Credit and Financial Protection PDF

Credit and Financial Protection How Consumer can use credit and protection wisely Contents Week’s Objectives Essential Questions Understanding Major Concepts What is Consumer Credit? Common Forms of Consumer Credit Advantages and Disadvantages How to Keep a Good Credit R...

Credit and Financial Protection How Consumer can use credit and protection wisely Contents Week’s Objectives Essential Questions Understanding Major Concepts What is Consumer Credit? Common Forms of Consumer Credit Advantages and Disadvantages How to Keep a Good Credit Rating Contents What is insurance and Risk-Sharing? What kind of Insurance do We Need? Basic types of Insurance Week’s Objectives By the end of this week, you will: Be able to explain why consumers buy on credit Be able to list examples and common forms of consumer credit Understand the pros and cons of credit Understand when they should buy on credit and what they should do if they decide to use credit. Explain how insurance provides protection against financial losses Week’s Objectives Compare and contrast the three major types of life insurance Identify and explain what may be covered under health insurance Examine the most common types of property and liability insurance Key Terms Key Terms Essential Questions – Diagnostics (T/F) Please answer the following questions: Consumer credit is a form of borrowing Consumers do not owe much money for their credit purchases There is no economic justification for buying goods or services on credit By using a charge account, an individual can make purchases without paying in cash. Buying on credit is usually more expensive than paying cash for a good or service Essential Questions – Diagnostics (T/F) Please answer the following questions: Individuals purchase insurance to guarantee that they will not have an accident. Everyone may purchase any kind of insurance All life insurance policies are savings and investments as well as insurance programs Health insurance may pay for medical expenses, loss of income, or both. Automobile insurance policies provide property and liability insurance Major Concepts: Consumer Credit Consumers’ purchases on credit represent a sizable portion of personal income. The wise consumer shops for credit. People tend to spend more if they buy on credit than when they pay for their purchases out of current earnings or savings. Credit may be either good or bad, depending on how wisely it is used. Consumers should follow wise buying practices when using and shopping for credit. Quick Question: Has credit become part of our way of life? What is Consumer Credit? Once upon a time, if you did not have cash in your pocket or deposited in a bank, you went without. Today, you can buy almost anything you want without having the money to pay for it. And many people do, using credit. Credit is a form of borrowing. Suppose you purchase a TV set on credit, you are receiving merchandise for which you promise to pay at a later date. In other words, you “buy now, pay later.” Following the above example, you ma be allowed to pay the amount owed in a series of payments, or installments. What is Consumer Credit? Then, is it possible for consumers to buy without money? IT IS NOT POSSIBLE When consumers use credit, it may seem that they are getting something for nothing. But the fact is that consumers are using someone else’s money to make their purchases. Consumers will have to repay the loan. And they will have to pay the store or the bank or the credit card company something extra for the use of its money. This extra charge is called interest. Consumer credit is most widely used in buying homes. But over one- fifth of all credit is for payments for consumer goods and services. Forms of Consumer Credit: Charge Accounts Charge accounts enable people to buy merchandise without having to pay cash. Instead, customers are billed once a month for their purchases. Consumers do purchase things at any time as long as they do not go above their credit line (limit). To these type of credit, a monthly interest rate is quoted to charge customers, which is a percentage a month on the unpaid balance they owe. Forms of Consumer Credit: Installment Plans These are a common form of consumer credit. These plans enable buyers to use and enjoy merchandise in exchange for a promise to pay for it at regular intervals over a period of time. Normally, when you use this form of credit, you must pay a certain amount of money (typically around 10% to 20%) and the rest of the amount by weekly or monthly payments. This is called down payment. If you are thinking of buying something on the installment plan, there are two things that you should know before you buy. First, you will not legally own the goods until you have finished paying for them. Forms of Consumer Credit: Installment Plans This means that if you fail to keep up with your installment payments, the seller can repossess (take back) the merchandise. Second, additional charges to cover the interest rate and service costs will be added to the selling price. For that reason, goods purchased on the installment plan cost more than if they had been bought for cash. Usually, they cost much more. Forms of Consumer Credit: Personal Loans Banks, finance companies, credit unions, and certain other financial organizations lend money to qualified consumers. In exchange for their credit, lenders charge interest on their loans. These personal loans may be either secured or unsecured. A secured loan is one in which the borrower pledges collateral (something of value, such as a bank account, a car, or stock certificates) in case the loan is not repaid. Unsecured loans are those that are given without any collateral. Naturally, lenders must have confidence in borrowers who receive unsecured loans. Forms of Consumer Credit: Credit Cards Could you tell how many transactions are made each day by credit card? These little plastic cards (also called “plastic money”) are accepted at stores, hotels, restaurants, and airlines—in fact, by businesses of all kinds all over the world. Credit cards enable consumers to make purchases simply by signing charge slips. Credit cards, like charge accounts, have maximum credit lines depending on each cardholder’s income and credit rating. Forms of Consumer Credit: Credit Cards While credit cards are convenient for shoppers, they can be costly: Annual fees. Consumers pay a price for using credit cards. Some credit card companies charge their customers an annual fee, while others do not. Late charges. If you do not make a monthly payment by a certain date, you will be charged a late fee. You can also be charged if you make a partial payment that is below a stated minimum. Interest rates. Credit cardholders who do not pay the full amount of their monthly purchases are charged interest on the unpaid balance. Credit: Advantages and Disadvantages Credit is now a part of the Market Economy way of life. You should know both the advantage and disadvantages of using credit before you borrow: Advantages: Buy and Enjoy Things Now. Were it not for credit, most people would have to save for many years before they could afford to buy a new home. In the same way, credit helps consumers to buy automobiles, home furnishings, computers, and any number of other costly items. Credit: Advantages and Disadvantages Deal With Financial Emergencies. The loss of a job, long illnesses, and emergencies can lead to piles of unpaid bills and added worries. At such times, a loan is often just the thing a family needs to help ease its problems. Make Purchases Without Carrying Cash. Using credit cards, consumers are able to shop, go on vacation, and eat at restaurants without carrying cash. Credit cards and charge accounts have become popular means of purchasing many goods and services. Credit: Advantages and Disadvantages Save Money. Remember the TV set Example previously discussed? Let’e assume it is on sale at 399 USD. This is 25% below the regular price of 532 USD. So, taking this into account, even adding on the cost of credit, you could save money by buying the TV set now, while it is on sale. Help Your Country’s Economy to Grow and Prosper. Credit increases sales. It enables consumers who could not or would not use cash to make purchases. Increased sales add to business profits and can lead to the expansion of a business. When businesses expand, they often hire new employees, add new floor space, buy more raw materials, and advertise more. Credit: Advantages and Disadvantages Disadvantages: Costs More than Cash Purchases. A credit purchase includes the purchase price plus any additional interest charges. Leaves Consumers with Less Money to Spend on Other Items. This follows from the first disadvantage listed. With a given income, you have to make a trade-off. If you are spending more on item A, then you have less to spend on item B. Credit: Advantages and Disadvantages Encourages Consumers to Spend Beyond Their Means. Easy credit lures some consumers into spending more than they can afford. As their monthly loan's charges mount, these consumers find it increasingly difficult to meet payments. Finally, these buyers fall so far behind in payments that lenders repossess their goods. For many, this means the loss of the furniture, car, appliances, and other purchases already partly paid for. Credit: Advantages and Disadvantages May Hurt the Nation’s Economy. As easy credit lures consumers into increased spending, higher prices and interest rates throughout the economy may result. As demand increases, the prices for most goods and services will also increase. So, too, will interest rates increase with an increased demand for borrowing. How to Keep a Good Credit Rating? People in the business of making loans want to lend as much money as they can. That is how they earn their living. However, they could not stay in business very long if too many borrowers failed to make their payments on time. Therefore, creditors will refuse loans to people who may not live up to their obligations. What is a creditor? A creditor, is a person who lends money, judge those coming to them for loans by the “three C’s”: Capacity, Collateral, and Character. What Creditors Look For? Capacity. This term refers to your ability to meet payments on time. Creditors want to know enough about your job, income, and expenses to satisfy themselves that you will be able to meet the loan payments. Collateral. Creditors want to know that if something happens to your income, you will still be able to repay the loan. For that reason, they will ask you about your collateral—property that can be pledged to protect the interests of the lender. Character. Some lenders regard character as the most important of the three C’s. It refers to your willingness to repay your debts. For that reason, they will check your credit history—the record of how well you have kept up on paying your bills. Insurance and Risk Sharing? Each day of our lives, at work or at play, we face all sorts of risks— chances that we may suffer some harm or loss. We may lose our health and then need money for doctors’ bills, medicines, and hospital expenses. When we grow old, we may lose our ability to work and earn a living. This is where insurance comes in. Insurance cannot prevent from happening any of the events just mentioned. But it can help us meet the financial burdens that follow. Insurance is a way of protecting ourselves and others against money losses. Insurance and Risk Sharing? Insurance is a cooperative, risk-sharing plan. In buying insurance, many people join together to share the risk of losses. Each insured person thus avoids becoming responsible for a big financial burden if he or she should have a loss. Insurance is like an umbrella. While an umbrella protects us when it rains, insurance protects individuals when a financial loss occurs. Insurance and Risk Sharing? How Do We Obtain Insurance? When individuals obtain insurance, they sign a contract called a policy. The buyer is called the policyholder. Life insurance policies have beneficiaries, the people who are to be paid in the event of a policyholder’s death, for example. With homeowner’s or renter’s insurance, the policyholder is the person to be paid in case of a fire or other damage to a home. With motor vehicle policies, the insurance company may agree to pay other persons not named in the policy to cover losses described in the policy. What Kind of Insurance Do We Need? Insurance is part of good money management. You buy insurance to fit your own individual needs. You do not need motor vehicle insurance if you do not own a motor vehicle, for example. A young and single person has different insurance needs from a person who supports a family. The insurance needs of a young couple will also differ from the needs of an older couple. What Kind of Insurance Do We Need? Three Basic Types of Insurance LIFE INSURANCE The main purpose of life insurance is financial protection for the policy’s beneficiary (or beneficiaries). The policy provides for a specified amount of payment to the beneficiary upon the insured’s death. Life insurance may also be a means of forced savings. During each year that the policyholder pays premiums, the policy increases in cash value. The policyholder may borrow against this cash value or cancel the policy and receive a cash settlement. There are two basic forms of life insurance: Term, and Straight-Life. Three Basic Types of Insurance Term. Term insurance is limited to a specific number of years, usually five. But a term policy can be renewed at a higher premium after the end of each term. Term insurance does not have a cash-in value. It is an ideal plan for someone who wants the maximum amount of life protection at the minimum cost over a limited period of time. Straight-Life. Straight-life insurance costs more than term, but it also offers much more. It provides a forced saving by building a cash value. You can borrow against this cash value or allow it to accumulate. Three Basic Types of Insurance Three Basic Types of Insurance HEALTH INSURANCE There are basically two types of health insurance. The first pays for various medical expenses. The second gives protection against loss of income while the insured is unable to work. Let’s look at other forms of health insurance as well: Hospital Insurance: covers many of the hospital costs such as room and board; drugs and medication taken in the hospital; general nursing care; use of operating room; and laboratory tests. Three Basic Types of Insurance Surgical Insurance: overs all or part of the surgeon’s fee for operations, if needed. Medical Insurance: pays for doctor’s services—other than surgery—in the hospital, at home, or in a doctor’s office. Major Medical Insurance: pays for all of the above once an established minimum has been reached. Loss of Income Insurance: pays monthly benefits to offset the loss of wages or other earnings because of extended illness or disability. Three Basic Types of Insurance PROPERTY AND LIABILITY INSURANCE Property insurance provides financial protection against loss or damage to the insured person’s property. Property, as you know, refers to something someone owns. We usually think of property as a tangible good such as a car, house, or piece of land. Liability insurance provides financial protection to the insured for damages or injuries to other persons or damage to their property. It is a must today—for your home and your motor vehicle. A liability is a debt that must be paid. Liability insurance is very important to an owner or renter of a house or an apartment. In Summary Insurance is a way of protecting yourself and others against financial losses that result from illness, accident, death, fire, theft, and many other risks. While insurance does not prevent loss, it provides financial help when a loss occurs. Insurance should be bought to fit the needs of the individual or family. There are three basic types of insurance—life, health, and property and personal liability insurance.