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Notes – CREDIT: Chapter 16.1
SMG – Portfolio Updates
Chapter 16
© 2010 South-Western, Cengage Learning
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Chapter
16
Credit in America
16.1 Credit: What and Why
16.2 Types and Sources of Credit
© 2010 South-Western, Cengage Learning
Learning Targets
Discuss the history of credit and the role
of credit today.
List and Explain advantages and
disadvantages of using credit.
Chapter 16
© 2010 South-Western, Cengage Learning
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KEY TERMS
Credit
Debtor
Creditor
Capital
Collateral
Finance Charge
Line of Credit
Deferred Billing
Chapter 16
© 2010 South-Western, Cengage Learning
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The Need for Credit
Credit is the use of someone else’s money.
borrowed now with the agreement to pay it
back later at a cost (typically interest)
Early forms of credit started with
Farmers
Credit today
Merchants, Retail, Wholesale, etc.
Credit has become a way of life!
© 2010 South-Western, Cengage Learning
Chapter 16
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The Use of Credit
A debtor is a person who borrows money from others.
This money, called debt, must be repaid.
A creditor is a person or business that loans money to
others.
Creditors charge money for this service in the form of
interest and fees.
A debtor must be qualified to receive credit.
Current economic crisis is due to this practice not being followed.
Chapter 16
© 2010 South-Western, Cengage Learning
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Qualifying for Credit
To qualify for credit, you must have the ability
to repay the loan.
Qualification is typically based on four things:
Income
Financial position
Collateral
Personal History
Chapter 16
© 2010 South-Western, Cengage Learning
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Income
Sources of income include:
Job
Interest
Dividends
Alimony
Royalties
Income represents cash inflow.
When your earnings exceed your expenses,
you have the capacity to take on debt.
Chapter 16
© 2010 South-Western, Cengage Learning
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Financial Position
Capital is the value of property you possess after
deducting your debts.
Capital Examples
Bank Accounts
Investments
Real estate
Other assets with unbiased value after deducting your debts.
Having capital = responsibility and monetary value.
Cash Outflow (Debt) will be compared to your Cash
Inflow (Income).
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© 2010 South-Western, Cengage Learning
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Collateral
Collateral is property pledged to assure repayment of a loan.
To borrow large amounts of money, creditors often want more
than just your promise to repay; they want collateral.
If you do not make your loan payments, the creditor can seize
the pledged property.
Repossession - Example
You buy a new 60in HDTV from Best Buy using a credit card.
You do not make your payments for an extended period of time.
Collection agency gets involved:
Call you at work/home trying to collect the debt.
Come and get the item you have defaulted payment on.
Chapter 16
© 2010 South-Western, Cengage Learning
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Making Payments
Swiping your Credit Card = you owe money!
Principal (amount borrowed) plus interest for the time
you have the loan is called the Balance Due.
Finance Charge is the total dollar amount of all interest
and fees you pay for the use of credit.
Minimum Payment is the least amount of money you
have to pay per your monthly statement.
Always pay more than the minimum due amount.
Chapter 16
© 2010 South-Western, Cengage Learning
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Credit
Advantages
Disadvantages
Increased Purchasing Power
Emergency Funds
Convenience
Deferred Billing
Proof of Purchase (records)
Safety
Higher Costs
Finance Charges
Overspending
Tie Up Future Income
Chapter 16
© 2010 South-Western, Cengage Learning
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Assignments:
Key Terms Review pg. 362
Questions: 1 – 8
Check Your Understanding pg. 362
Question: 10
Apply Your Knowledge pg. 362
Question: 11
Chapter 16
© 2010 South-Western, Cengage Learning
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Monday, Dec. 1st
Transaction Register – Week 3
Drake – missing week 2
Dre – missing week 2
Basketball Game Scheduling:
Sign-Up (must be done today)
Get Camera, Chargers and Tripods
Tomorrow
Notes – Types and Sources of Credit
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 14
Types and Sources of Credit
Learning Targets
List and describe the types of credit
available to consumers.
Describe and compare sources of credit.
Chapter 16
© 2010 South-Western, Cengage Learning
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KEY TERMS
Open-End Credit
APR
Grace Period
Closed-End Credit
Service Credit
Finance Company
Loan Sharks
Usury Law
Pawnbroker
Chapter 16
© 2010 South-Western, Cengage Learning
SLIDE 16
Types of Credit
Open-end credit
Closed-end credit
Service credit
Chapter 16
© 2010 South-Western, Cengage Learning
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Open-End Credit
Open-end credit is where a borrower can use credit up
to a stated limit.
Charge Cards
Master Card
Visa
Discover
American Express
American Eagle
Sears
Kohl’s
Best Buy
NOTE – Charge Cards are types of “Revolving Credit”
Chapter 16
© 2010 South-Western, Cengage Learning
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Credit Card Agreements
the terms of the credit card agreement affect the
overall cost of the credit you will be using.
APR – Annual Percentage Rate
Grace Period
Billing Cycle
Finance Charge
Fees – Processing, Transaction, Transfer, Late, Cash
Advance, Currency Conversion, Over Credit Limit, etc.
Chapter 16
© 2010 South-Western, Cengage Learning
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Closed-End Credit
Closed-end credit (also called Installment Credit) is a loan for a
specific amount that must be repaid in full, including all finance
charges, by a stated due date.
Payment Booklet
Set Due Date
Interest Included in Payment Amounts
Examples
Cars
Furniture
Major Appliances
Home Mortgages
Chapter 16
© 2010 South-Western, Cengage Learning
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Service Credit
Service credit involves providing a service for which you will pay later.
Examples:
Utility services
Phone services
Cable/Satellite TV services
Examples of businesses that extend service credit:
Doctors
Dentists
Lawyers
Dry Cleaners
Auto Repair Shops
Terms are set by individual businesses.
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© 2010 South-Western, Cengage Learning
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Sources of Credit
Retail stores
Credit card companies
Banks and credit unions
Finance companies
Pawnbrokers
Private lenders
Other sources of credit
Remember it is NOT FREE – consumers pay for it.
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© 2010 South-Western, Cengage Learning
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Retail Stores
Examples
Department stores
Discount stores
Specialty stores.
Many retail stores offer their own credit cards.
These cards are accepted only at the issuing store.
Advantages
Receive Discounts
Advance notice of sales
Receive Gift Cards
Disadvantages
Very High Interest Rates
Can only use them there
Most retail stores also accept credit cards issued by major credit card
companies.
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© 2010 South-Western, Cengage Learning
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Credit Card Companies
Credit Card Issuers
Examples - Visa, MasterCard, Discover, Amer. Express
Benefits
Accepted most places
Available cash advances
Access to Checks
Chapter 16
© 2010 South-Western, Cengage Learning
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Banks and Credit Unions
Credit cards
Closed-end loans
House
Car
Vacation
Home Repair
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© 2010 South-Western, Cengage Learning
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Finance Companies
A finance company is an organization that makes high-risk
consumer loans – typically to those people denied by banks.
There are two types of finance companies:
Consumer finance companies
Sales finance companies
Loan sharks are unlicensed lenders who charge illegally
high interest rates.
A usury law is a state law that sets a maximum interest rate
that may be charged for consumer loans.
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© 2010 South-Western, Cengage Learning
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Pawnbrokers
A pawnbroker (or pawnshop)
Legal business
High-interest loans based on the value of personal
possessions pledged as collateral.
Customers typically only receive 10% - 60% value of items
Most Popular Pawned Items:
Guns
Cameras
Jewelry
Radios
TVs
Computers
Collector Items
Popular Reality TV - Pawn Stars and Hard Core Pawn
Chapter 16
© 2010 South-Western, Cengage Learning
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Private Lenders
One of the most common sources of
cash loans is from a private lender –
typically they do not charge interest.
Examples of Private Lenders
Parents
Relatives
Friends
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© 2010 South-Western, Cengage Learning
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Other Sources of Credit
Life insurance policies – loan doesn’t have to be repaid but interest
is charged and policy coverage amount will decrease.
Borrowing against a deposit - typically has a low interest rate because
of the safety of the loan.
CD
IRA
Treasury Note
Bond
Borrowing against an asset
Car – usually has to be less then 5yrs old and you owe nothing on it
House
Chapter 16
© 2010 South-Western, Cengage Learning
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Assignments:
Key Terms Review pg. 371
Questions: 1 – 6
Check Your Understanding pg. 671
Question: 7 – 8
Apply Your Knowledge pg. 362
Question: 9
Chapter 16
© 2010 South-Western, Cengage Learning
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