Chapter 7 Buying Decisions

Financial Literacy Chapter 7 Goals: Discuss results of being financially responsible vs. financially irresponsible Design a buying plan using some of your personal spending goals Compare the sources of credit and explain the benefits as well as drawbacks of using credit Explain credit card rates and practices and how they can affect consumers Discuss how we as consumers can make wise credit choices Slide 2

How Can You Be Financially Responsible? Use systematic decision making: consider all the pros and cons of a choice along with the costs. Be financially responsible: plan your earning, spending, and saving to meet your financial goals. A financially responsible person is able to: Live a comfortable lifestyle Provide for their own needs and wants Enjoy vacations and leisure time Save money for their future and emergencies 7-1 Designing a Buying Plan Slide 3

Financial Irresponsibility Symptoms Financial Irresponsibility is failing to live up to your financial obligations to meet your goals and needs Symptoms of a financially irresponsible person: Bills and borrowed money are not paid in a timely manner There is inadequate provision to live a comfortable lifestyle (food, clothing, shelter) Money is spent on luxury items while basic needs are not being met A month’s paychecks do not last the entire month Stress and pressure can lead to poor family relationships Unhealthy lifestyle and lack of recreation and fun Slide 4

What Is a Buying Plan? A buying plan is an organized method for making good buying decisions. Step 1: Define your spending goal. Step 2: Choose the item to buy -Comparison shop Step 3: Define criteria (features, functions, and quality of item you want to purchase). Step 4: Set a timeline. Step 5: Set a spending limit. See Buying Plan on page 222 7-1 Designing a Buying Plan Slide 5

Buying Plan for a Washer and Dryer Spending Goal Item Criteria Timeline Spending Limit To wash clothes at home rather than at a Laundromat (saving time and money) Washer and dryer (new or used) Washer should be heavy-duty, have cycles for different kinds of clothes, and have a bleach dispenser. Dryer should be electric (not gas) and have several heat settings. 1 year or sooner $750 7-1 Designing a Buying Plan Slide 6

Where Can Consumers Get Credit? Credit is the ability to borrow money and pay it back later. Service credit - receive services now and pay later. Ex: electricity, doctors Credit cards - charge to account up to a maximum. High interest charged on outstanding balance. Fees… Store accounts - charge account only for that store. High interest rate. Lessens your comparison shopping... Charge cards - must pay balance in full each month. Ex: American Express and Diners Club. Annual fee… Consumer loans – direct loan of cash made to a consumer at a fixed interest rate for a set time. EX: Car, home repairs Lines of credit- preapproved loan amount to borrow against only when needed. No interest charged until you use it. Slide 7

Installment Payment Plan Installment credit is used to finance a high-priced item with a series of equal payments made over a set period of time. Amount borrowed $1,200.00 Annual rate of interest 16% Number of monthly payments 36 Amount of monthly payment (including both principal and interest) $42.19 Total amount to be repaid (36 payments of $42.19) $1,518.84 Total interest paid for the loan $318.84 Installment Plan for a Refrigerator 7-2 Getting Started with Credit Slide 8

What Are the Benefits of Credit? Convenience and rewards Pay one bill each month Get points or bonuses Increased spending power – use for necessity like washer/dryer when needed and pay off over time Records and protection – monthly statement shows record of spending, spending, proof to resolve disputes 7-2 Getting Started with Credit Slide 9

Focus On . . .What’s in a Credit Report? See page 231 A credit report is a statement of your credit history: your borrowing and repayment performance. It helps creditors determine your ability to pay new debt. It is issued by a credit bureau. It can affect your financial future. You have a right to see your report. 7-2 Getting Started with Credit Slide 10

Success Skills – Read page 233 Managing Your Credit Score Your credit score (FICO) is compiled on a point system. It is calculated based on five categories: payment history, amounts owed, length of credit history, new credit, and types of credit. An excellent score is in the 700-850 range. You can improve your score. Examples: pay debts promptly, pay more than the minimum, reduce amount owed 7-2 Getting Started with Credit Slide 11

How Is Interest Computed on Credit? Finance charges are interest and fees you pay on the credit card balance. A fixed interest rate is set. A variable interest rate can change. Interest can be computed using: adjusted balance method, see page 238 previous balance method, see page 239 or average daily balance method, see page 239 7-3 Computing the Costs of Credit Slide 12

Credit Card Statement (partial) 7-3 Computing the Costs of Credit Slide 13

What Are Common Credit Policies? Minimum payment Penalties and fees Over-the-limit fee Late payment fee + interest Cancellation fee Interest rate increases Lowered credit limit 7-3 Computing the Costs of Credit Slide 14

How Can You Make Wise Credit Choices? Be cautious about special offers Low introductory rates and balance transfers. Be wary of easy access credit. It is quick and easy but has high or hidden fees. Be careful when applying for credit online. Avoid credit offers that come in e-mails or pop-up ads; use a secure site. Examine your credit card statement. Make sure charges, credits, and fees are correct. Ask for grace on fees if warranted…usually will do a one time waiver of late fee Slide 15

Disadvantages of Credit Good Credit Practices View your account online to keep track of balances and debt Advantages of Credit Disadvantages of Credit Used wisely, credit costs can be kept to a minimum Pay full amount due each month and avoid interest charges Be aware of your billing cycle and plan purchases accordingly. (ex: Waiting a week to make a purchase until next month’s cycle may help your monthly budget) Unwise use of credit leads to overspending Late payments cost fees and your interest rate will increase Misuse causes credit rating to suffer Slide 16

Building Communications Skills – see page 225 Informal Speaking Express your ideas clearly. Speak clearly. Use standard English. Use proper grammar. Use an appropriate tone. Speak at an appropriate volume. Listen to others and let them respond. Slide 17