Chapter 4 Section 1 Americans and Credit • Reading Objectives • 1. What are the advantages of repaying installment debt over a long period? • 2. Why do people go into debt? • 3. What factors should you consider when deciding whether or not to use credit?
Terms to Know • credit • principal • interest • installment debt • durable goods • mortgage
What is Credit? • Credit: the receiving of funds either or indirectly to buy goods and services today with the promise to pay for them in the future. • The amount owed-the debt-is equal to the principal plus interest
What is Credit? • Principal: the amount originally borrowed • Interest: the amount the borrower must pay for the use of someone else’s money. • The “someone else” may be a bank, a credit card company, or a store
When I get a loan is that the same as buying something on credit? • Yes, anytime you take out a loan that is the same as buying something on credit.
Do I have to just pay back what I borrowed or is there extra added to it? • Yes, you have to pay back the principle as well as the interest.
Installment Debt • Installment debt: type of loan repaid with equal payments, or installments, over a specific period of time • Example: Car payment
Durable goods • Durable goods: manufactured items that have a life span longer than three years • Examples: • (1) automobiles • (2) refrigerators • (3) washers • (4) other appliances
Are Installments plans all the same?? • No, the length of an installment plan varies from loan to loan. • The longer the installment plan makes the monthly less, however you will pay more interest. • The faster you pay something off means that you will pay less interest.
Mortgage • Mortgage: Installment debt owed on houses, buildings, or land • Mortgages are the largest form of installment debt in our country.
Why People Use Credit • They feel forced to buy items on credit because they feel they have to have it. • Many people don’t want to postpone purchasing an important durable good
Why People Use Credit • To spread the payments over the life of the item being purchased • Example… People don’t buy a truck and let it sit. They buy it for availability
Deciding to Use Credit • The decision to borrow or use credit involves whether the satisfaction the borrower gets from the purchase is greater than the interest payments
Deciding to use credit is basically a question of comparing costs and benefits Benefit Cost The cost is whatever the borrower must pay in interest or lost opportunities to buy other items. • The benefit of borrowing is being able to buy and enjoy the good or service now rather later.
Checklist for Buying on Credit • Do I really require this item? Can I wait to get this? • If I pay cash, what will I be giving up that I could buy with this money. • Continued next slide
If I borrow or use credit, will the satisfaction I get from the item I buy be greater than the interest I must pay? • Have I done comparison shopping for credit? Have you decided on the best loan or credit deal? • Can I afford to borrow or use credit now?
Chapter 4 Section 2 Sources of Loans and Credit Reading Objectives • 1. What are six types of financial institutions? • 2. What three kinds of charge accounts are available from stores? • 3. How are credit cards used? • 4. How do finance charge and an annual percentage rate differ?
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)
Where can I get a Loan? • Commercial banks:banks whose main functions are to accept deposits, lend money, and transfer funds among banks, individuals, and businesses • Commercial banks offer checking and savings accounts as well as loans to individuals.
What are savings and loans Associations ? • Savings and loan association: depository institution that accepts deposits and lends money • S and L’s make many of the single-family and multi-family dwelling mortgages and auto loans
What were savings and loans set up for? • They were set up to serve the small savers who were overlooked by the large commercial banks. • Since 1980, savings banks, like commercial banks, have also been able to offer services similar to checking accounts.
What do many unions and large companies often have set up for its members? • Credit Unions: depository institutions owned and operated by its members to provide savings accounts and low-interest loans only to its members • Credit Unions primarily make personal, auto, and home improvements loans as well as home mortgages.
What is a Finance Company? • 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.
How can I use credit without having to borrow the money first? • I can use a charge account or a credit card. http://www.youtube.com/watch?v=jBaPx3sym0I&feature=related
A charge account allows a customer to buy goods or services from a particular company or department store • Example…. • Macy’s, Target, Visa, Mastercard
What are the three types of Charge accounts? • Revolving • Regular • Installment
Regular Charge Accounts • A regular charge account, also known as a 30-day charge, has a credit limit such as $500 or $1,000.
At the end of every 30 day period, the store sends a bill for the entire amount. • No interest is charged, but the entire bill must be paid at that time. If it is not, interest is charged on the unpaid amount
Revolving Charge Accounts • 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. • Usually you must pay a certain portion of your balance each month.
Interest is charged on the amount you do not pay. • If you pay everything 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 an installment charger 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 the payment period, the borrower owns the item he or she has made payments on.
How do credit cards work? • A credit card allows a person to make purchases without paying cash. • The difference from a charge account and a credit card is that credit cards can be used at many kinds of stores, restaurants, hotels, and other businesses throughout the U.S. and the world. • These cards can also be used to purchase items or to borrow money. http://www.youtube.com/watch?v=2JwdIWjVHaU
When I apply for a credit card what is the finance charge? • Finance charge:cost of credit expressed monthly in dollars and cents • The way finance charges are computed is an important factor in determining the cost of credit
Four methods to determine how much people will pay for credit • 1. previous balance • 2. average daily balance • 3. adjusted balance • 4. past due balance http://www.youtube.com/watch?v=FunpS4QXcRI&feature=related
Annual Percentage rate (APR) • Annual percentage rate (APR): cost of credit expressed as a yearly percentage • Knowing which creditor is charging the most for credit would be very difficult without knowing the APR • The APR allows consumers to compare costs regardless of the dollar amount of those costs or the length of the credit agreement.
How is a debit card different from a credit card? • A debit card removes money electronically from your bank account.
Chapter 4 Section 3 Applying for Credit • Reading objectives • 1. What four factors determine a person’s credit rating. • 2. What are your responsibilities as a borrower? • http://www.youtube.com/watch?v=FunpS4QXcRI&feature=related
Terms to Know • Credit bureau • Credit check • Credit rating • Collateral • Secured loan • Unsecured loan
What factors go into a persons creditworthiness? • Your income • Any current debts • Details about your personal life • How well you have repaid debts in the past • This is called a credit check and it is done by a agency that is hired out called a credit bureau • http://www.youtube.com/watch?v=XwfTinIGKYQ&feature=channel
If I want to buy a car, house, boat, or rent an apartment should I worry about my credit rating? • Yes, this a rating of the risk-good, average, or poor involved in lending funds to a specific person or business. • If you have a history of not paying bills or paying them on time this will reflect a poor credit history. • The creditor reviewing the credit check will be less willing to lend you money if you have a poor history.
What are the three factors that a credit check reveals? • 1. Capacity to pay • 2. Your character • 3. Any collateral you may have • http://www.youtube.com/watch?v=dZ-USrClgNU&feature=related
Character • Character refers to a persons reputation as a reliable and trustworthy person. • A creditor may look at things like…. • 1. your educational background • 2. Whether you had any problems with the law • 3. Other factors that have to do with the strength of your character.
Will it be hard for me to get an apartment if I don’t have a savings account? • Yes, creditors look to see what type of collateral you have. • Collateral: something of value that a borrower lets the lender claim if a loan is not repaid.
What is a Secured Loan? • Secured loan: loan that is backed up by collateral • Items of collateral may be houses, cars, boats, or something else of value that you own.
What is an unsecured loan? • Unsecured loan: loan guaranteed only by a promise to repay it • When dealing with a trusted customer, financial institutions will sometimes lend funds on a persons reputation alone.
“I’m only 20 yrs old, How can I get a car with no real collateral of my own?” • A bank will sometimes lend funds to a person without a financial reputation if he or she has a cosigner. • A cosigner is a person who signs a loan contract along with the borrower and promises to repay the loan if the borrower does not.
What are my responsibilities as a borrower? • Pay off the money owed. This prevents you from damaging your credit. • Keep a complete record of all the charges that you have made. • Notify the credit card company if you loose your card. • Seek help from a financial adviser if needed.