1. Chapter 8 Managing Your Credit

2. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-2 Chapter Objectives Describe the key characteristics of credit cards Explain how to estimate credit repayment Describe the key components of the credit card statement Explain the effects of the Credit CARD Act Offer tips on using credit cards

3. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-3 Credit Cards Advantages No need to carry large amounts of cash Free financing as long as you pay in full each month Monthly statement for recordkeeping Disadvantages Can make purchases that you can’t afford Allows spending beyond your means Excessive spending can continue with minimum payments

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5. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-5 Credit Cards (cont’d) Applying for a credit card –Personal information Cash inflows Cash outflows Credit history Capital Collateral –Credit check Credit card issuer obtains a credit report

6. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-6 Credit Cards (cont’d) –Other information that creditors evaluate Income Existing debt level Current economic conditions

7. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-7 Characteristics of Credit Cards Providers of credit cards –Most popular are MasterCard, Visa and American Express –Retail (or proprietary) credit card: a credit card that is honored by a specific retail establishment Retail stores and gas stations Limits purchases to a single merchant

8. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-8 Characteristics of Credit Cards (cont’d) Credit limit—maximum amount of credit allowed Overdraft protection—allows purchases beyond credit limit Annual fee Incentives to use the card –Prestige cards: credit cards, such as gold or platinum cards, issued by a financial institution to individuals who have an exceptional credit standing

9. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-9 Characteristics of Credit Cards (cont’d) Grace period—period between time of purchase and when payment is due Interest Rate –Types of interest rates charged on credit cards May be fixed, variable or tiered –Regulations on interest rates – new regulations more favorable to users –Cash advances

10. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-10 Financial Planning Online Go to cgi.money.cnn.com/tools/debtplanner/ cgi.money.cnn.com/tools/debtplanner/ debtplanner.jsp This Web site provides an estimate of your future credit card payments.

11. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-11 Finance Charges Finance charge: the interest that you must pay as a result of using credit Average daily balance method –Most frequently used –Interest charged on average daily balance at the end of every day in the billing period Previous Balance Method –Interest charged on the balance at the beginning of the new billing period

12. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-12 Finance Charges (cont’d) Adjusted Balance Method –Interest is charged based on the balance at the end of the new billing period

13. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-13 Financial Planning Online Go to www.federalreserve.gov/pubs/shop/default. htm www.federalreserve.gov/pubs/shop/default. htm This Web site provides tips on selecting a credit card.

14. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-14 Estimating Credit Repayment Simple interest rate: the percentage of credit that must be paid as interest on an annual basis Annual percentage rate (APR): the simple interest rate including any fees charged by the creditor –Allows comparison among potential lenders

15. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-15 Estimating Credit Repayment (cont’d) Impact of interest rate on the amount you owe –The larger the interest rate, the higher the interest payments Impact of financing period on credit payments –Total interest paid depends on the length of the financing period

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17. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-17 Exhibit 8.2 How Interest Payments Are Influenced by Interest Rates (cont’d)

18. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-18 Estimating Credit Repayment (cont’d) Using calculators to estimate repayment –Many websites have calculators to help determine monthly payment required to pay off a balance over a certain number of months –Help achieve goal of paying off balance in a particular period of time –www.federalreserve.gov/creditcardcalculator is one examplewww.federalreserve.gov/creditcardcalculator

19. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-19 Credit Card Statement Statements typically sent at the end of the billing cycle Lists: –Previous balance –Purchases –Cash advances –Payments –Finance charge –New balance –Minimum payment

20. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-20 Credit Card Statement Always scrutinize statement for errors Dispute any errors, but pay correct charges in a timely manner Customer service number and/or dispute instructions included on statement

21. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-21 Regulation of Credit Cards Credit CARD Act –Passed in 2009; contains provisions to protect consumers Conditions for fees Advance notice to change interest rate Promotional interest rate guidelines Payment period Credit limit Disclosure about paying balance due

22. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-22 Regulation of Credit Cards (cont’d) Restrictions for cardholders less than age 21 Summary of provisions Bureau of Consumer Financial Protection –Created in 2010 as part of Financial Reform Act –Goal is to enforce consumer finance laws –Makes sure consumers receive full disclosure of information to help them make financial decisions

23. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-23 Financial Planning Online Go to www.frbsf.org/publications/consumer/credit rights.html www.frbsf.org/publications/consumer/credit rights.html This Web site provides information about various laws that protect your rights when using credit.

24. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-24 Tips on Using Credit Cards Use a credit card only if you can cover the bill Impose a tight credit limit Reduce credit limit when the economy weakens Pay credit card bills before investing money Pay off credit card debt before other debt Avoid credit repair services

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27. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-27 Financial Planning Online Go to www.frbsf.org/publications/consumer/credit. html www.frbsf.org/publications/consumer/credit. html This Web site provides information about establishing, using and protecting credit.

28. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-28 Tips on Using Credit Cards (cont’d) Resolving an excessive credit balance –Spend as little as possible –Consider ways to increase income –Borrow from a family member –Get a debt consolidation loan –Sell assets for cash –Reduce everyday expenses

29. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-29 Tips on Using Credit Cards (cont’d) –Personal bankruptcy: a plan proposed to the court in which you repay at least a portion of your debt and pay attorney and filing fees Chapter 7 allows the discharge of almost all debts, but also have to surrender assets to pay debt Chapter 13 allows you to keep your assets, but the court takes control of your finances and devises a 3–5 year repayment plan

30. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-30 Financial Planning Online Go to www.consumercredit.com/debt- payoff-calc.htmwww.consumercredit.com/debt- payoff-calc.htm This Web site provides estimates of the time it will take to pay off your credit cards utilizing different monthly payments.

31. Copyright ©2014 Pearson Education, Inc. All rights reserved.8-31 How Credit Management Fits Within Your Financial Plan Key credit management decisions for your financial plan are: –What limit should you impose on your credit card? –When should you use credit?

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