Transcript Going Into Debt $$$

Going Into Debt
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Americans & Credit
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Credit allows people to own homes,
improve their communities and purchase
other items instead of waiting.
Homeownership is the key to the U.S.
economy.
Easy credit creates a temptation to live at
a higher level than one can afford.
Americans & Credit
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Economy depends on individuals and
groups being able to borrow funds.
Governments borrow funds.
Credit – receipt of money either directly or
indirectly to buy goods and services in the
present with the promise to pay for them
in the future
Consumer Debt – Figure 4.1 on page 84
Americans & Credit
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Debt = Principal + Interest
Principal – amount of money originally
borrowed in a loan
Interest – amount of money the borrower
must pay for the use of someone else’s
money
Americans & Credit
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Installment Debt – type of loan repaid
with equal payments, or installments, over
a specific period of time
Durable Goods – manufactured items that
have a life span longer than 3 years (cars
& appliances)
Longer repayment period means smaller
payments but more interest being paid
(Figure 4.2, page 85).
Americans and Credit
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Mortgage – debt owed on real property
(houses, buildings and land)
People use credit to obtain and benefit
from goods now instead of in the future.
People buy now and pay it off during the
lifetime of the item.
Decision to use credit depends if the
satisfaction gained is greater than the
interest payments
Sources of Loans & Credit
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Types of Financial Institutions
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Commercial Banks – bank whose main
functions are to accept deposits, lend money,
and transfer funds among banks, individuals
and businesses
Savings & Loan Associations (S&L) –
depository institution that accepts deposits
and lends money with typically a lower
interest rate than commercial banks
Sources of Loans & Credit
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Types of Financial Institutions
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Savings Banks – depository institution originally set
up to serve small savers overlooked by commercial
banks (TV commercial)
Credit Unions – depository institution owned and
operated by its members to provide savings accounts
& low-interest loans only to its members
Finance Company – company that takes over
contracts for installment debts from stores and adds a
fee for collecting the debt;
Sources of Loans & Credit
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Charge Accounts – credit extended to a
consumer allowing the consumer to buy
goods or services from a particular
company and to pay for them later
Credit Card – credit device that allows a
person to make purchases at many kinds
of stores, restaurants, and other
businesses without paying cash (Visa,
MasterCard, Discover & American Express)
Sources of Loans & Credit
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Finance Charge – cost of credit expressed
monthly in dollars and cents
Annual Percentage Rate (APR) – cost of
credit expressed as a yearly percentage
(Figure 4.9 on page 93)
Debit Cards – enable customers to transfer
funds directly from their bank accounts to
a store
Applying for Credit
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Jason Britton - $21,000- 16 Credit Cards
Creditworthiness – Are you able to loan money?
How much? At what cost?
Credit Application
Credit Bureau – private business that
investigates a person to determine the risk
involved in lending money to that person
Credit Check – investigation of a person’s
income, current debts, personal life, and past
history of borrowing and repaying debts
Applying for Credit
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Credit Rating – rating of the risk involved in lending
money to a specific person or business
Credit Score – numerical value placed on a person’s
creditworthiness – 850 is the highest score
Capacity to Pay – looks at income, debt & employment
Character – person’s reputation as a reliable and
trustworthy person (education & legal issues)
Collateral – something of value that a borrower lets the
lender claim if a loan is not repaid
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Secured Loan – loan that is backed up by collateral
Unsecured Loan – loan guaranteed only by a promise to repay it
Applying for Credit
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Responsibilities as a Borrower
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Pay off your debts
Collection agency
Costs to other borrowers if you do not repay
Receiving a bad credit history limits your
ability to borrow in the future
Keep track of charges and report any
problems or missing credit cards
Muhammad Yunus – Page 99
Government Regulation of Credit
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Truth in Lending Act – must give APR, how
fees are calculated, 3 day cooling off
period, and limits losses for stolen credit
cards
Equal Credit Opportunity Act – prohibits
discrimination based on sex, race, religion,
marital status, age or receipt of public
assistance
Government Regulation of Credit
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Fair Credit Billing Act – sets up a
procedure to correct mistakes on credit
accounts
Fair Debt Collection Practices Act –
prevents abuse by debt collectors
Usury Law – law restricting the amount of
interest that can be charged for credit
Government Regulation of Credit
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Personal Bankruptcy
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Bankruptcy – the inability to pay debts based
on the income received
Buying on credit is a serious consumer activity
During bankruptcy creditors must give up
much of what they own and are still
responsible to pay certain debts (taxes).
Personal bankruptcy remains on your record
for 10 years and makes it difficult to borrow in
the future