Transcript Money, Banks, Credit

* Money
Ch. 20
*
Currency – Paper and coin money
Replaced the barter system in traditional economies
*Functions of money
*Medium of Exchange
*Used to trade/purchase goods/services
*Store of Value
*Ability to store or save
*Medium/Measure of Value
*Can be divisible
*Each one must be equal to the other
*Not easy to counterfeit
*
*Brings savers (sellers) &
borrowers (buyers) together in
the market
*Savers = deposits
*Borrowers = loans
*Banks are a business and have
profit motive
*Make money off of fees and
interest on loans
*Reserve Requirements –
Amount of money banks are
required to keep. Banks want
more deposits so they can loan
more money
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1.
Commercial Banks – full service to individuals
& businesses (Most common)
2.
Credit Unions – non-profit – sponsored by large
businesses, labor unions or government
institutions – offer full services at usually
lower prices
3.
Savings & Loan Associations – traditionally
loaned money to people buying homes &
issued only savings accounts
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*Federal Deposit Insurance Corporation
*Insures deposited money in the bank up to
$250,000
*Most banks are FDIC insured
*
1.
Checking Account
* Allows customers to write checks, use debit
cards or withdraw money from an ATM
(Automated Teller Machine)
* Money transactions are quick and efficient
* Money does not stay in the account for long
* Depositor usually receives no interest
*Transfer of funds electronically
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2.
Savings Account
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Banks pay interest to customers based
on how much money is deposited
*
Money remains untouched for longer
periods of time so money grows larger
the longer it is there.
Sample Bank Book
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3.
Certificate of Deposit (CDs)
*Customers loan a certain amount to the
bank for a certain amount of time
*Ex. I bought a $1,000 CD for 1 year at
4%
*Higher rates of interest than savings
*Customers can’t withdraw their money
without a penalty
* What US event caused the
formation of the FDIC?
1.
2.
3.
9/11
Bombing of Pearl Harbor
The stock market crash and bank runs during
the Great Depression
*
*Agreement for borrowing money with repayment
plus interest
*Used to make expensive purchases
*Banks make money on the interest paid for a loan
and fees
*In order to make loans, banks have to have money
*To have the money, banks must attract deposit
customers
*Can increase the supply of money in the economy
*Principle – amount borrowed
*Interest Rate – rate of cost to borrow
*Interest – cost of borrowing
*
1. Unsecured loans – loan based on reputation. No
collateral used.
2. Secured loans – have collateral to back up the
loan.
Ex. You need something of equal value to cover the
cost of the loan the bank can take if you default on the
loan (don’t pay)
Interest on the loan can be Fixed – interest is set & can’t be changed
Variable – Changes when interest rates change
*How do bank loans increase the supply
of money in the economy?
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*Buy goods & services at individual stores & pay
for them later
*Credit limit:
maximum amount a person can
buy with the promise of payment
1.
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Installment Account
Repaid with equal payments over a certain period of
time
Part of the payment goes towards interest & part
towards the principle
Car loan or mortgage
2. Regular Account
No interest is charged if entire bill is paid on time –
If you do not pay the entire bill on time, then you must pay
interest on the entire loan amount.
Account can’t be used again until the balance is paid
Furniture Stores usually do this. Pay by 2020,
certain amount each month, but with no interest.
*
3. Revolving Account
* Billing cycles where a bill is sent at
the end
* Interest charged on portion not paid
* Account can still be used until credit
limit is reached
* Example: Credit Cards
*
*Make purchases without having the money
*Charge high interest rates
*Lower interest rates if the customer is
reliable (Makes payments on time!!!)
*Finance Charges – Cost of credit (interest)
expressed in dollars
*Annual Percentage Rate – Cost of credit
(interest) expressed as a percentage
*Fill out application
*Credit Bureau does a credit check
*Creditor may ask for references
*Credit checks show your income, debt and
ability to pay past debts
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*Rating of risk:
*
Excellent, Good, Average or
Poor
*Ratings have a number associated with them
*3 Credit Bureaus: Experian, Transunion &
Equifax
*Gives lenders an idea of reliability when
issuing loans
*Higher Credit Score = less interest you are
charged on a loan = saving money
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*Equal Credit Opportunity Act:
a person can’t
be denied credit because of race, religion,
national origin, gender, marital status or age
*Usury Laws:
Restrict the amount of interest
companies, not banks, can charge
*
*Debts are so large they can’t be paid back
*Most of what a debtor owns is sold or
given to creditors
*Takes about10 years to reestablish credit
*States can become bankrupt too
*Types of Income
*Disposable Income – money after taxes
taken out.
*Money to pay for house, car, etc.
*Discretionary Income – money remaining
after paying for necessities
*Either save or spend it
*
*Consumerism – a movement to educate buyers on
purchases and to make sure products are safe
*Congressional laws – Pure Food and Drug Act in 1906
*Private groups – Better Business Bureau (BBB)
*
*Consumer Bill of Rights
*Consumers have…
*Right to a safe product
*Right to be informed
*Right to choose
*Right to be heard
*Right to redress (to remedy or set right a
wrong/grievance)
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*Smart Buying Strategies
*Get info on products
*Watch out for advertising
*Comparison shopping – find out prices on
product from different stores/internet
*Brand Name vs. Generic
*When product fails
*Report it
*Check the warranty
*Keep a copy of the receipt
*Be calm
*Make Fair complaints