1. Credit and Buying Necessities

2. Credit
Credit: receiving funds, directly or indirectly, to buy goods and services today with the promise of paying for them in the future. (basically – taking goods and services and promising to pay for them later)
Debt (amount owed from credit) = Principal + Interest
Principal: amount originally borrowed
Interest: cost for borrowing money (credit)
Most common type of debt:
Installment debt: loan paid back in equal payments over a specific amount of time
Used for purchasing durable goods: items that have longer life span, usually over three years (cars, appliances)
Longer payback times have lower payments, but more interest
Mortgage: installment debt on houses, buildings, or property

3. Credit Why use Credit? Deciding to Use Credit
To satisfy an immediate feeling of need (avoid waiting) or an actual need
To spread payments over the life of the product (car or truck)
As a necessity when making large purchases (house)
Deciding to Use Credit
Question comparing costs to benefits – interest payments vs. enjoyment times
Be aware of costs of using credit
Do you require the purchase now?
What’s the opportunity cost of using cash?
Will satisfaction be greater than interest amount?
Is this the best credit available?
Can I afford to use credit?
You do not have to accept credit (offered a lot)

4. Sources of Credit
Two main sources of credit: using credit cards and borrowing money directly from financial institutions
Types of Financial Institutions:
Commercial Banks: control largest amount of money and have widest range of services, checking, savings, individual loans, and transferring funds
Savings and Loan Associations: accept deposits and lend money; make single family and multi-family dwelling mortgage loans, commercial mortgages, and car loans (usually at lower interest rate than commercial banks)
Savings Banks: lend for home mortgages, personal and auto loans
Credit Unions: Union member owned to offer savings accounts and low interest loans only to its members (primarily personal, auto and home improvement loans); offer higher interest rates on savings and charge lower interest rates on loans

5. Sources of Credit
Finance companies: take over contracts from stores and add fee for collecting debts (in form of higher interest rates than before)
Consumer finance companies: lend directly to consumer at high interest rate, usually because borrower cannot borrow elsewhere (bad credit)
Charge Accounts: credit from a particular company for a consumer to buy goods or services there and to pay later
Three types:
Regular charge account: 30-day charge with credit limit (maximum amount of credit), must be paid in full to not accumulate interest
Revolving charge account: allows consumer to make additional purchases without paying previous bill in full, but with interest added
Installment charge account: equal payments over a period of time (part to interest, part to principal), at end of term, consumer owns product

6. Sources of Credit
Credit Cards: allows consumer to buy something and pay for it later
Can be used in variety of places
High interest rates due to large number of delinquent loans
Some offer lower rates with special terms to attract consumers
Finance charge: cost of credit monthly in dollar amount (principal + interest + other charges
Four methods of determining charges: (Figure 4.9 p. 93)
Previous Balance
Adjusted Balance
Average Daily Balance
Past Due Balance
Annual Percentage Rate (APR): cost of credit as a yearly percentage
Allows for easier credit comparisons (Figure 4.10 p. 94)
Debit Cards: cashless purchases electronically transferring funds, not a loan

7. Applying for Credit Fill out a credit application
Lending agency that hires a credit bureau to do a credit check.
Credit bureau: private business that investigates a person to determine the risk in lending them money
Credit check: investigation of a person’s income, debts, personal life, and history of borrowing and paying debts

8. Credit Rating
Credit rating: rating of the risk in lending money to a specific person
what credit bureau reports to creditor
Factors to help checked for creditworthiness
History
Capacity to pay: income and debt
Good character: reputation, trustworthiness, legal issues
Collateral: size of personal capital (something of worth)
Secured loans: backed up by collateral
Unsecured loans: promise to repay money (sometimes require cosigner, who is responsible in non-payment)
Responsibilities as a Borrower:
pay on time
repay all debts or suffer bad credit
Keep records to not go over credit limit
Concentrate on high-interest debts first, and pay more that minimum if debt is unmanageable

9. Government Regulations of Credit
Truth in Lending Act
first law to expand government’s role of protecting consumer credit
ensures that consumer are fully informed of conditions of borrowing
Equal Credit Opportunity Act
Creditors cannot discriminate on basis of race, religion, nationality, gender, marital status or age
Lender must give reasons for denying loan application
State Usury Laws
Restrict amount of interest that can be charged, setting maximum interest rates
Interest ceilings can lead to shortage of credit if general rates rise, hurting lender and consumer

10. Personal Bankruptcy Bankruptcy: inability to pay debts based on income
For people who absolutely cannot repay debts
Debtors give up most of what they own to be distributed among creditors
Creditors are forced to forgive entire debt
Remains on a person’s credit history for 10 years (difficult to reestablish credit and borrow funds)

11. Buying Necessities Comparison Shopping:
Making comparisons to decide what and where to shop
Must consider time costs and transportation costs
Advertisements and coupons can save time and money
Trade-offs in Food Stores:
Club warehouse stores: carries limited number of brands and items in large quantities and is less expensive
Convenience stores: open most of the time, higher prices, but open more hours
Brand-names are well known nationally or regionally.
Private-labeled products are lower priced store-brand products carried by some supermarkets and warehouse stores (save almost 40%)
Generic products have no brand name and are lower priced.
Coupons are available to attract consumers to brand names.

12. Clothing Choices Comparing Clothing Value:
Three factors that influence clothing value:
Style: tend to be more expensive and change each year
Durability: ability of an item to last a long time
Service flow: amount of time you get to use the product and the value you place on that use.
Cost of Care: require dry cleaning vs. machine washed
More for Less:
Clothing costs have decreased significantly over time.
Clothing sales generally happen at the end of a season.
Bargain fanatics buy items because they are on sale; if it is unnecessary, you may not be saving at all.

13. Housing Options Rent or Buy How much to spend? Buying a House
Avoid spending more than you can afford
Need cash for down payments and closing costs: fees involved in arranging a mortgage or in transferring ownership of property
Be aware of points: fees paid to lenders and computed as a % of the loan (included in closing costs) each point = 1% of borrowed amount
Buying a House
Many different types of mortgages and finance options (Figure 5.9 p 124)
Mortgages include down payments, interest, paid in monthly installments, and often property taxes, homeowners insurance, and mortgage insurance

14. Housing Options Renter Rights and Responsibilities:
Most renters sign a lease: long-term contract describing terms of rented property (read carefully)
Tenants have right to property under agreements in the lease, and a right to privacy, but must pay rent on time, take care of property, notify landlord for major repairs
Some must place a security deposit (money held by landlord in case rent is not paid or to cover damages) down
Tenants must give written notice if leaving before end of lease (may result in fees and fines for breaking lease)
Landlords must supply minimum services (ex. Heat) and obey safety laws
Rent-control laws limit the amount a landlord can charge in rent

15. Buying and Operating a Vehicle
Trade-offs of deciding which vehicle:
Smaller engines give better gas mileage, but less acceleration
Newer vehicles cost more, but need les repairs
Smaller vehicles are more energy efficient, but often less protection
Registration fees are state fees paid each year
Normal maintenance and repairs (oil and filter changes, tune-ups)
Extended warranties covers future problems, but costs more
Depreciation (decrease in value of the vehicle) as it ages
States require liability insurance: to cover bodily injury and property damages (varies based on age, sex, and driving history)