© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Presentation transcript:

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Using Credit #6

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Goals Describe the reasons for using consumer credit and identify its benefits and problems. Develop a plan to establish a strong credit history.Distinguish among the different forms of open account credit.Apply for, obtain, and manage open forms of credit. Choose the right credit cards and recognize their advantages and disadvantages. Avoid credit problems, protect yourself against credit card fraud, and understand the personal bankruptcy process.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Basic Concepts of Credit Why we use credit Avoid paying cash for large outlaysMeet a financial emergencyConvenienceInvestment purposes

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Improper Uses of Credit Meet basic living expensesMake impulse purchasesPurchase non-durable goods

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Rule of Thumb! Product should outlive the payment schedule Watch your increasing use of credit!

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Minimum Payments Mean Maximum Years Calculations here are based on a minimum 3 percent payment and 15.0 percent annual interest rate.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Establishing Credit Build a good credit history by not getting overextended fulfilling all credit terms paying on time notifying creditors if unable to pay being truthful Open checking and savings accounts Get one card and make small purchases

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. How Much Credit Can You Stand? Monthly consumer credit payments (excluding mortgage) should not exceed 20% of monthly net income. Debt Safety Ratio = Monthly consumer credit payments Monthly take-home pay

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Credit Guidelines Based on Ability to Repay

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Credit Cards and Other Open Account Credit Credit extended to consumer prior to a purchase Consumer can buy up to a specified credit limit Offered by retailers and financial institutions Monthly credit statements Pay balance in full to avoid interest

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Bank Credit Cards Most popular open account credit Line of credit depends on applicant’s financial status and ability to pay Cash advances and balance transfers Interest rates and fees

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Other Fees High interestPrime rate + a percentageAnnual feesTransaction feesLate-payment feesOver-the-limit feesBalance transfer feesForeign transaction fees

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Special Types of Bank Credit Cards Reward cardsFrequent flyer programsAuto rebate programsOther merchandise rebatesAffinity cardsSecured (collateralized) credit cardsStudent credit cards

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Retail Charge Cards Second largest categoryDepartment storesOil companiesBuild loyaltyPreset credit limits

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Debit Cards Looks like a credit card but works like writing a check by accessing checking account No line of credit Greater liability exposure if fraudulently used Prepaid card is a debit card with a fixed amount available — it does not access checking account

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Revolving Credit Lines Open account credit offered by banks or other financial institutions Usually offer higher credit lines and lower interest rates than credit cards Access money by writing checks

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Forms Of Revolving Credit Overdraft protection linesUnsecured personal credit linesAvailable on as-needed basisHome equity credit linesSecured by equity in owner’s home Interest tax deductible (if deductions are itemized)

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Obtaining and Managing Open Forms of Credit Steps in opening an account: 1. Credit card application2. Credit investigation3. Credit bureau

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Computing Finance Charges Truth in Lending Act: Lenders must disclose Annual percentage rate (APR) –true rate of interest over life of loan –includes all fees and costs Method used in computing finance charges

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Computing Finance Charges Average Daily Balance (ADB) – method of computing finance charges by applying interest charges to the average daily balance ADB excluding new purchases - most consumer friendly ADB including new purchases - most frequently used, no grace period on new purchases balance is carried

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Average Daily Balance

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Managing Your Credit Cards Review statements monthly to verify entries Pay by due date –minimum monthly payment –entire amount to avoid finance charges

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Shop Around for the Best Deal Annual fees Rate of interest charged on balance Length of grace periodMethod of calculating balances

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 6.6 Low-Cost Credit Cards

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Avoiding Credit Problems Use discipline when purchasing Reduce number of cards Be selective in accepting preapproved credit Limit new charges Pay more than the minimum Pay off cards with highest finance charges first Transfer balances to card with lowest rate

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Credit Card Fraud Don’t give account number to organizations who call you Use secure internet sites Never put credit card info on checks Destroy old cards and shred old statementsReport lost or stolen cards immediately

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Bankruptcy – Paying the Price for Credit Abuse File Bankruptcy Chapter 13 - wage earner plan -- debt restructuring Chapter 7 - straight bankruptcy -- wipe the slate clean In 2010 over 1.5 million people filed for personal bankruptcy Use credit counselors!