Chapter 25 The Basics of Credit Read to Learn

Chapter 25

The Basics of Credit

Section 25.2

Types of Credit

Read to Learn

Name the places where you can get credit, and list the three different types of credit cards.

The Main Idea

There are many different types of credit plans, including charge accounts, credit cards, single payment loans, installment loans, and mortgage loans. There are also many different sources of credit.

Key Concepts Sources of Credit

Key Terms

charge account

credit provided by a store or company for customers to buy its products

installment loans repaid in regular payments

loans

over a period of time

Key Terms

collateral

something of value a bank can take if a borrower does not make the required loan payments

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Sources of Credit

Various sources of loans provide different types of loans for varying lengths of time.

Short-Term Loan One year or less

Medium-Term Loan One to five years

Long-Term Loan

More than five years

Graphic Organizer

Sources of Credit

Charge Accounts

Credit Cards

Banks and Other

Financial Institutions

SellerProvided

Credit

Consumer Finance

Companies

Other Types of Loans

? SinglePurpose Cards

? Multipurpose Cards

? Travel and Entertainment Cards

? SinglePayment Loan

? Installment Plan

? Mortgage Loan

? Payday Advance Services

? Pawnshops "Borrow-UntilPayday" Loans

Charge Accounts

A customer with a charge account at a store can use his or her credit card to buy now and pay later.

charge account credit provided by a store or company for customers to buy its products

Credit Cards

Credit cards are like charge accounts, but some can be used in many different places.

Some credit cards have annual fees, which can range from $25 to $80.

Credit Cards

Single-purpose cards can be used to buy goods or services only at the business that issued the card.

Credit Cards

Multipurpose cards are also called bank credit cards because banks issue them.

Multipurpose cards can be used at many different businesses.

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Credit Cards

Holders of travel and entertainment cards must pay the full amount due each month and pay an annual fee.

Examples include American Express? and Diners Club?.

Standard Formats

Did you ever wonder why all credit cards are the same size? The International Organization for Standardization developed a standard that defines the format for credit cards. It specifies a a size of 3.370 X 2.125 inches for bank cards.

Banks and Other Financial Institutions

Banks and other financial institutions want to lend money to people with good credit ratings.

Credit unions only lend money to credit union members and employees.

Banks and Other Financial Institutions

A debtor pays back a single-payment loan in one payment, including interest.

Many farmers secure single-payment loans in the spring.

Banks and Other Financial Institutions

Student loans, car loans, and home improvement loans are types of installment plans.

installment plans loans repaid in regular payments over a period of time

Banks and Other Financial Institutions

A mortgage loan is a form of an installment loan, only it is written for a long period, such as 15 to 30 years.

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Banks and Other Financial Institutions

With a mortgage loan, the home serves as collateral.

collateral something of value a bank can take if a borrower does not make the required loan payments

Seller-Provided Credit

Many stores provide credit for their customers.

Clothing, furniture, and appliance stores as well as car dealerships are among those that offer credit to customers.

Consumer Finance Companies

Consumer finance companies specialize in loans to people who might not be able to get credit elsewhere.

These loans are more expensive because the risk for the lender is high.

Other Types of Loans

Payday advance services offer short-term loans until payday.

Payday advance services charge high fees and interest.

Other Types of Loans

A pawnshop loan is based on the value of something you own that is left with a pawnbroker as security against money borrowed.

Items can be bought back later.

Other Types of Loans

"Borrow-until-payday" loans are short-term loans.

The cost of this kind of loan is very high.

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1. Discuss the different sources of credit.

retail stores, financial institutions, and finance companies

2. How is a multipurpose credit card different from a travel and entertainment card?

Multipurpose cards are used at many stores; travel and entertainment cards can be used only for travel and entertainment expenses.

3. Which types of loans usually cost the most?

pawn shops, payday advance loans, and "borrow-until-payday" loans

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