Upload
nathaniel-tenney
View
224
Download
0
Tags:
Embed Size (px)
Citation preview
8.01
Evaluate various sources of credit available to the government,
business, and consumers.
T008.01.01
G3
Who uses Credit?
• Consumer Credit
– Credit used by people for personal reasons.
• Commercial Credit
– Credit used by businesses.
T008.01.02
G4
Types of CreditCharge Accounts – most common type of short- term or medium-term
credit.
– Regular Charge Accounts• Require that you pay for purchases in full within a certain period
of time.
– Revolving Charge Accounts• Allows you to borrow or charge up to a certain amount of money
(credit limit) and pay back a part or the entire balance each month.
– Budget Charge Accounts• Allows you to pay for costly items in equal payments spread out
over a period of time.
T008.01.03
G5
Credit CardsSingle-Purpose
• Can only be used to buy goods or services at the business that issued the card.
• Examples: JC Penney, Sears
Multipurpose• Similar to a revolving charge account.• May be used at several locations.• Examples: Visa and Master Card
Travel and Entertainment• Similar to regular charge accounts.• Must be paid in full each month.• Example: American Express
T008.01.04
G6
Banks and Other Financial Institutions
• Single Payment Loan– Debtor pays off loan in one payment.– Promissory Note
• Written promise to repay with interest.
• Installment Loan– Repaid in regular payments.
T008.01.05
G7
Installment LoansTypes:
– Student, mortgage, automobile, etc.
• Secured vs. Unsecured– Secured loans are backed by collateral (help guarantee the repayment of a
loan).
• Closed vs. Open Ended – Closed-end credit is used for a specific purpose and involves a definite
amount of money.– Open-end credit gives you a certain limit on the amount of money you can
borrow.
• Cosigner – Responsible for the repayment of a loan if the original party does not pay.
T008.01.06
G8
Seller-Provided Credit
• Many stores provide credit to customers.
T008.01.07
G9
Consumer Finance Companies
• Specialize in loans to people with poor credit ratings.
• The cost of credit is higher than other institutions.
T008.01.08
G10
Payroll Advance Services
• Short-term loans.
• Pawnshop – Based on the value of something you own.
• “Borrow Until Payday” Loan– Cost is extremely high.
T008.01.09
G11
BondsBonds – written promise to repay a loan with interest
on a specific date. The buyer of the bond is considered the creditor.
• Corporate Bonds– Usually used to finance buildings and equipment.
• Municipal Bonds– State and local governments use these to finance projects.
• Savings Bonds– Sold by federal government.
T008.10.10
G12
Other Sources of Credit for Businesses
• Small Business Administration – Offers a number of financial, technical, and
management programs to help businesses.
T008.01.11
G13
Other Sources of Credit for Consumers
• Life Insurance Plans– Cash Value Insurance
• Provides both savings and death benefits.
• Retirement Plans
T008.01.12
G14
8.02
Explain when and why borrowing is used for the purchase of goods and
services.G23
T008-02.01
Terms• Credit
– Privilege of using someone else’s money for a period of time.
• Creditor– One who sells on credit or makes a loan.
• Debtor– Anyone who buys on credit or receives a loan.– Obligated to pay back the loan.
G24
T008-02.02
Why Use Credit?
• Convenience– Shop without carrying cash.
• Immediate Possession– Allows you to have possession on the goods or
services now.
• Emergencies– Helps in case of a serious situation.
G25
T008-02.03
8.03
Determine the advantages and disadvantages of using credit.
T008-03.01
G32
Advantages• Immediate Possession• Convenience
– Buy now and pay later.
• Emergencies• Saving Money
– Buy an item while it is on sale.
• Credit Rating– Establish a favorable credit rating.
• Growth of the Economy– Buying goods will help the economy expand.
T008-03.02
G33
Disadvantages• Overbuying
– Most common hazard.
• Careless Buying– Comparison shopping may not be a priority– Encourages impulse buying
• Higher Prices– Some stores offer discounts for cash sales.
T008-03.03
G34
Disadvantages continued
• Overuse of Credit– Too much is owed – unable to pay back.
• Credit Fees– Interest paid on balance
• Habit Forming
T008-03.04
G35
Results of Overuse
• Garnishment of Wages– Money deducted from wages for money owed.
• Repossession– Loss of property because of failure to repay
loan.
• Bankruptcy
T008-83.05
G36
8.04
Discuss the factors on which credit is granted and the cost of credit.
G42
T008-04.01
Process of Obtaining Credit
1. Credit Application
2. Documentation
3. Processing
4. Underwriting
5. Closing
6. Funding
G43
T008-04.02
Credit Application
• Form on which you provide information needed by a lender to make a decision about granting credit or approving a loan.
• Provide the following information:– Salary, Employer, Outstanding Credit (Debt),
Assets, Credit References, Checking and Savings Accounts, Stock Portfolio, etc.
G44
T008-04.03
Documentation
• Creditor will collect and verify necessary documentation for the extension of credit.– Examples: Bank statements, credit card
statements, past W-2’s, etc.
G45
T008-04.04
Processing
• Building of loan file.
• Evaluating credit worthiness.
G46
T008-04.05
Credit Worthiness Terms (Processing)The C’s of Credit Worthiness• Capacity
– Your ability to pay (income)
• Character– Earned by paying bills on time and being a trustworthy,
reliable, stable person.– References – people you have borrowed from in the past.
• Collateral – Security to help guarantee that the creditor will be repaid.
G47
T008-04.06
Credit Worthiness Terms (Processing)
continued• Credit History– Indicates the amount of debt you have and your payment
history.
• Capital – How much you have beyond what you owe.
• Credit Limit– Maximum amount you can borrow.
• Cosigner– Responsible for a loan if you, the original debtor, do not
pay.
G48
T008-04.07
Underwriting
• Reviewing loan for soundness.
• Consumer Reporting Agencies– Company that compiles and keeps records on
consumer payment habits.– Used to evaluate creditworthiness.
• Examples: Equifax, Experian, and TransUnion.
G49
T008-04.08
Closing
• Representative explains terms of credit.
• Debtor signs appropriate forms.
G50
T008-04.09
Funding
• Creditor will issue credit/funds to the debtor.
G51
T008-04.10
Denial of Credit
• Fair Credit Opportunity Act requires that credit denial cannot be based on sex, family, religion, etc.
• Must be based on ability to pay back loan.
G52
T008-04.11
Cost of Credit• Interest Rates
– Percentage that is applied to debt.
• Principal– Amount of money borrowed.
• Time Factor– Length of time for which interest will be charged.
• Maturity Date– Date on which a loan must be repaid.
G53
T008-04.12
• Finance Charge or Fees– Cost of credit stated in a dollar figure
• Annual Percentage Rate (APR)– Indicates how much credit costs on a yearly basis.
• Grace Period– Time period during which no finance charges will
be added to an account.
• Cash Advance– Borrow money on a credit card.
Cost of Credit continued
G54
T008-04.13
Simple Interest Formula
I=PRT
I=Interest
P=Principal
R=Rate
T=Time
T008-04.14
G55
8.05
Examine bankruptcy and credit laws.
G70
T008-05.01
Your Credit• Credit Bureau
– An agency that collects information on how promptly people and businesses pay their bills.
– Information retrieved from banks, finance companies, stores, credit card companies, and other lenders.
• Building Credit– Open a checking or savings account– Apply for a local department store credit card.– Take out a small loan from your bank. – Pay all loans and credit card bills on time.
G71
T008-05.02
Handling Credit Problems
• Credit Counselor– Helps consumers with credit problems.
• Consolidation Loan– Combines all your debts in order to make one monthly
payment on several different loans or credit cards.
G72
T008-05.03
Handling Credit Problems continued
• Credit Services– Consumer Credit Counseling Service
• Nonprofit organization that provides debt counseling services for families and individuals with serious financial problems.
– Debt Repayment Plan• Reorganizes debt and sometimes includes
renegotiating terms of debt.• Creditors will often accept such arrangements for
partial payment, rather than not be repaid.
G73
T008-05.04
What if you are denied credit?
• The Equal Credit Opportunity Act says:– You have the right to know the reasons.
– You are entitled to know what specific information in the credit report led to your denial.
– No fee will be charged if you state why you are requesting a copy of the report.
– You are entitled to ask the credit bureau to investigate any inaccurate or incomplete information and correct your records.
G74
T008-05.05
Truth-in-Lending Laws
• Requires that you be told the cost of a credit purchase in writing before you sign a credit agreement.
• Protects consumers against unauthorized use of credit cards.– Limits your liability to $50 for unauthorized
credit card purchases made prior to notification of the issuer.
G75
T008-05.06
Usury Laws
• Restricts the amount of interest that can be charged.
G76
T008-05.07
Equal Credit Opportunity Act
• The credit application can be judged only on the basis of financial responsibility.
• Cannot discriminate based on gender, age, ethnicity, or religion.
• Allows only three reasons for denying credit:– Low income
– Large current debts
– Poor record of making payments in the past
G77
T008-05.08
Fair Credit Billing Act• Requires creditors to correct billing
mistakes brought to their attention.
• Requires creditor to inform consumers of steps they need to take to get the error corrected.
G78
T008-05.09
Fair Credit Reporting Act
• Gives consumers the right to know what specific information credit bureaus are providing to potential creditors, employers, and insurers.
G79
T008-05.10
Fair Debt Collection Practices Act
• Protects consumers from collection agents.
• Collection agents:– Must identify themselves.– Cannot tell others about the debt.– Cannot harass debtor.
G80
T008-05.11
Federal Trade Commission(FTC)
• Enforces laws on credit.
G81
T008-05.12
Bankruptcy
Legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts.
G82
T008-05.13
US Bankruptcy Act of 1978• Chapter 7 (Liquidation)
– Draw up a petition listing assets and liabilities.
– Most of the debtor’s assets are sold to pay off creditors.
– Cannot release debt on alimony, child support, taxes, fines, educational loans, and court fees.
• Chapter 11 – (Reorganization) Businesses Only
• Chapter 13– Propose a plan for using future earnings and assets to
eliminate debts over a period of time.
G83
T008-05.14
Effects of Bankruptcy
• Kept on file with credit bureau for 10 years.
• Affects credit rating, future extensions of credit, loss of jobs, etc.
T008-05.15
G84