final wk 6
dfresh90
BS-MG353_Week3_Chapter6.ppt
PFIN
55
Using Credit
6
BILLINGSLEY/ GITMAN/ JOEHNK/
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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1 Describe the reasons for using consumer credit and identify its benefits and problems
2 Develop a plan to establish a strong credit history
3 Distinguish among the different forms of open account credit
4 Apply for, obtain, and manage open forms of credit
LEARNING OUTCOMES
PFIN5 | CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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5 Choose the right credit cards and recognize their advantages and disadvantages
6 Avoid credit problems, protect yourself against credit card fraud, and understand the personal bankruptcy process
LEARNING OUTCOMES (continued)
PFIN5 | CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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The Basic Concepts of Credit
- Why we use credit
- Avoid paying cash for large outlays
- Meet a financial emergency
- Convenience
- Investment purposes
- Improper uses of credit
- Meet basic living expenses
- Make impulse purchases
- Purchase non-durable goods
PFIN5 | CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Credit Crisis on Borrowers
- Households were unable to repay the mortgages
- Monthly consumer credit payments (excluding mortgage) should not exceed 20% of monthly net income
Debt Safety Ratio =
Monthly consumer credit payments
Monthly take-home pay
PFIN5| CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Establishing Credit
- Open checking and savings accounts
- Build a strong credit history
- Inform the lender if there is a delay in payment
- Limit your usage to your abilities to repay
PFIN5| CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Exhibit 6.2
Credit Guidelines Based on Ability to Repay
PFIN5 | CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Credit Cards and Other Open Account Credit
- Credit extended to consumer prior to a purchase
- Consumer can buy up to a specified credit limit
- Offered by retailers and financial institutions
- Monthly credit statements
- Pay balance in full to avoid interest
PFIN5 | CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Bank Credit Cards
PFIN5 | CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Special Types of Bank Credit Cards
PFIN5 | CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Retail and Debit Cards
- Retail cards
- Issued by department stores and oil companies
- Preset credit limits
- Debit cards
- Works like writing a check by accessing checking account
- Greater liability exposure if fraudulently used
PFIN5 | CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Forms Of Revolving Credit
- Overdraft protection lines
- Unsecured personal credit lines
- Available on as-needed basis
- Home equity credit lines
- Secured by equity in owner’s home
- Interest tax deductible (if deductions are itemized)
PFIN5 | CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Opening an Account
- Credit application
- Available at the bank
- Personal and professional information
- Credit investigation
- Evaluates the creditworthiness of the borrower
- Credit bureau
- Cost-effective way of verifying employment and credit history
PFIN5 | CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Computing Finance Charges
- Annual percentage rate (APR)
- True rate of interest over life of loan
- Includes all fees and costs
- Method used in computing finance charges
- ADB excluding new purchases - Consumer friendly
- ADB including new purchases - Take the outstanding balance, including new purchases, and subtract payments and credits
PFIN5 | CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Avoiding Credit Problems
- Use discipline when purchasing
- Reduce number of cards
- Be selective in accepting preapproved credit
- Limit new charges
- Pay more than the minimum
- Pay off cards with highest finance charges first
- Transfer balances to card with lowest rate
PFIN5 | CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Credit Card Fraud
- Don’t give account number to organizations who call you
- Use secure internet sites
- Never put credit card information on checks
- Destroy old cards and shred old statements
- Report lost or stolen cards immediately
PFIN5| CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Bankruptcy – Paying the Price for Credit Abuse
- Personal bankruptcy: Petition for request for protection from creditors
- Wage earner plan: Debt restructuring
- Straight bankruptcy: Wipe the slate clean and starting anew
PFIN5| CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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- Debt safety ratio
- Open account credit
- Credit limit
- Bank credit card
- Line of credit
- Cash advance
- Base rate
- Grace period
- Reward credit card
- Affinity cards
- Secured cards
- Student credit card
KEY TERMS
- Retail charge card
- Debit card
- Revolving line of credit
- Overdraft protection
line
- Unsecured personal
credit line
- Home equity credit line
- Credit investigation
- Credit bureau
- Annual percentage rate
- Average daily balance
PFIN5 | CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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SUMMARY
- Consumer credit plays a major role in the personal financial planning process
- Different forms of credit are used for the sake of convenience
- Credit cards and other forms of credit need to be used wisely
- Understanding the advantages and disadvantages of credit cards are very important
PFIN5 | CH6
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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