Credit and Debt

Personal Finance

What is Money?

•Medium of Exchange• Used to determine value during the exchange

•Unit of Account• Ability to compare value of g/s

•Store of Value• Holds value if saved and not spent

What Backs our Money?

•Commodity• Objects that have value in and of themselves

•Representative• Holder can exchange them for something of value

• Fiat• An order or decree• Has value because the government stands behind it• FED keeps track of the money and growth of the economy

Modern Banking

•Federal Reserve System•Not enough gold•Central bank to lend $ to member banks•Established a board of governors•Control $ supply

Changes to Banking

•Great Depression•High-risk loans•Bank runs, failure•Glass-Stiegle Act

•FDIC•Bank holiday• Insure deposits•Fiat money

New Problems

•Deregulation•Relaxation of government restrictions• Credit Cards –

1962• Repeal Glass-

Stiegle - 1991

•S & L Crisis (1980s)•New competition•High interest rates•Bad loans, fraud

Issues of Today

•Credit Crisis (2000s)•Credit default swaps•Cheap money•Stated Income•Community Reinvestment Act•ARM loans

•FED policy of quantitative easing

HISTORY OF CREDIT

• Credit has been around since people first started making transactions with each other• It used to be … thought of as evil •Only for business and government, not individual people

• It was … made available to a few •Only for people you knew well and could trust

• It is now … acceptable and expected• For everyone, all the time, and everywhere

CREDIT SCORES

•Available through services•Free once per year•Assess applicants credit risk•Equifax, Experian, TransUnion•“I Love Debt Score”

MORTGAGES

• Secured loan for the purchase of real property• Fixed = interest stays the same throughout life of loan• Longer term costs more• Plan for budget

•Adjustable = interest rate varies with the market•Usually starts off lower •May be capped• Refinance

CAR PAYMENTS

• Lease• New cars, maintenance free, short run savings• Limits on mileage, no ownership, expensive in long run, insurance

• Buy New• New cars, ownership• Depreciation, eventual maintenance, possible high interest rate,

insurance

• Buy Used• Least expensive, ownership, insurance savings• Not new, maintenance costs

CONSUMER PROTECTION

• SEC = federal agency responsible for regulating the securities industry and for enforcing federal securities law• FTC = promotion of consumer protection and the

elimination and prevention of anticompetitive business practices• BBB = nonprofit, independent, local organizations focused

on advancing marketplace trust• OCC = represents households in proceedings before state

and federal regulators and in the courts; also educates consumers about electric, natural gas, telephone and water issues.