Personal Finance Chapter 8 - Managing Your Credit PDF
Document Details
Uploaded by Ameera
University of Sharjah
2017
Jeff Madura
Tags
Summary
This document is a chapter from a personal finance textbook, focusing on managing credit. It details various aspects of credit cards, including advantages, disadvantages, types, and how to use them responsibly, along with explanations of the different methods used for calculating finance charges and interest rates. It also covers topics like applying for credit cards, and tips and strategies for managing credit effectively.
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Personal Finance SIXTH EDITION Chapter 8 Managing Your Credit Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rig...
Personal Finance SIXTH EDITION Chapter 8 Managing Your Credit Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Chapter Objectives 8.1 Provide a background on credit cards 8.2 Explain credit repayment 8.3 Describe how to review the credit card statement 8.4 Explain credit card regulations 8.5 Offer tips on using credit cards 8.6 Explain how managing your credit fits within your financial plan Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Credit Cards (1 of 4) 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Credit Cards (2 of 4) Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Credit Cards (3 of 4) Applying for a credit card – Personal information ▪ Cash inflows ▪ Cash outflows ▪ Credit history ▪ Capital ▪ Collateral – Credit check ▪ Credit card issuer obtains a credit report ▪ https://www.government.ae/en/information-and- services/business/financial-credibility-for-individuals-and- companies Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Credit Cards (4 of 4) – Other information that creditors evaluate ▪ Income ▪ Existing debt level ▪ Current economic conditions Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Characteristics of Credit Cards (1 of 3) Types of credit cards – Most popular are MasterCard, Visa and American Express ▪ MasterCard and Visa allow financing ▪ Most American Express cards require payment in full – 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Characteristics of Credit Cards (2 of 3) 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Characteristics of Credit Cards (3 of 3) 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Finance Charges (1 of 2) 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Finance Charges (2 of 2) Adjusted Balance Method – Interest is charged based on the balance at the end of the new billing period Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Estimating Credit Repayment (1 of 4) 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Estimating Credit Repayment (2 of 4) 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Estimating Credit Repayment (3 of 4) EXHIBIT 8.2 How Interest Payments Are Influenced by Interest Rates (assume loan amount of $10,000) Simple Interest Total Simple Interest Simple Interest Rate Payment per Year Payments over Four Years 6 $ 600 $2,400 8 800 3,200 10 1,000 4,000 12 1,200 4,800 14 1,400 5,600 16 1,600 6,400 18 1,800 7,200 20 2,000 8,000 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Estimating Credit Repayment (4 of 4) Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Credit Card Statement (1 of 2) Statements typically sent at the end of the billing cycle Lists: – Previous balance – Purchases – Cash advances – Payments – Finance charge – New balance – Minimum payment Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Credit Card Statement (2 of 2) 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Regulation of Credit Cards (1 of 2) 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Regulation of Credit Cards (2 of 2) ▪ Restrictions for cardholders less than age 21 ▪ Summary of provisions Consumer Financial Protection Bureau – 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Tips on Using Credit Cards (1 of 5) 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Tips on Using Credit Cards (2 of 5) Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Tips on Using Credit Cards (3 of 5) Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Tips on Using Credit Cards (4 of 5) 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Tips on Using Credit Cards (5 of 5) – 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved
