1. Chapter 7 Buying Decisions
Copyright 2007 Thomson South-Western

2. Buying Decisions
Impulse Buying: when you do not think about a purchase ahead of time.
Often leaves the buyer feeling dissatisfied and wishing they had chosen more wisely.
Some say that any purchase over $50 should be considered carefully.
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3. Buying Plan
A buying plan is a method for making good buying decisions.
Helps you stretch your limited resources
Helps prevent buyer’s remorse which is regret over a buying decision that was made.
A detailed extension of your budget
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4. Steps in Creating a Buying Plan
Evaluate needs and wants. Items you purchase should be selected to meet your needs and wants. This helps make good buying decisions.
Consider opportunity costs—what you have to give up in order to buy the items.
Criteria: standards or rules by which something can be judged. This would include the features, functions, and quality of the item
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5. Evaluate Needs and Wants
Set a Timeline: how soon you wish to make the purchase
Set a Spending Limit: maximum amount you are willing to pay for an item. This prevents being tempted to spend more than you planned.
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6. Gather Information
Find out what products/services are available, including their features and prices.
Comparison shopping: know all options available.
Check for a rebate which is a refund of part or all of the purchase price.
The Internet is a good place to do product research. The lowest price is not always the best price.
Add taxes, handling charges and shipping fees when looking at total cost.
Select the purchase method.
Knowing in advance how you will pay for a product or service puts you in a better position to bargain.
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7. Make the Purchase Choose the product or service
Be sure the item is in good condition
Verify the package/box is sealed
Know about the warranties and return policies
Sometimes delivery or setup is extra
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8. Evaluate the Purchase
Ask yourself how satisfied you are with the purchase.
Why?
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9. Check In 1 What are the advantages of using a buying plan?
What are the steps of a buying plan?
Why does comparison shopping lead to better buying decisions?
Why is the internet a good place to research products?
What can you do after a purchase to help ensure you make good choices in the future?
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10. Sources of Credit
Credit is the ability to borrow money with the agreement to pay it back later. The purpose of credit is to allow buyers to purchase items at the present time and pay for them in the future.
The person who borrows money is the debtor.
The lender is known as the creditor.
Always give honest and complete answers on credit application. Be sure you understand and agree to the terms of the credit agreement before you sign and submit.
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11. Service Credit
The ability to receive services and pay for them later is known as service credit.
Examples include utilities such as electricity, water, and sewer and doctors and dentists.
Some service creditors require a deposit until they are familiar with your credit history.
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12. Bank Credit Cards
Banks credit cards are issued by banks through providers such as MasterCard and Visa with which you can purchase products and get cash throughout the world.
It is revolving credit, which allows you (the account holder) to use it as often as you like up to a dollar limit.
Either the entire debt or part of the debt can be paid each month.
The account can have an ongoing balance, but a minimum monthly payment is due.
Interest is charged on the outstanding balance.
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13. Bank Credit Cards Interest on credit card balances can be quite high!
Credit cards can have an annual fee!
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14. Store Accounts
Credit accounts issued by specific department stores, gas companies, or other retail merchants.
Allow you to charge item or services only at their store.
May discourage comparison shopping because people tend to buy where they have accounts
May be revolving credit or installment credit:
Installment credit - payments are made and balance is paid off in a set period of time. (Example: Buying a refrigerator and agreeing to pay 18% interest on a 3-year plan.
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15. Charge Cards
Charge cards are a form of credit card because you buy now and pay later.
Charge card balances must be paid in full each month.
Because there is no interest or service fee, these cards often require a large annual fee ($50-$100 or more).
Examples include American Express and Diner’s Club.
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16. Loans Banks and other financial institutions loan money to consumers.
An installment loan has regular payments over a set time
Single-payment loans have the entire balance due at the end of the set term.
The lender may require the borrower to offer security, or collateral, for the loan *personal property*
A cosigner is sometimes required. They must repay the loan if the borrower does not.
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17. Lines of Credit
A line of credit is a preapproved amount that a debtor can borrow when needed.
No interest is charged until the credit is used.
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18. Benefits of Credit Convenience and Rewards
Don’t have to carry large amounts of cash
Accounts can be set up to bill credit cards monthly
Cash advances with some credit cards
Points or other bonuses redeemable for merchandise or other goods and services.
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19. Benefits of Credit Increased Spending Power
Without credit, most people would have to wait to buy things that save them time and money, such as a washer and dryer, or car.
Credit allows people to buy expensive items they may not be able to purchase if they had to pay for them at one time. (Example: Buying a home and taking out a loan known as a mortgage.)
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20. Benefits of Credit Records and Protection
Credit card receipts provide records of purchases useful for price adjustments and returns and exchanges.
Credit card purchases can be disputed. For example, an Internet purchase which does not ship in the expected time-frame.
No charges for fraudulent use of the card
Refunds for stolen or damaged goods within 90 days of purchase
Emergency replacement of lost cards (often within 24 hours)
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21. Check In 2 What is the purpose of using credit?
List several sources of credit.
How are store credit accounts different from bank credit card accounts?
Give 2 examples of collateral that might be used to secure a loan
List several benefits of using credit.
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22. Costs of Credit
Credit can also have disadvantages and costs. It can lead to overspending. Late payments affect your credit rating negatively.
If you use credit wisely, you can minimize costs.
If you carry an outstanding balance, you will pay interest.
Finance charges have the effect of increasing the costs of items you purchase with credit.
There are several ways to compute interest.
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23. Fixed vs. Variable Rates
Fixed Rate: the interest rate does not change each month or year.
Even with a fixed rate, the credit card company can raise the interest rate with a 30 day notice.
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24. Fixed vs. Variable Rates
With variable rates of interest, the credit card company can change the rate often.
Rates tend to rise fast when interest rates in general go up.
However, rates go back down slowly.
Choose a card with a fixed rate when two cards have similar interest rate.
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25. Computing Interest Adjusted Balance Method Previous Balance Method
Average Daily Balance Method
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26. Methods of Computing Interest
Adjusted balance method
Slide 26
7-3 Costs of Credit

27. Methods of Computing Interest
Previous balance method
Slide 27
7-3 Costs of Credit

28. Methods of Computing Interest
Average daily balance method
7-3 Costs of Credit
Slide 28

29. Minimum Payments How much you must pay each month on a credit account
Paying only the minimum balance could make the interest charges cost you more than the purchase itself.
Usually 3-5% of the balance owed.
Minimum payments can be raised at any time by the credit card company.
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30. Penalties and Fees
If you make a late payment you will be charged a penalty, or a fee charged for violating the credit agreement.
If you attempt to charge over your credit limit, if approved, you could be charged an over-the-limit fee.
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31. Special Rates
Credit card interest rates are expressed as an annual percentage rate (APR)
Low introductory interest rates often last six months to a year.
These temporary rates are then replaced with variable or fixed rates.
The purpose of these rates is to get you to switch to a new credit card. But beware of the new card changing to a higher rate (eventually) than your previous one.
You can transfer balances from an old card to the new card
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32. Checking Credit Statements
Compare charges with your sales receipts
Verify your payments are shown on the statement
Verify that credits for returns are on the statement
Take note of any penalties or fees you’ve been charged
Verify the interest amount and new balance are correct
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33. Checking Credit Statements
If you find any errors on the statement, contact the company using the method given in the credit agreement.
Usually required to make the complaint in writing.
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34. Check In 3
Explain the difference between fixed interest rates and variable interest rates?
What does it mean to make a “minimum payment”?
Describe fees and penalties charged by credit card companies?
Why do credit card companies offer low introductory annual rates for purchases and account balance transfers?
What items should you verify when you receive a credit card statement?
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