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Transcript
CHAPTER 16, CREDIT IN AMERICA CREDIT- Privilege of buying something now, with the agreement to pay for it later, or borrowing money with the promise to pay it back later. The need for credit arose when the country grew from a bartering and trading society to a currency exchange. Americans began to be dependent on one another. Sources of credit was needed to help families meet their financial needs. Consumer credit had begun. Earliest forms of credit was theaccount at the local general store. Banks lent farmers lump sums of money as large as $500 to put in crops at the start of the planting season. Interest rates were very high (25-50%). Credit wasn’t easily accepted by most people, it signified debt and dependence on others. Early 1900’s Lending institutions began to ask for security on loans. Individual purchasing power increased. More people were willing and able to buy more goods and services, the economy grew at a healthy pace. Economy grew until WW I and the country was in debt. After the War, the US entered the 1920’s in a secure position with credit stronger than ever. Next Sixty YearsBetween 1920-1980, buying on credit became the American way of life. In 1929- Stock market crashed. Banks went bankrupt and loans went into default. WW II was costly and the government into debt. Consumer credit continued to grow. Interest rates were low in the 40’s,50’s, and 60’s and inflation rates were under 10 percent. 1970’s brought rapid grown, overuse of credit and high interest rates. People could not afford to buy a new home or car even with the use of credit. Credit Counseling came about. How to use credit wisely, pay bills, and get out of trouble with credit. The 1980’s From 1981-1985 the US experienced a recession that cost many jobs and saw a rapid decline in the use of credit. Financial planner assist consumers who have over-extended themselves to not being able to pay. Financial planners earn fees based on options chosen by the planner. (Commissions or a percentage of the purchase price. Dawson_David Thursday, November 13, 2008 1:48:38 PM ET Credit Today Credit is a major marketing tools across industries in corporate America today. Consumers can choose from a multitude of credit cards. Car manufacturers give credit for new cars. Airlines give bonus air miles when travel is charged. Telephone companies give discounts on calls. 1990’s brought lower interest rates which stimulated growth in the credit industry. Credit is tight in some areas, such as real estate financing and other large loans. Vocabulary of Credit pg. 384. Advantages of Credit Emergency funds. Increased buying power Credit if convenient Sometimes get better service Shopping is safer (not carrying large sums of money) Deferred billing – service available to charge customers whereby services are not billed to the customer until later. Line of Credit- Preestablished amount that can be borrowed on demand. Money is always available. Disadvantages of Credit Credit purchases may cost more than cash purchases. Reduces the amount of comparison shopping Future income is tied up Buying on credit can lead to overspending Kinds of Credit Open-Ended – The lender places a limit on how much a customer can borrow during a given period. Thirty-Day Accounts Promises to pay the full amount in 30 days. American Express and Diner’s Club/ Accepted widely accepted nationwide and have high or no credit limits. Dawson_David Thursday, November 13, 2008 1:48:38 PM ET Revolving Credit Accounts- Option of paying in full or making minimum payment based on the amount of the balance due. Dept stores, gas and oil companies. Visa, MasterCard or Discover use revolving credit. Credit Card Terms - pg. 390 Tips for Using Credit Cards Sign newly issued cards immediately Carry only the cards you need Notify creditors immediately when a card is lost or stolen Destroy or cut old cards expired Don’t give credit card numbers and expiration dates by phone Closed Ended- Installment Credit Loan is repaid in fixed payment that include principal and interest. Down payment is required APR Annual Percentage rate- Collateral is used with Installment Credit. Installment Cash Loans- Promissory note is a written stating the amount of the loan. Service Credit- Service performed and paying later. Telephone and Utility bills. Many doctors, lawyers, dentists, hospitals, dry cleaners. Some creditors do not impose finance charges, but expect regular payments. Layaway Plans Merchandise is held in your name. Most merchants require 25% or more as a down payment, with regular payments. A service fee, ranging for $1 to $5 is charged and a fee will be charged if you change your mind. Sources of Credit Retail Stores- Department stores, drugstores, clothing stores, hardware stores and all types of service businesses. Commercial Banks and Credit Unions Loans require a collateral, capital and credit records. or financial institution. Interest rates vary with location Credit Card Advance- Money borrowed against the credit card limit. Use of access checks against the credit card account. Supplied by the credit card company. Finance Companies- Usually charge high rates of interest for the use of their money. Dawson_David Thursday, November 13, 2008 1:48:38 PM ET Consumer finance company extends mostly consumer loans to customers buying consumer durables. (automobile, refrigerator, or stereo. Sales Finance Company- Loans made through representatives. (GMAC) Loans Sharks- Unlicensed lenders who charge very high and usually illegal interest rates. Unsury laws- set maximum interest rates that may be charged. When laws don’t exist finance companies charge the maximum. Pawnshop- is a legal business where loans are made against the value of a specific personal possessions. Jewelry, radios, guns, cameras. Merchandise is considered collateral. Private lenders- individual’s parents, other relatives, friends and so. Interest may or may not be charged on loans made. Life Insurance policies, Certificate of deposit with a bank or credit union can be borrowed against. Dawson_David Thursday, November 13, 2008 1:48:38 PM ET