a cosigner. Thenask students to write a paragraphcomparing how the borrower, thelender, and the cosigner might viewcosigning.

Answer: when a person has nothad enough experience with bor-rowing and repaying money tobuild up a financial reputation

Name Date Class

4, 3

A PPLYING FOR CREDIT


6. Your credit rating affects your ability to

a. obtain a loan. b. get a job.c. save money. d. get an education.

7. Which of the following factors might affect a person’s capacity to pay back a loan?

a. other large debts b. involvement in community organizationsc. educational background d. problems with the law

8. Which of the following could be used as collateral?

d d b d b

SCORE

A1. credit check

2. credit rating

3. collateral

4. secured loan

5. unsecured loan

Ba. something of value that a borrower lets the lender

claim if a loan is not repaid

b. estimation of the risk involved in lending money to aperson or business

c. investigation of a person’s income, current debts,personal life, and past history of repaying debts

d. loan guaranteed only by a promise to repay it

e. loan that is backed up by collateral


Section Quiz 4–3




Organize students into six groups, and assign each group one of the six financial insti-tutions discussed in Section 2. Have groups interview loan officers at their assigned finan-cial institution to discover the methods used to establish borrowers’ creditworthiness andto deal with borrowers who fall behind on payments or default on their loans. Have groupspresent their findings to the class in a brief written report. BLOCK SCHEDULING


101

101Going In to Debt

Terms to Know• usury law• bankruptcy

Reading Objectives1. How has the Equal Credit

Opportunity Act affectedconsumer credit?

2. What are state usury laws?

3. Why might a person declarepersonal bankruptcy?

READER’S GUIDE

To protect consumers, the federal and state governmentsregulate the credit industry. Some states have set a maxi-mum on the interest rates charged for certain types of

credit. The federal government has also passed laws designed toincrease the flow of credit information to consumers. In this sec-tion, you’ll learn about these laws and how they protect con-sumers from unfair credit practices.

4

KIPLINGER’S PERSONAL FINANCE MAGAZINE, DECEMBER 1998

Lawmakers areat odds over a billthat would requirecredit card issuersto disclose moreinformation to con-sumers. Amongother things, the

statement would show how long it would take topay off your balance if you made only the mini-mum payment. For example, at 21% interest, itwould take nearly four years to pay off a $1,000balance if you paid $35 a month.

Card issuers say such a disclosure would be bur-densome and costly.






Presentation Plus!


OverviewSection 4 describes state usury

laws and federal laws that regulatethe credit industry and explainswhy a person who cannot repaydebts might file for bankruptcy.


Preteaching VocabularyHave students find the origins

of the terms usury and bankruptcyin an etymological dictionary. Callon volunteers to share their find-ings with the class.


READER’S GUIDE

SPOTLIGHT

A Hard Lesson on Credit Cards

100 CHAPTER 4

SPOTLIGHT ON THE ECONOMY

The moment college studentsstep on campus, they become

highly sought-after credit-card cus-tomers. To establish relationshipscard marketers hope will extendwell beyond the college years,

they are offering studentseverything from free T-shirts to

chances to win airline tickets asenticements to sign up. As a result, college

students now have heavy card debts. As long as they are over 18, students can get

a card without asking mom or dad to co-sign.Since card issuers’ pitches may be confusing,experts dish out this advice:• Beware of teaser rates. Credit-card marketers

may advertise a low annual percentage rate(APR), but it often jumps substantially afterthree to nine months.

• Pay on time. Because students move oftenand may not get their mail forwardedquickly, bills can get lost. Then the studentsfall prey to late-payment fees. If one or twopayments are overdue, many cards bumpinterest rates up as well.

• Shun cash advances.Students are often unawarethat rates on cash advancesare much higher thanthose on card balances.

• Don’t ask for extra credit.Instead, find a card thathas a restrictive creditline. Another option:Get a secured creditcard. Its credit limit depends on your savings at the issuing bank.Debt advisers say students should hold only

a credit card on which they can carry a smallbalance and a charge card they must pay offmonthly. They should pay more than the mini-mum on credit cards. And they should notcharge purchases they can pay for in cash, suchas pizza and gas.—Reprinted from March 15, 1999 issue of Business Week by special

permission, copyright © 1999 by The McGraw-Hill Companies, Inc.

Think About It1. How are students enticed to get credit cards?

2. Describe six ways to avoid credit card debt.

Check It Out! In this chapter you’ve learned about yourresponsibilities as a borrower. In this article, read tolearn what pitfalls to avoid when applying for creditcards.

A Hard Lesson on Credit CardsA Hard Lesson on Credit Cards

100

Point out that one recent studyestimated that the average collegestudent carries $1,843 in creditcard debt. Another study estimatedthat about 20 percent have creditcard debt of $10,000 or more.

Inform students that colleges aretaking steps to bring the studentdebt problem under control. Nearly450 colleges and universities haveforbidden credit card companies tomarket their wares on campus. Inaddition, legislators have draftedbills to control the distribution ofcredit cards to young people. ASK:What do you think should bedone to bring this problem undercontrol?

Answers to Think About It

Approximately 75 percent ofcollege students carry and use atleast one credit card. And 25 per-cent of these students reportedthat they obtained their first cardwhile still in high school.

1. from free T-shirts to chances to win airline tickets2. Avoid cards with low initial APRs; pay on time; do not use the card for cash

advances; do not ask for a higher line of credit; get a credit card that allows only asmall monthly balance and a charge card that must be paid off monthly; pay cash foreveryday items, such as gasoline and pizza.

To find up-to-date news andanalysis on the economy, busi-ness, technology, markets,entrepreneurs, investments,and finance, have studentssearch feature articles and spe-cial reports on the BusinessWeek Web site.www.businessweek.com




R OLE OF GOVERNMENT IN CONSUMER CREDIT

1. Why were consumer credit laws enacted?

2. What can you infer from the table about consumer credit in theUnited States in the 1960s?

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Major Consumer Credit Laws

• Federal lawsWHATThey Are

• Financial institutions that extend credit and consumers who seek or have credit

WHOThey Affect

• Most were passed in the 1970sWHENThey Were

Enacted

• Financial institutions must follow the laws or face the threat of criminal and civil actions

HOWThey Function

• Throughout the United StatesWHEREThey are in

Force

• Primarily to protect consumers, to ensure they have full information, privacy, equal treatment, and are not abused

WHYThey Were

Enacted



http://www.businessweek.com

103

Major Federal LawsRegulating Consumer Credit

103


Name of Law

Truth inLending Act(1968)

Fair CreditReporting Act(1970)

Equal CreditOpportunityAct (1974)

Fair CreditBilling Act(1974)

Fair DebtCollectionPractices Act(1977)

Main Purpose

Ensures that con-sumers are fullyinformed about thecosts and conditions ofborrowing.

Protects the privacyand accuracy of infor-mation in a creditcheck.

Prohibits discrimina-tion in giving credit onthe basis of sex, race,religion, marital status,age, or receipt of pub-lic assistance.

Sets up a procedurefor the quick correc-tion of mistakes thatappear on consumercredit accounts.

Prevents abuse by pro-fessional debt collec-tors; does not apply tobanks or other busi-nesses that collecttheir own accounts.

Major Provisions

• Creditors must keep borrowers informed of acredit agreement’s annual percentage rate, theway charges and fees are calculated, and the pay-ment schedule.

• Consumers have a 3-day cooling-off period inwhich to cancel certain contracts.

• Consumers are liable for only the first $50 inunauthorized purchases made on a credit cardbefore it is reported lost or stolen.

• If refused credit, a consumer can request fromthe lender the name and address of the creditbureau issuing the report.

• The credit bureau, if requested, must provide atleast a summary of a consumer’s credit file.

• If the consumer claims part of the file is in error,the bureau must correct the record or explain it.

• Questions about age, sex, and marital status canbe asked only if those questions relate directly toa person’s ability to repay a loan.

• Loan applicants must receive notice of a decisionwithin 30 days. If the loan is denied, the lendermust give the reasons.

• Consumers have 60 days to notify a creditor of adisputed item on a billing statement. The creditormust correct the mistake or explain the charge.

• While the mistake is checked, the consumer canwithhold payment of the disputed sum.

• Under certain circumstances, a consumer canwithhold payment for defective merchandise.

• Collectors can contact a person other than thedebtor only to discover the debtor’s location.

• The debtor cannot be contacted at an inconven-ient time or place.

• All harassing behavior is prohibited, including thethreat of violence, annoying phone calls, etc.



IndependentPracticeL1 Summarizing Ideas Ask stu-dents to find a recent article on eitherconsumer credit laws or bankruptcy.Encourage them to write a summaryof the article. Have students sharetheir articles. Then lead the class in adiscussion of the latest developmentsin credit regulation and bankruptcy.

BLOCK SCHEDULING


CHAPTER 4SECTION 4, Pages 101–105 The Truth in Lending Act

The Truth in Lending Act of 1968 was the first of a series ofmajor federal laws that greatly expanded the government’s role inprotecting users of consumer credit. An important aspect of thegovernment regulation of credit is to make sure that everyone hasequal access. Figure 4.13 presents the important points aboutthis act and other major federal government laws to regulate credit.

The Equal Credit Opportunity ActIn 1974 Congress enacted the Equal Credit Opportunity Act

(ECOA) as an addition to the Truth in Lending Act of 1968.Among other things, those who provide credit cannot deny yousuch credit solely on the basis of your race, religion, national ori-gin, gender, marital status, or age. In addition, no one is allowedto discriminate against you in offering credit simply because yourincome might come from public assistance benefits.

Historically, credit discrimination against married women hasbeen the norm. The 1974 Credit Act made it illegal for a creditorto require an applicant’s spouse unless an application for creditwas made jointly by husband and wife. If a woman qualifies onher own for the amount and terms of credit requested, she doesnot have to get her husband to sign the credit application. SeeFigure 4.14 on page 104.

State Usury LawsA law restricting the amount of interest that can be charged for

credit is called a usury law. Some states set up different maxi-mum rates for different types of consumer credit. Maximum rateson charge accounts and credit cards, for example, are often about18 percent a year, or 11/2 percent per month. Consumer finance

agencies, in contrast, are often allowed tocharge higher rates because their loansinvolve higher risks.

The maximum rates from usury lawswere controversial in past years when inter-est restrictions in many states were as low as 6 or 10 percent. When interest rates in gen-eral began to rise in the early 1970s, manylenders complained that they could notkeep within such restrictions and still makea profit. In states that were slow to raiseinterest restrictions, some lenders cut back

Student Web Activity Visit the Economics Today and Tomorrow Web site at ett.glencoe.comand click on Chapter 4—Student WebActivities to learn more about the Fair DebtCollection Practices Act.

102 CHAPTER 4

usury law: law restricting theamount of interest that can becharged for credit

102

Guided PracticeL2 Applying Ideas Have studentsreview the information in Fig-ure 4.13. Then ask them to identifythe law that protects consumers,and what steps consumers can take,in the following situations:• A debt collector is calling sev-

eral times a day.• A consumer discovers that a

mistake on a credit card bill hasnot been corrected.

• A consumer is refused a loanbut is given no reason for therefusal.

• A consumer discovers that theinterest rate on a loan is notwhat was originally agreedupon.

See the Web Activity LessonPlan at ett.glencoe.com for anintroduction, lesson description,and answers to the Student WebActivity for this chapter.

Limited English Proficiency Students with limited proficiency in English may have trou-ble distinguishing among the different federal acts that regulate consumer credit. Have stu-dents copy the main points of each act onto different color paper; in effect, color-codingthe information. Students then will be able to associate the different colors with the differ-ent acts.


ELL


Name Date Class


G OVERNMENT REGULATION OF CREDIT

OUTLINING

Directions: Locate the heading in your textbook. Then use the information under the heading to help youwrite each answer.

I. The Truth in Lending Act—What is the main purpose of the Truth and Lending Act of 1968?

II. The Equal Credit Opportunity Act

A. What does the Equal Credit Opportunity Act prevent?

B. Historically, who used to be hurt by credit discrimination?

III. State Usury Laws

A. What is a usury law?

B. What problems did usury laws create in the 1970s ?

4-4


Economic Connectionto... LiteratureEconomic Connectionto...

Punishing Debtors In the past,failure to pay debts was a punish-able offense, often by publichumiliation. In England, for exam-ple, debtors in the 1600s were putin the stocks. In the 1800s,English debtors had their namespublished prominently in popularnewspapers. People with chronicdebt problems usually werethrown in prison until their debtswere paid. Imprisonment for debtremained on the statute booksuntil 1869.

Organize students into an equal number of small groups. Have half the groups researchfederal consumer credit laws. Direct the other groups to research consumer credit lawsenacted by their state and local governments. Then have all groups combine the materialsthey have gathered to create an illustrated bulletin-board display titled “GovernmentRegulation of Consumer Credit.” BLOCK SCHEDULING


L ECTURE LAUNCHERIn 1985, Hawkeye Pipe Services, Inc. went out of business. Its founder, Bill Bartmann, owedover $1 million. It took him two years to repay his creditors. Today Bartmann is president of adebt-collection agency. What can a debt-collection agency do to try and collect payments?

I. The Truth in Lending Act

A. The first law that expanded the government’s role in protecting users of consumercredit

B. Ensures that consumers are fully informed about costs conditions of borrowing


Why do you think the government needs to be involved in protecting users of con-sumer credit? (Some outside body needs to regulate credit to see that both consumers andlenders are protected from abuses.)

II. The Equal Credit Opportunity Act

A. Creditors cannot discriminate solely on basis of race, religion, national origin, gender,marital status, or age.

B. After 1974, a woman no longer had to have her father or husband sign for her to get

4-4

PAGE 102

PAGE 102



105

105Going In to Debt

choosing bankruptcy to get out of your credit “mess” should be alast resort. Also, when you declare bankruptcy, you are makingsure that your creditors will never be paid off (at least not in full)for what they loaned out.

Understanding Key Terms1. Define usury law, bankruptcy.

Reviewing Objectives2. Graphic Organizer Create a chart like the

one below to describe how the Truth in LendingAct, the Fair Credit Reporting Act, the EqualCredit Opportunity Act, and the Fair CreditBilling Act have affected consumer credit.

3. What are state usury laws?

4. Why might a person declare personalbankruptcy?

Applying Economic Concepts5. State Usury Laws The effect of a usury law

is often a shortage of available loans. What cir-cumstances might create a surplus of availableloans?

6. Making Comparisons Research the twotypes of bankruptcy known as Chapter 7 andChapter 13. Which requires debtors to set upa repayment plan? Which deletes the debtcompletely? What are the long-term effectsof each type on one’s future?




4

Using Credit Just becausecredit card companies make iteasy to obtain credit does notmean that you should accept theiroffers. What are some questionsyou should ask yourself beforebuying on credit?

4.154.15

Legislation Effect on Consumer Credit

AUTH ©1997 The Philadelphia Inquirer. Reprinted with permission of Universal Press Syndicate. All rights reserved.



ReteachAsk students to rewrite the sub-

headings in Section 4 as questions.Then have them review the sectionand draft answers to their questions.

1. All definitions can be found in the Glossary.2. Truth in Lending Act: consumers informed

about the costs and conditions of borrow-ing; Fair Credit Reporting Act: privacy andaccuracy of credit check are protected;Equal Credit Opportunity Act: cannot berefused credit because of sex, race, reli-gion, marital status, age, or receipt of publicassistance; Fair Credit Billing Act: mistakes

that appear on consumer credit accountsare now quickly corrected

3. state laws that set limits on the amount ofinterest lenders may charge

4. too many loans, uses too many creditcards, and piles up unpayable debts

5. Answers may include if interest rates aretoo high, fewer people will demand loansoffered by many creditors.

6. Chapter 13 requires debtors to set up arepayment plan, while Chapter 7 deletesmost of the debt completely. Students alsowill note that both have long-term effects ona person’s future, since a bankruptcy filingremains on that person’s credit history for10 years.

As a closing activity, have students discuss the importance of credit regulation laws for consumers.

Name Date Class

4, 4

usury law Law restricting the amount of interest that can be charged for credit (page 103)

bankruptcy The inability to pay debts based on the income received (page 104)




Should a credit card company be able to set their interest rates as high as they want? How wouldyou feel if you were turned down for a credit card just because of your religion or gender?

This section explains how government regulations have tried to guarantee fairness and equity incredit practices. It also explains what a consumer can do if his or her debt becomes too great.


Use this chart to help you take notes as you read the summaries that follow. As you read, thinkabout what you can do to protect yourself from acquiring too much debt.

Federal and State Regulations on Credit Practices

Name or type of regulation How the law or act protects consumers

1.

2.

KEY TERMS




104 CHAPTER 4

bankruptcy: the inability to paydebts based on the incomereceived

on the amount of credit they offered. Others stopped lending com-pletely. Many consumers, particularly those who were poor creditrisks, found it hard to obtain credit.

People opposed to raising interest restrictions claimed thatpeople with lower incomes would not be able to afford credit.Supporters of higher rate restrictions claimed that low rates madecredit less available because it was less profitable for lenders.Low rates actually hurt those they were supposed to help.

Personal BankruptcyEvery day in the United States, thousands of families get into

financial trouble because they have ignored the total costs of alltheir borrowing. They have too many credit cards, too manycharge accounts, and own a home that has too large a mortgage.Just because someone offers you credit or allows you to borrowdoes not mean that you should accept. Buying on credit is a seri-ous consumer activity. See Figure 4.15.

If debtors take out too many loans, use too many credit cards,and pile up debts that they cannot pay off, they may have to filepersonal bankruptcy. When a bankruptcy is approved through abankruptcy court, debtors must give up most of what they own,which is then distributed to their creditors. The Constitutionauthorizes Congress to establish bankruptcy laws. Certain debts,such as taxes, must continue to be paid, however.

If you declare personal bankruptcy, be aware that the bank-ruptcy proceedings remain on your credit record for 10 years.During this period, it is very difficult to reestablish credit andborrow funds for items such as a new car or home. That is why

Women and Credit Changes in lawsregarding credit have improved a woman’sopportunities to borrow money. What lawmade it illegal for creditors to deny crediton the basis of marital status?

4.144.14

104




Answer: Equal Credit OpportunityAct



6. The credit industry is regulated by

a. only the federal government. b. both federal and state governments.c. only state governments. d. financial institutions.

7. Which of the following laws made it illegal to deny credit on the basis of race, religion, national origin,gender, marital status, or age?

a. Truth in Lending Act b. Fair Credit Reporting Actc. Equal Credit Opportunity Act d. Fair Credit Billing Act

8. One disadvantage of an interest ceiling is

a i t t t ill t i b 10 t b l i dit lt

SCORE

A1. usury law

2. bankruptcy

3. Truth in Lending Act

4. Equal Credit Opportunity Act

5. Fair Credit Reporting Act

Ba. inability to pay debts based on income received

b. ensures that consumers are informed about thecosts and conditions of borrowing

c. protects the privacy of information in a credit check

d. restricts the amount of interest that can be chargedfor credit

e. prohibits discrimination in giving credit


Name Date Class

4, 4

Section Quiz 4–4

Declaring Bankruptcy Some Americans think that filing for bankruptcy has become tooeasy. These people want the bankruptcy laws to be revised. They suggest that Chapter 7bankruptcy—where all debts except taxes, mortgages, student loans, child support, andalimony are wiped out—should be limited to people with low incomes. Anyone earningabove the national median income would have to file for bankruptcy under Chapter 13.This entails the setting up of a repayment schedule designed to retire at least a third of thedebt.

Relevant Issues in Economics

Answer: Do I really require thisitem? Can I postpone purchasingthe item? Have I done comparisonshopping for credit, finding the low-est interest rate? See Figure 4.5 onpage 87 for other questions oneshould ask before buying oncredit.

105

107

107Going In to Debt

Americans and Credit

• Credit is the receiving of funds either directly orindirectly to buy goods and services today with thepromise to pay for them in the future.

• The amount owed—the debt—is equal to theprincipal plus interest.

• Many people buy durable goods and obtainmortgages using installment debt.

• People go into debt because they do not want towait to purchase an item with cash, and they wantto spread the debt payments over the life of theitem being purchased.

Sources ofLoans and Credit

• The major financial institutions that lend con-sumers funds include commercial banks, savingsand loan associations, credit unions, andfinance companies.

• A charge account allows a customer to buy goodsor services from a particular company and pay forthem later.

• A credit card, often charging high interest, may beused at stores, restaurants, or other businesses.

• Finance charges tell you the monthly cost of creditin dollars and cents.

• The annual percentage rate tells you the annualcost of credit in percentages.

Applying for Credit

• After you have filled out a credit application, acredit bureau will perform a credit check anddetermine your credit rating.

• Before granting you credit, a creditor looks at yourcapacity to pay, your character, and any collateralyou may have.

• Your responsibilities as a borrower include payingon time, keeping records of your debt, and notspending more than you can repay.

Government Regulation of Credit

• Legislation states that those who provide creditcannot deny you such credit solely on the basis ofyour race, religion, national origin, gender, maritalstatus, or age.

• A usury law restricts the amount of interest thatcan be charged for credit, but also leads to a short-age of available credit.

• People who cannot repay their debts may have tofile personal bankruptcy.

C H A P T E R

SECTION 1

SECTION 2

SECTION 3

SECTION 4

Chapter Overview Visit the Economics Today and Tomorrow Web site at ett.glencoe.comand click on Chapter 4—Chapter Overviews toreview chapter information.

4

Use the Chapter 4 Summary to preview, review, condense, orreteach the chapter.

Preview/ReviewVocabulary PuzzleMaker Soft-

ware reinforces the key terms usedin Chapter 4.

Interactive Tutor Self-Assess-ment Software allows students toreview Chapter 4 content.

CondenseHave students listen to the

Chapter 4 Audio Program (alsoavailable in Spanish) in the TCR.Assign the Chapter 4 Audio ProgramActivity and give students the Chap-ter 4 Audio Program Test.

ReteachHave students com-

plete Reteaching Activity 4 in theTCR (Spanish Reteaching Activitiesare also available).

C H A P T E R 4

ECONOMICS & YOU

Going Into Debt


If you do not have accessto a videodisc player, theEconomics & You programs arealso available in VHS.

Credit and Debt Ask students to keep track of the advertisements concerning debt andcredit they see on television, in newspapers and magazines, or hear on the radio. Havethem list the types of companies that advertise to offer credit. Also, ask them to note whichcompanies offer credit for major purchases and which offer credit for small purchases.Then have them use the information they have gathered to write a paragraph supportingor refuting the following statement: Credit is too easily available to too many people.

Economics Journal

■ President and chiefoperating officer ofthe AmericanExpress Company

■ Board member ofseveral companies,including IBM andQuaker Oats

■ Board member ofseveral educational,sports, and charita-ble organizations

■ Recipient of manyawards recognizingbusiness achieve-ments and charitywork

A fter working as a lawyerand a business consultant,

Kenneth Chenault accepted aposition at the American ExpressCompany in 1981. An energeticworker and imaginative problemsolver, Chenault rose steadilythrough company ranks, and in1997 he was named presidentand chief operating officer.

Chenault believes that it is notso much what or who you know,but what you do:

“Having a solid track record,building relationships with the peo-ple that you work with, and thenimpressing them with your abilitieswill make people in a position tohelp your career take note. As aresult, you will earn the respect ofthe people who know your workwell, rather than simply meetingpeople who may or may not haveoccasion to help you.”

As an African American,Chenault has faced obstacles inhis career. Taking a practical

approach to the situation, hebelieves, helps people to confrontand overcome such obstacles:

“Everyone, regardless of theirethnic, religious, age, gender, . . . orother differences has to contend withobstacles. So you have to isolatewhat you can control, from whatyou can’t. You can’t control people’sbiases. You can control your ownperformance, your own behaviorand the values you choose to uphold.

I also think it’s important tocultivate a measure of resilience.And, perhaps unfortunately, thebest teacher of resilience is failure.There is nothing quite like over-coming failure with your characterand values intact, to reinforce thefact that learning from your mis-takes can be one of life’s mostimportant lessons.”Checking for Understanding

1. What, according to KennethChenault, is the key to success?

2. What advice does Chenault give peo-ple for confronting and overcomingobstacles?

Kenneth ChenaultENTREPRENEUR (1951—)

106

106

BackgroundIn mid-1999, American Express

Co. announced that Chenaultwould assume the positions of chiefexecutive officer and chairman inthe early 2000s.

Answers to Checking for Understanding1. what you do in your job, rather than what you know or who you know2. People should isolate what they cannot control, such as people’s biases. Then they

should focus on what they can control—their own performance, their own behavior,and the values they choose to uphold. In addition, Chenault thinks it is importantfor people to cultivate a measure of resilience and to learn from failure.

Point out that Chenault feels thatbusiness people can gain a greatdeal from participating in activitiesoutside of work. He believes that“there is a tremendous career bene-fit that people can gain from workoutside their day job. You may beplaced in a leadership position atan earlier stage than you might atyour job. There is often an opportu-nity to hone other skills, like publicspeaking, management, strategicthinking.”

Continue by mentioning thatChenault also thinks that peopleallow company business to dictatetoo much of their day-to-day sched-ule. He suggests that there is just asmuch to be gained from spendingsome time with friends and familyand doing charity work.

Conclude by asking students tooffer their opinions on Chenault’sviews on what can be gained fromparticipating in activities outsidethe job.

CHAPTER 4Assessment and Activities


109

109Going In to Debt

2. Synthesizing Information Imagine that youneed both a car loan and a home mort-gage. Use a chart like the one below tohelp decide which of the six types of lend-ing institutions discussed in this chapterwould be most appropriate for each loan.

3. Drawing Conclusions If you declare per-sonal bankruptcy, your creditors clearlylose. What ethical concerns should youhave before ever taking this action?

ApplyingEconomic ConceptsThe Role of Government Sometimes creditcards are lost or stolen. The owner must takesteps to keep his or her card from being usedby an unauthorized person. Research theTruth in Lending Act to find out what acredit card holder must do when his or hercard is lost or stolen.

CooperativeLearning Project

Work in small groups to create a loan appli-cation that is appropriate for high school stu-dents, and circulate it in class. After going overthe application, discuss why it is or is not diffi-cult to decide who should receive loans. Is itdifficult to decide who should not receiveloans?

Reviewing SkillsUsing a Database Call various retail storesand gas stations and ask them to send you acredit card application. Analyze the applica-tions, then prepare a database that organizes

the answers to thefollowing questions.1. What questions

asked on eachapplication arevirtually thesame?

2. What questionsasked on the gasstation applica-tions are differentthan those asked on the retail storeapplications?

3. Were any questions asked that you thinkviolate the Equal Credit Opportunity Act?Explain.

TechnologyActivityUsing the Internet If you ever wish to borrowmoney, your credit rating will be important.You can determine what your credit rating isby going to the Internet.

Enter the words credit rating in yoursearch engine. You will find numerous sitesthat will give you a credit check on yourself.A wealth of online credit reporting servicesare available, and some of these reportingservices are free.

The first banks arose in Europe during theMiddle Ages. Indeed, the word bank comesfrom the banca, or bench, that moneychang-ers set up at medieval fairs to exchange cur-rencies, transfer funds, receive deposits, andarrange loans. Research these early financialinstitutions and the interest rates theycharged their customers.

Financial Institution Services Car or Home Loan?

Applying EconomicConcepts

Card holders must notify issuersof lost or stolen cards immediately.Card holders are responsible for thefirst $50 of new charges on a lost orstolen card.

CooperativeLearning Project

Discussions should focus onwhat lenders might look for interms of creditworthiness of highschool students.

Reviewing SkillsEncourage students to review the

guidelines in the Practicing the Skillsection of the Skills feature on page95.

Technology ActivityEncourage students to share

their findings with the rest of theclass.

Analyzing theGlobal Economy

Have students present their find-ings in a brief illustrated report.

ASK: How does a credit carddiffer from a debit card? A creditcard allows consumers to makecashless purchases by givingthem access to loans. A debit carddoes not provide a loan. Instead,it makes cashless purchases pos-sible by enabling customers totransfer funds electronically fromtheir bank accounts directly to thebusiness where they purchasedgoods.

Chapter BonusTest Question

Thinking Critically1. The benefit of buying on credit is being

able to enjoy the good or service nowrather than later. The cost is whatever theborrower must pay in interest or lostopportunities to buy other items. The ben-efit of buying with cash is that the buyerdoes not incur debt. The costs are thetime the buyer may have to wait to buywhile saving and the lost opportunities tobuy other items.

2. Charts should reflect that banks, savingsbanks, savings and loan associations, andsome larger credit unions are more appro-priate for mortgage loans.

3. Answers may vary. Many students willsuggest that people should strongly con-sider their reputations and the promisesthey have made before deciding not tofully repay their creditors.



Identifying Key TermsWrite the letter of the definition in Column Bthat correctly defines each term in Column A.

Column A1. principal2. usury law3. collateral4. annual percentage rate5. unsecured loan

Column Ba. restricts the amount of interest that can be

charged for creditb. requires only a promise to repayc. amount of money borrowed in a loand. something of value that a borrower uses

as a promise of loan repaymente. cost of credit expressed as a yearly

percentage

Recalling Facts and IdeasSection 11. What do you have to pay when you borrow?2. How is taking out a loan similar to buying

an item on credit?

3. What type of goods do people typicallyuse installment debt to buy?

4. Why do people use credit?

Section 25. What are the six types of basic lending

institutions in our economy?6. What are some of the most common

types of credit cards used today?7. When you take out a loan, what do you

call the total cost of credit expressed indollars and cents?

Section 38. When you make an application for a

loan, what are four factors that a creditorlooks at to determine whether you arecreditworthy?

9. What is the difference between a securedand an unsecured loan?

10. What are your responsibilities as aborrower?

Section 411. What does the Equal Credit Opportunity

Act of 1974 prohibit?12. What are three important federal laws

regulating consumer credit?13. How can usury laws be harmful to the

people they are trying to help?

Thinking Critically1. Making Comparisons In deciding whether

to pay cash or use credit for a purchase,what are the costs involved and the bene-fits of each choice?

4

Self-Check Quiz Visit the Economics Today and Tomorrow Web site at ett.glencoe.comand click on Chapter 4—Self-Check Quizzes toprepare for the Chapter Test.

108 CHAPTER 4

108

Identifying KeyTerms1. c 4. e2. a 5. b3. d

Recalling Facts and Ideas1. principal plus any interest and

fees2. In both cases, interest must be

paid for the use of someoneelse’s purchasing power.

3. consumer durables and realproperty

4. People want or need itemsimmediately and wish to spreadthe payments over time.

5. commercial bank, savings andloan association, savings bank,credit union, finance company,consumer finance company

6. Visa, MasterCard, and othercards issued through banks

7. finance charges8. credit history, capacity to pay,

character, collateral9. Secured loans are backed by col-

lateral; unsecured loans aremade based on the reputation ofthe borrower.

10. Borrowers must repay the loan on time,keep records of charges made, and notifycard issuers promptly if credit cards arelost or stolen.

11. It prohibits discrimination in lendingbased on factors—such as race, age, andsex—that have no bearing on an appli-cant’s ability to repay a loan.

12. Any three of the following: Truth inLending Act, Fair Credit Reporting Act,Equal Credit Opportunity Act, Fair Credit

Billing Act, Fair Debt Collection PracticesAct

13. When interest rates in general begin torise, many lenders feel that they could notkeep within ceilings set by usury lawsand still make a profit. Therefore, they cutback on the amount of credit they offer.As a result, many consumers, particularlythose who are poor credit risks, find ithard to obtain credit.

Have students visit theEconomics Today and TomorrowWeb site at ett.glencoe.com toreview Chapter 4 and take the Self-Check Quiz.

MindJogger Videoquiz

Use MindJogger to reviewChapter 4 content.


CHAPTER 4 Resource Manager CHAPTER 4 Resource Managersleconomics.weebly.com/uploads/1/2/4/2/12428029/chap04.pdf · Spanish Vocabulary Activity 4 Spanish Reteaching Activity 4 Spanish

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