T008.01.

01

8.01
Evaluate various sources of credit
available to the government, business,
and consumers.
G3
 T008.01.02

Who uses Credit?

Consumer Credit
Credit used by people for personal
reasons.
Commercial Credit
Credit used by businesses.

G4
 Types of Credit T008.01.03

Charge 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.
G5
 Credit Cards T008.01.04

Single-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
G6
 T008.01.05
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.

G7
 Installment Loans T008.01.06
Types:
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. G8
 T008.01.07

Seller-Provided Credit
Many stores provide credit to customers.

G9
 T008.01.08

Consumer Finance
Companies
Specialize in loans to people with poor
credit ratings.
The cost of credit is higher than other
institutions.

G10
 T008.01.09

Payroll Advance Services

Short-term loans.
Pawnshop
Based on the value of something you own.
Borrow Until Payday Loan
Cost is extremely high.

G11
 T008.10.10

Bonds
Bonds 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.

G12
 T008.01.11

Other Sources of Credit for

Businesses
Small Business Administration
Offers a number of financial, technical, and
management programs to help businesses.

G13
 T008.01.12

Other Sources of Credit for

Consumers
Life Insurance Plans
Cash Value Insurance
Provides both savings and death benefits.
Retirement Plans

G14
 T008-02.01

8.02
Explain when and why borrowing is
used for the purchase of goods and
services.
G23
 T008-02.02
Terms
Credit
Privilege of using someone elses 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
 T008-02.03
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
 T008-03.01

8.03
Determine the advantages and
disadvantages of using credit.
G32
 T008-03.02
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.
G33
 T008-03.03

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.
G34
 T008-03.04

Disadvantages continued
Overuse of Credit
Too much is owed unable to pay back.
Credit Fees
Interest paid on balance
Habit Forming

G35
 T008-83.05
Results of Overuse
Garnishment of Wages
Money deducted from wages for money owed.
Repossession
Loss of property because of failure to repay
loan.
Bankruptcy

G36
 T008-04.01

8.04
Discuss the factors on which credit is
granted and the cost of credit.
G42
 T008-04.02

Process of Obtaining Credit

1. Credit Application
2. Documentation
3. Processing
4. Underwriting
5. Closing
6. Funding

G43
 T008-04.03

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
 T008-04.04

Documentation
Creditor will collect and verify necessary
documentation for the extension of credit.
Examples: Bank statements, credit card
statements, past W-2s, etc.

G45
 T008-04.05

Processing
Building of loan file.
Evaluating credit worthiness.

G46
 T008-04.06
Credit Worthiness Terms (Processing)
The Cs 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
 T008-04.07
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
 T008-04.08

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
 T008-04.09

Closing
Representative explains terms of credit.
Debtor signs appropriate forms.

G50
 T008-04.10

Funding
Creditor will issue credit/funds to the
debtor.

G51
 T008-04.11

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
 T008-04.12

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
 T008-04.13
Cost of Credit continued
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.
G54
 T008-04.14

Simple Interest Formula

I=PRT
I=Interest
P=Principal
R=Rate
T=Time

G55
 T008-05.01

8.05
Examine bankruptcy and credit laws.

G70
 T008-05.02
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
 T008-05.03

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
 T008-05.04
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
 T008-05.05

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
 T008-05.06

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
 T008-05.07

Usury Laws
Restricts the amount of interest that can be
charged.

G76
 T008-05.08

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
 T008-05.09

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
 T008-05.10

Fair Credit Reporting Act

Gives consumers the right to know what
specific information credit bureaus are
providing to potential creditors, employers,
and insurers.

G79
 T008-05.11
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
 T008-05.12

Federal Trade Commission

(FTC)
Enforces laws on credit.

G81
 T008-05.13

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
 T008-05.14
US Bankruptcy Act of 1978
Chapter 7 (Liquidation)
Draw up a petition listing assets and liabilities.
Most of the debtors 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
 T008-05.15

Effects of Bankruptcy
Kept on file with credit bureau for 10 years.
Affects credit rating, future extensions of
credit, loss of jobs, etc.

G84