Chapter Menu Chapter Introduction Section 1:Section 1:Americans and Credit Section 2:Section 2:Sources of Loans and Credit Section 3:Section 3:Applying.

Chapter Menu

Chapter Introduction

Section 1: Americans and Credit

Section 2: Sources of Loans and Credit

Section 3: Applying for Credit

Section 4: Government Regulation of Credit

Visual Summary

Chapter Intro 1

Governments and institutions help participants in a market economy accomplish their financial goals.

Chapter Intro 2

Have you ever taken out a loan or used a credit card? If so, why did you make the decision to borrow? Were you able to easily pay back the amount? In this chapter, read to learn how to apply for credit and how to use credit wisely.

Chapter Preview-End

Section 1-Main Idea

Section Preview

In this section, you will learn about the advantages and disadvantages of using credit to make purchases.

A. A

B. B

C. C

Section 1-Polling Question

Do you understand how credit works?

A. Yes

B. Somewhat

C. Not at all

A B C

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Section 1

Credit and Installment Debt

The price of credit is the interest charged on the amount borrowed.

Section 1

Credit and Installment Debt (cont.)

• Credit is the receipt of funds either directly or indirectly to buy goods and services in the present with the promise to pay for them in the future.

• Principal is the amount originally borrowed.

• Interest is the amount the borrower must pay for the use of someone else’s funds.

Section 1

Credit and Installment Debt (cont.)

• One of the most common types of debt is installment debt.

• Many durable goods lasting more than 3 years are purchased on an installment plan.

– The longer it takes to repay an installment loan, the greater the interest the lender charges, and so the total payment will be greater.

View: Increase in Borrowing

Section 1

Credit and Installment Debt (cont.)

• The largest form of installment debt in the United States is what people owe on mortgages. A mortgage is debt owed on houses, buildings, or land.

View: Pay Now or Pay Later?

A. A

B. B

Section 1

Taking out a loan is not the same as buying an item on credit.

A. True

B. False

A B

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Section 1

Why People Use Credit

The use of credit allows the borrower to enjoy consumption now rather than later.

Section 1

Why People Use Credit (cont.)

• People use credit because:

– They believe “big ticket” products are essential and they want them immediately.

– They can spread the payments over the service life of the item being purchased.

Section 1

Why People Use Credit (cont.)

• Consumers must compare the costs and benefits. The benefit of borrowing is being able to buy and enjoy now rather than later. The cost is whatever the borrower must pay in interest or lost opportunities to buy other items, or earn interest on the amount put into a savings account or investment.

View: Buying on Credit

A. A

B. B

C. C

Section 1

In your opinion, is it worth paying interest in order to have an item immediately?

A. Yes

B. Sometimes

C. Never

A B C

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Section 1-End

Section 2-Main Idea

Section Preview

In this section, you will learn about the major types of credit and the cost of credit.

Section 2

Types of Financial Institutions

Financial institutions borrow funds at one interest rate and lend it at a higher rate.

Section 2

Types of Financial Institutions (cont.)

• Places to comparison shop for a loan:

– Commercial Banks

– Savings and Loan Associations (S&L)

– Savings Banks

– Credit Unions

– Finance Companies

Section 2

Charge Accounts and Credit Cards

Charge accounts and credit cards extend credit directly to an individual or business.

Section 2

Charge Accounts and Credit Cards (cont.)

• A charge account is credit extended to a consumer allowing the consumer to buy goods and services from a particular company and to pay for them later.

Section 2

Charge Accounts and Credit Cards (cont.)

• Department stores offer three main types of charge accounts:

– A regular charge account, also known as a 30-day charge has a credit limit or a maximum amount of goods or services a person or business can buy on the promise to pay in the future.

• You must pay the full amount every 30 days or interest will be due.

Section 2

Charge Accounts and Credit Cards (cont.)

– A revolving charge account allows you to make additional purchases from the same store even if you have not paid the previous month’s bill in full.

• You are charged interest on the amount you do not pay.

Section 2

Charge Accounts and Credit Cards (cont.)

– An installment charge account allows you to buy expensive items and pay for them through equal payments spread over a period of time.

• You are charged interest along the way.

Section 2

Charge Accounts and Credit Cards (cont.)

• A credit card allows a person to make purchases at many kinds of businesses without paying cash.

• A debit card allows funds to be taken directly from your checking account, usually within 72 hours. It does not provide a loan or extend credit.

Section 2

Finance Charges and AnnualPercentage Rates

The cost of credit can be expressed as a finance charge or as an annual percentage rate.

Section 2

Finance Charges and Annual Percentage Rates (cont.)

• A finance charge is the cost of credit expressed monthly in dollars and cents.

– Interest costs plus any other charges connected with credit are taken into account.

View: Methods of Computing Finance Charges

Section 2

Finance Charges and Annual Percentage Rates (cont.)

• Finance charges are computed in four different ways:

– Previous balance

– Average daily balance

– Adjusted balance

– Past due balance

Section 2

Finance Charges and Annual Percentage Rates (cont.)

• The annual percentage rate (APR) is the cost of credit expressed as a yearly percentage.

– This charge also takes into account any non-interest costs of credit, such as a membership fee.

Section 2-End

Section 3-Main Idea

Section Preview

In this section, you will learn about how to obtain credit and about your responsibilities after becoming a borrower.

Section 3

Will You Be Able to Get Credit?

Lenders determine creditworthiness by evaluating a borrower’s credit history.

Section 3

• Several factors determine a person’s creditworthiness. When applying for credit:

Will You Be Able to Get Credit? (cont.)

– You will be asked to fill out a credit application.

– The lender will hire a credit bureau to do a credit check.

– The credit bureau will provide the creditor with a credit rating for you.

View: Your Credit Score

View: What Hurts Your Credit Rating?

Section 3

Will You Be Able to Get Credit? (cont.)

– Creditor also reviews:

• Your capacity to pay

• Your character

• Any collateral you may have

Section 3

Will You Be Able to Get Credit? (cont.)

– A financial institution will usually ask the borrower to provide collateral.

• Secured loan

• Unsecured loan

Section 3

Will You Be Able to Get Credit? (cont.)

• A bank will sometimes lend funds to a person if he or she has a cosigner—a person who signs a loan contract along with the borrower and promises to repay the loan if the borrower does not.

Section 3

Responsibilities as a Borrower

Maintaining a good credit rating is important for obtaining credit at favorable interest rates.

Section 3

Responsibilities as a Borrower (cont.)

• Credit use carries responsibilities which include:

– Paying your debts on time

– Keeping a complete record of all the charges you have made

– Notifying the issuer if your card has been lost or stolen

Section 3

Responsibilities as a Borrower (cont.)

• If you lose control of your debt, you should pay high-interest rate credit cards first, and pay more than the minimum payment.

A. A

B. B

C. C

Section 3

Do you feel that the benefits of owning a credit card outweigh the risks?

A. Yes

B. Somewhat

C. Not really

A B C

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Section 3-End

Section 4-Main Idea

Section Preview

In this section, you will learn about laws that protect consumers from unfair credit practices, as well as those that regulate personal bankruptcy.

Section 4

Laws Protecting Borrowers

Laws have been enacted to protect borrowers against unfair lending practices and to help them make informed decisions.

Section 4

Laws Protecting Borrowers (cont.)

• The Truth in Lending Act—this act requires creditors to keep consumers fully informed about the costs and conditions of borrowing.

• The Equal Credit Opportunity Act—this act prohibits providers from denying credit based on race, religion, national origin, gender, marital status, or age.

Section 4

Laws Protecting Borrowers (cont.)

• State usury laws restrict the amount of interest that can be charged for credit (usually no more than 18% a year).

Section 4

Personal Bankruptcy

Personal bankruptcy should be used only as a last resort to relieve the financial burden of debt.

Section 4

Personal Bankruptcy (cont.)

• Bankruptcy is the state of legally having been declared unable to pay off debts owed with available income.

Section 4

Personal Bankruptcy (cont.)

• When bankruptcy is approved through bankruptcy court, debtors must give up most of what they own, which is then distributed to the creditors.

– By law, certain debts, such as taxes, must continue to be paid.

– Bankruptcy proceedings remain on your credit record for 10 years.

Section 4-End

VS 1

The cost of credit is the interest charged on the amount borrowed. The longer the loan period, the higher the amount of interest paid.

VS 2

The two main sources of credit are credit cards/charge accounts and financial institutions.

VS 3

Lenders look at your credit history to determine your creditworthiness. It is important to manage your credit wisely and avoid situations that will hurt your credit rating.

VS-End

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Figure 6

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Vocab1

credit: receipt of funds either directly or indirectly to buy goods and services in the present with the promise to pay for them in the future

Vocab2

principal: amount originally borrowed in a loan

Vocab3

interest: amount the borrower must pay for the use of someone else’s funds

Vocab4

installment debt: type of loan repaid with equal payments, or installments, over a specific period of time

Vocab5

durable goods: manufactured items that have a life span longer than three years

Vocab6

mortgage: installment debt owed on houses, buildings, or land

Vocab7

commercial bank: bank whose main functions are to accept deposits, lend funds, and transfer funds among banks, individuals, and businesses

Vocab8

savings and loan association (S&L): depository institution that accepts deposits and lends funds

Vocab9

savings bank: depository institution originally set up to serve small savers overlooked by commercial banks

Vocab10

credit union: depository institution owned and operated by its members to provide savings accounts and low-interest loans only to its members

Vocab11

finance company: company that takes over contracts for installment debts from stores and adds a fee for collecting the debt; a consumer finance company makes loans directly to consumers at high rates of interest

Vocab12

charge account: credit extended to a consumer allowing the consumer to buy goods or services from a particular company and to pay for them later

Vocab13

credit card: credit device that allows a person to make purchases at many kinds of stores, restaurants, and other businesses without paying cash

Vocab14

finance charge: cost of credit expressed monthly in dollars and cents

Vocab15

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

Vocab16

credit bureau: private business that investigates a person to determine the risk involved in lending to that person

Vocab17

credit check: investigation of a person’s income, current debts, personal life, and past history of borrowing and repaying debts

Vocab18

credit rating: rating of the risk involved in lending to a specific person or business

Vocab19

collateral: something of value that a borrower lets the lender claim if a loan is not repaid

Vocab20

secured loan: loan that is backed up by collateral

Vocab21

unsecured loan: loan guaranteed only by a promise to repay it

Vocab22

usury law: law restricting the amount of interest that can be charged for credit

Vocab23

bankruptcy: the state of legally having been declared unable to pay off debts owed with available income

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