Credit in America

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Chapter 16

• Credit in America

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Objectives

• Describe the history of credit in America and
  define credit vocabulary
• List advantages and disadvantages of using credit
  in todays changing economy
• List and describe the kinds of credit available
  to the American consumer
• Describe and compare sources of credit in the
  American economy

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History of Credit

• Over 80 of all purchases made in the United
  States are made through the use of credit, and
  with internet transactions, this number is
  increasing every year
• Credit is the privilege of buying something now,
  with the agreement to pay for it later
• Need for credit arose when the country grew from
  a bartering and trading society to a currency
  exchange economy

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History of Credit

• Earliest form of credit was account at the local
  mercantile or general store
• Usually no interest and account would be paid off
  at harvest or when a paycheck was received
• Banks would loan money to farmers to plant and
  get paid back after harvest
• Interest was high (25-50)

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The Early 1900s

• As people grew accustomed to, and learned about
  interest, rates began to drop
• Use of credit expanded, as did individual buying
  power and as a result, the American economy grew
• New jobs were created through the expansion of
  credit
• Economy grew until WWI
• Once war debt was paid off, the United States
  entered the 1920s with credit stronger than ever

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1920 - 1980

• Buying on credit became the American way of life
• 1929 many Americans lost their savings when stock
  market crashed and credit suffered for the next
  decade
• In the 40s-60s interest rates remained low and
  inflation was slow
• 1970s brought unusually rapid economic growth,
  worldwide dependence on oil, and high inflation
• 1970s brought the first consumer credit
  protection legislation as laws were enacted to
  protect consumers from fraudulent credit
  practices
• A new occupation arose in the 70s, credit
  counseling
• Advise consumers how to use credit, pay bills,
  get out of trouble with credit, avoid damaging
  credit rating when to seek legal advice

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Credit in the 80s

• Early 80s America suffered a recession that cost
  jobs and resulted in a rapid decline in the use
  of credit
• Financial Planning became a new career choice
• Assist people who have become insolvent (unable
  to pay debt)
• Offer banking and investment advice
• Assist in budgeting and planning

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Credit Today

• 1990s brought lower interest rates which
  stimulated continued growth in the credit
  industry
• Car manufacturers give credit towards new car
  purchases
• Airlines give bonus air miles when travel is
  charged on their cards
• Non-banks began to issue credit cards (Visa,
  Mastercard from companies such as gas companies,
  airlines, etc)

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Credit Vocabulary

• Balance Due amount that remains due on a loan
• Billing (Closing) Date last date of the month
  that any purchase made is recorded on the account
• Borrower person who borrows money or uses credit
• Capital property you possess that is worth more
  than your debt
• Collateral personal property pledged to a lender
  to secure a loan

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Credit Vocabulary

• Creditor person or company to whom one owes
  money
• Due Date date on or before which payment is due
• Finance (or Handling) Charge amount a borrower
  must pay for the use of credit, including
  interest or service charges
• Installment Purchase (or Sales) Contract written
  agreement to make regular payments on a specific
  purchase

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Credit Vocabulary

• Prorate to divide proportionally over a period
  of time (interest or handling charge)
• Secured Loan loan wherein the borrower pledges
  property or other assets to secure the creditor
  of repayment
• Service (or Carrying) Charge amount charged to
  borrowers or customers by merchants or banks for
  servicing an account or loan

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Advantages of Credit

• Provides emergency funds
• Sudden needs for money can be solved with a line
  of credit (pre-established amount that can be
  borrowed on demand)
• Makes budgeting easier (itemized and categorized
  statements)
• Increases buying power
• Deferred Billing purchases are not billed to the
  customer until later

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Advantages of Credit

• Convenience (no need to carry cash or write
  checks)
• Credit receipt is usually more descriptive than
  cash receipt
• Makes shopping (traveling) safer and faster
  because it is not necessary to carry large sums
  of cash

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Disadvantages of Credit

• Credit purchases sometimes cost more
• Service/finance charges
• Some merchants offer cash discounts to avoid
  paying for credit card fees
• Reduces comparison shopping
• Consumers will buy what they see right then
• Consumers will shop only at stores where they
  have charge accounts
• Ties up future income
• Can lead to overspending

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Kinds of Credit

• Open-Ended Credit
• Lender places a limit on how much a qualifying
  customer can borrow during a given period
• Credit/Charge card accounts
• Can repay entire amount within a given time
  period to avoid finance charges
• Can be used multiple times until the borrowing
  limit is reached

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Kinds of Credit

• Open-Ended Credit contd
• 30 Day Accounts
• Consumer promises to pay entire balance each
  month
• Examples Diners Club, American Express
• Revolving Credit Accounts
• Consumer has option to pay entire balance each
  month or making minimum payment based on balance
  due
• Examples Visa, Mastercard, Discover
• Accepted by merchants to attract customers who do
  not have accounts at their stores

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Kinds of Credit

• Open-Ended Credit contd
• Credit Card Terms
• Annual Percentage Rate (APR) measure of the cost
  of credit expressed as a yearly rate
• Free Period (Grace Period) allows consumer to
  avoid finance charges by paying balance in full
  before due date shown on statement
• Annual Fees membership fees charged by credit
  card companies
• Transaction Fees and Other Charges Fees charged
  by credit card companies for late payments or
  going over credit limit

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Kinds of Credit

• Open-Ended Credit contd
• Tips for using credit cards
• Sign newly issued cards immediately
• Carry only the cards that you need
• Notify creditors immediately when a card is lost
  or stolen
• Destroy (cut) expired cards
• Dont give card numbers and expiration dates by
  phone to people or businesses you do not know

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Kinds of Credit

• Closed-End (Installment) Credit
• Installment Loan loan is repaid in fixed
  payments that include principal and interest
• Closed-End Credit is for a specified amount
• Installment Purchase Agreements contracts
  defining the repayment of the purchase price plus
  finance charges in equal regular payments
  (installments)
• Generally used for large purchases such as
  automobiles, appliances, furniture, etc
• Items purchased serve as collateral and will be
  reposessed if payments are not made

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Kinds of Credit

• Closed-End Credit contd
• Installment Cash Loans Loans from banks with
  paid back in regular payments that include
  principal and finance charges
• Must sign a promissory note that states the
  amount of loan, APR, terms, and due date
• Main difference between installment purchase
  agreement and installment cash loan is the lender
• Purchase agreements are with a seller for a
  product
• Cash loans are agreements with a financial
  institution for cash used to buy a product

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Kinds of Credit

• Service Credit
• Having a service performed and paying for it
  later
• Examples telephone, utilities, doctors,
  dentists, mechanics, etc
• Some service providers dont charge interest as
  long as regular payments are made until balance
  it paid off
• Some providers require payment in full within a
  certain time period

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Kinds of Credit

• Layaway Plans
• Merchandise is held in consuemrs name while
  regular payments are made. When merchandise is
  paid for it is claimed by consumer.
• Down payment is normally required
• If consumer changes mind or stops making
  payments, money already contributed is sometimes
  forfeited
• Merchant has provided a service (credit and
  storage) and is entitled to payment for that
  service
• Disadvantage is you dont get the merchandise
  until a later date when it is paid for

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Sources of Credit

• Retail Stores
• Dept. stores, drug stores, clothing stores, etc,
  and all types of service businesses
• Take advantage of credit because customers like
  to shop where they have credit established
• Commercial Banks and Credit Unions
• Make loans to individuals and companies based on
  collateral, capital, and credit records
• Extend credit to individuals through the use of
  credit cards

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Sources of Credit

• Finance Companies
• Small loan companies that charge high rates for
  the use of its money
• High rates result from willingness to take risks
  that banks and credit unions will not take
• Consumer Finance Companies
• General-purpose company that extends mostly
  consumer loans to customers
• Sales finance company that makes loans through
  authorized representatives
• Growth of finance companies is a result of effort
  to eliminate loan sharks (unlicensed lenders who
  charge very high and usually illegal interest
  rates)
• Usury laws set maximum interest rates that may be
  charged

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Sources of Credit

• Pawnshops
• Legal businesses where loans are made against the
  value of specific personal possessions
• Loans made are for significantly less than the
  value of the item (25-50)
• Item is held for a period of time (usually two
  weeks to six months) then sold if loan is not
  repaid
• Once loan is repaid, the item may be claimed

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Sources of Credit

• Private Lenders
• Parents, relatives, friends, etc
• Interest may or may not be charged
• Can be a source of conflict when money is not
  repaid
• Other Sources or Consumer Credit
• Life insurance policies that build cash value
• Money can be borrowed against value of policy
• Loan does not have to be repaid, but interest
  will be charged and the value of the policy will
  be lowered

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Good Luck!!