Managing Credit

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Managing Credit

BA250 - Personal

Week 4

The Basic Concepts of Credit

Why we use credit

  • Avoid paying cash for large outlays
  • Meet financial emergencies
  • Convenience
  • Investment purposes

Improper Uses of Credit

  • Meet basic living expenses

  • Make impulse purchases

  • Purchase non-durable goods

Establishing Credit

Build a good credit history by

  • not getting overextended
  • fulfilling all credit terms
  • paying on time
  • notifying creditors if unable to pay
  • being truthful

Open checking and savings accounts

Get one card and make small purchases

How Much Credit Can You Stand?

Monthly consumer credit payments (excluding mortgage) should not exceed 20% of monthly net income.

Debt Safety Ratio =

Monthly consumer credit obligations

Monthly take-home pay

Credit Guidelines Based on Ability to Pay

Credit Cards and Other Open Account Credit

  • Credit extended to consumer in advance of a purchase

  • Consumer can buy up to the specified credit limit

  • Offered by financial institutions and retailers
  • Monthly credit statements
  • Pay balance in full to avoid interest

Bank Credit Cards

  • Most popular open account credit

  • Features include:
  • Line of credit depends on applicant’s financial status and ability to pay
  • Cash advances and balance transfers
  • Interest rates and fees

Retail Charge Cards

  • Second largest category
  • Department stores
  • Oil companies
  • Build loyalty
  • Preset credit limits

Debit Cards

  • Looks like a credit card but works like writing a check—accesses checking account
  • No line of credit
  • Greater liability exposure if fraudulently used

Prepaid card is a debit card with fixed amount available—does not access checking account

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

Bankruptcy – The Price for Credit Card Abuse

File Bankruptcy

  • Chapter 13 - wage earner plan -- debt restructuring
  • Chapter 7 - straight bankruptcy -- wipe the slate clean

Use credit counselors!

References

Gitman, L. J., Joehnk, M. D., & Billingsley, R. S. (2011). PFIN. Mason, OH: South-Western Cengage Learning.