1. Theme 4: Banking and Credit

2. Finance What is finance? What is its purpose?
What are the tools (products) that they create?

3. Short Term
Financial Services for Short-Term Needs (daily purchases, Emergency Funds)

4. Long-Term
Financial Services for Long-term Needs (Major purchases, Long-term financial security)

5. Effects on Currency
Banks and Financial Services create a number of tools (their products) available to the public. But not all for investments/loans:
One of the newest is the ability to pay without having any physical money on hand.
Debit Cards, Direct Deposit, The Square, Bitcoin, Paypal, Credit Cards, Apple Pay, Stored Value Cards

6. Financial Institutions
Commercial Banks:
For-Profit institution owned by private or public investors that provides specific services: checking, savings, and lending
Person (w/money) uses service => Bank (provide services with customers money => Money is transferred to persons (w/out money)
Credit Unions:
Non-Profit financial institution owned by members (traditionally a labor union: teachers, welders,…). Since it is not for profit, the interest rates on loans for its members are lower and, sometimes, the rates on their investments are higher.
Investment companies:
For-profit institutions which combine your investments in bonds and stocks with others, and manage these investments to garner greatest return on investments. (they try to predict the marketplace and when and where to invest)
Others: Savings and Loans and Mutual Savings Banks

7. Failure
How do banks fail?
Run on the bank
If their investments fail

9. Protecting from Failure
FDIC: Federal Deposit Insurance Corporation
Federal government protects deposits up to $100,000 (I think that it is $250,000 right now)
How does this protect from runs on the bank?

10. Tools (Services) Provided
Savings Account: traditionally low interest rate (rate of return), but a safe place to keep money and make withdrawals and deposits. (incentives?)
Certificate of Deposits (CDS): Money is left in a deposit for a stated period of time at a specific rate of return. The money becomes available to you on its maturity date (incentives?). Three criteria to consider:
You will have to leave your money in the CD for a given amount of time.
You will pay a penalty if you take it out early.
You will have to pay a minimum amount.
Beware of rollovers: once your “one-year” CD has matured, the bank will automatically place it in a new “one-year” CD if you don’t claim it.

11. Continued…
Money Market Account: savings account that requires a minimum balance and earns interest that varies from month to month
U.S. Savings Bonds: Lend the federal government money which they will pay back with interest at a later date.

12. Continued…
IRA:
Roth IRA:

13. Evaluating Investment Options
1) Rate of return
2) Does the investment have compounding interest?
3) Fees on deposits (service charges)
4) Inflation
5) Tax considerations (is it taxed or not, and at what rate)
6) Liquidity (access and change in value)
7) Restrictions (delays and regulations)

14. Checking Accounts (Service, Not Investment)
Usually require no minimum balance, but also usually give no interest (why?)
Beware: Overdraft Fees- Overdraft protection is an automatic loan given to your account if the balance does not cover expenditure.
Best to waive overdraft protection
Checking is important for liquidity: a measure of how quickly you can convert resources into cash without a loss in value.
Writing a check?

15. Check
You owe restaurant Lord of the Fries $ (you really like fries) .

16. Credit
Credit: the use of someone else’s money, borrowed now with the agreement to pay it back later.
The debtor v. creditor
Open-end Credit: enables a borrower to use credit up to a stated limit.
Revolving account: option to pay the balance in full or pay a minimum (the minimum payment required to not endure a late penalty or default). If the balance is not paid, interest is applied to the remaining balance.
Standard Interest on Credit Cards is between 14%-22%.
Standard Minimums are between 1%-3%.
$2200 balance with a minimum of 2% and an interest rate of 17%. If you pay the minimum this month, what will you owe next month BASED on this month alone.

17. Sources of Credit Credit Card companies
Retail stores (Macy’s, Gap, Walmart)
Banks and Credit Unions
Finance Company (high-risk loans at maximum agreed upon rates)
Usury law: a state law that sets a maximum interest rate that may be charged for consumer loans.
Pawnbrokers: high-interest loans based upon valuable possessions as collateral (property pledged to assure payment of a loan).
Pay day loans: small loans at high interest rates
Insurance companies

18. Traps!
Low Introductory Rate: the rate will rise from a low rate (as low as 0%), but make sure to know the final rate.
Adjustable rate: the rate can change with the markets (to be determined by the creditor).
Closed Account Rate: High rate to close an account. (as high as 20%-30%)
Others- Late Fees, Over-the-limit Fees, Transaction Fees

19. Credit Records/Scores
Credit History: the complete record of your borrowing and repayment performance.
Performed by a Credit Bureau: a business that is paid by borrowers to track credit information.
Credit report: a written statement of a consumer’s credit history
Point system: the credit bureau assigns points based off of different criteria (FICO score- 300 is lowest and 850 is highest)
What is the purpose of one’s Credit History?

20. Ways to Build a Credit History (now)
Savings Account
Checking Account
Store Credit Account
Small Loan
Credit Card
Can even get added to a parent’s account. (Piggybacking)

21. Paying Off Debt Credit Card/Account Current Balance Interest Rate
Minimum Payment
Priority
Visa #1
$850
18%
$55 ?
Visa #2
$450
22.9%
$15
Store #1
$300
14.9%
$10
Store #2
$600
11.9%
$25
MasterCard
$500
9.99%
$20
You have $200/month to pay for Credit Cards. What do you have and do? Priorities? Strategies?

22. Considerations Do you go after the lowest payments first?
Do you go after the highest interest rates?
Can you use one credit card to help pay off another? Limits?
Do you calculate only in $ or must you consider psychology?
Consider Visa #2
$450 with APR 22.9%
DPR (Daily Periodic Rate) 22.9/365 = .063%
30 days $450 X X 30 = $8.51
= X …...
Consider Visa #1
$850 with APR 18%
DPR: .049%
30 Days $850 X X 30 = 12.50
$ X