COA 4131 1st Edition Lecture 7 Outline of Last Lecture I Financial Statements II Making Savings Grow III The New Financial Marketplace IV Financial Institutions V Deposit Accounts VI Saving Accounts Outline of Current Lecture I Managing Credit and Loans II Credit and Credit Cards III Pros and Cons of Credit IV Establishing credit V Opening an Account VI Credit Bureau VII Manage Credit VIII College Students and Credit IX Types and Sources of Credit X Costs of Credit XI Additional Fees XII Annual Percentage Rate XIII Average Daily Balance XIV Best Deals XV Consumer Credit Legislation XVI Loans XVII Debt Warning Signs XVIII Credit Problems and Solutions Current Lecture A Managing Credit and Loans a Over a trillion dollars a year are spent using credit cards b A typical cardholder has 8 10 credit cards with an average balance of 3 900 B Credit and Credit Cards a Receiving goods money and services based on an agreement between the lender and borrower b Credit Cards C Pros and Cons of Credit a Pros i Convenient ii Taking advantage of sales iii Accumulating rebates frequent flyer points gifts etc iv Identification v Emergencies vi Big ticket items vii Simplifying record keeping viii Insurance benefits b Consumer alert i Buy it now and pay it off over the next so odd months 1 Great if you can pay it off 2 If you can t then big interest 3 Called balloon charge ii Value of rebate 1 Some can be changed or rescinded without notice c Cons i Overextending 1 Charge too much 2 If over 20 of monthly take home pay goes to debt repayments you are overextended ii High interest and finance charges iii Add on fees iv Lost cards v Loss of privacy vi Loss of freedom D Establishing Credit a Five C s of Credit i Capacity 1 How much ii Capital 1 Net worth iii Character 1 background iv Collateral 1 Property to secure loans 2 If you can t pay they will take your car v Conditions 1 general state of the economy b To establish a strong credit rating i Open a checking or savings account ii Use credit and pay off bill when it s due iii Pay off existing loans iv Get a job v Buy or rent for a year or more E Opening an Account a Application i Name ii Address iii Work school iv Sources of income v Bank name vi Other credit cards F Credit Bureau a Credit Bureau i Reporting agency that collects stores and sells information to potential lenders ii Top 3 1 Equifax 2 Transunion 3 Experien b Third parties i People who are loaning money to you renting to you or providing credit card look at the credit report c FICO score i Same as credit score 1 Fair Isaac Credit Org ii Good score 720 or above 1 You pay your bills on time and take care of everything iii Median score 623 iv Range 300 850 v Below 500 is considered subpar 1 Considered a risk vi Employers look at vii Mortgage lenders look at viii Don t request too many reports G Manage Credit a Use when necessary b Know the agreement i interest rates c Make your payments on time d Pay it off each month in full if you can i Only 6 of cardholders do this e Inform creditors if you cannot make payments H College Students and Credit a 80 percent of full time undergrads have credit cards i Probably higher now b 54 percent of students expect parents to help them financially after they graduate i Way higher c Affinity Cards i Cards have special pictures on them 1 A cause Florida State whoever ii Whoever s picture it is gets money back iii Just make sure you aren t getting charged extra d Credit cards target students to get brand loyalty early on e Trends i Students pursued by credit card companies ii Debt can build in college iii Debt affects students career choices I How much credit is affordable a Most people can handle 10 to 15 percent per month i Debt safety ratio 1 The proportion of total monthly consumer credit obligations to monthly take home pay J Types and Sources of Credit a 3 types i Open Ended Credit 1 Discover Visa MasterCard ii Installment Credit 1 Pay the same each month a Car payment furniture payment iii Noninstallment b Open Ended Credit i Most commonly used of consumer credit ii Credit extended in advance of any transaction iii Bank credit cards c Bank credit cards i Can be used in a variety of places ii Cash advance 1 Loans on the cards 2 Can be very expensive interest rates iii Credit limit iv Credit statement d Consumer alert i Department stores notoriously have high interest rates on their credit cards 1 Can be 21 or 22 percent interest if you do not pay monthly bill K L M N O e Installment i An agreement that requires a fixed number of regular payments of principle and interest f Noninstallment i Single payment system ii This is rare Costs of Credit a Good interest rate i Lowest you can find that offers both the services and benefits you are looking for ii Credit cards range anywhere from 4 to 21 iii Usury laws iv Prime rate 1 What is happening nationally will affect individuals 2 Bigger picture v Grace periods Additional Fees a Fees i How money is made by the issuer other than interest 1 Overlimit fee a If you spend too much they will charge you 2 Late payment fee 3 Cash advance fee 4 Annual fee 5 Foreign ATM fees 6 Foreign Exchange fees Annual Percentage Rate a APR i The true rate of interest paid over the life of credit or a loan ii Must be disclosed and the method of computing iii The lower the APR the lower the cost of credit Average Daily Balance a ADB Method i A way finance charges are determined ii Four ways 1 ADB excluding new purchase 2 ADB including new purchase with a grace period 3 ADB including new purchase with no grace period 4 Two cycle average daily balance including new purchases Best deals a Look at the basics b Rate of Interest APR is the most important feature c Rebates and gifts d Fees e Length of grace period f Method of calculating balances P Consumer Credit Legislation a Right of rescission i The right to cancel a contract or agreement after it is signed ii Gives consumers three business days to rescind a credit transaction Q Loans a Managing loans i Personal loans ii Collateral iii Cosigner 1 If you cosign for someone and then they can t pay it falls on you 2 Do not do it for friends family is more trustworthy iv Defaults liens 1 Can t pay it b Types i Auto ii Durable goods iii Personal cash loans iv Home equity loans v Home equity line of credit vi Home improvement loans vii Education loans c Sources i Banks and S L …
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