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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