COA 4131 1st Edition Lecture 7 Outline of Last Lecture I. Financial StatementsII. Making Savings GrowIII. The New Financial MarketplaceIV. Financial InstitutionsV. Deposit AccountsVI. Saving AccountsOutline of Current Lecture I. Managing Credit and LoansII. Credit and Credit CardsIII. Pros and Cons of CreditIV. Establishing credit V. Opening an AccountVI. Credit BureauVII. Manage Credit VIII. College Students and Credit IX. Types and Sources of Credit X. Costs of Credit XI. Additional FeesXII. 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 LectureA. Managing Credit and Loansa. Over a trillion dollars a year are spent using credit cardsb. A typical cardholder has 8-10 credit cards with an average balance of $3,900B. Credit and Credit Cardsa. Receiving goods, money, and services based on an agreement between the lender and borrowerb. Credit Cards C. Pros and Cons of Credita. Prosi. Convenientii. Taking advantage of salesiii. Accumulating rebates, frequent flyer, points, gifts, etc.iv. Identificationv. Emergenciesvi. Big ticket itemsvii. Simplifying record keepingviii. Insurance benefitsb. Consumer alerti. Buy it now and pay it off over the next so odd months1. Great if you can pay it off2. If you can’t then big interest 3. Called balloon chargeii. Value of rebate 1. Some can be changed or rescinded without noticec. Consi. Overextending1. Charge too much 2. If over 20% of monthly take-home pay goes to debt repayments, you are overextendedii. High interest and finance chargesiii. Add on feesiv. Lost cardsv. Loss of privacyvi. Loss of freedomD. Establishing Credit a. Five C’s of Crediti. Capacity1. How much ii. Capital1. Net worthiii. Character 1. backgroundiv. Collateral 1. Property to secure loans2. If you can’t pay, they will take your carv. Conditions 1. general state of the economy b. To establish a strong credit ratingi. Open a checking or savings accountii. Use credit and pay off bill when it’s dueiii. Pay off existing loansiv. Get a jobv. Buy or rent for a year or moreE. Opening an Accounta. Applicationi. Name ii. Addressiii. Work/schooliv. Sources of incomev. Bank namevi. Other credit cards F. Credit Bureaua. Credit Bureau i. Reporting agency that collects, stores and sells information to potential lendersii. Top 3:1. Equifax 2. Transunion 3. Experien b. Third partiesi. People who are loaning money to you, renting to you, or providing credit card look at the credit reportc. FICO scorei. Same as credit score 1. Fair Isaac Credit Orgii. Good score: 720 or above1. You pay your bills on time and take care of everything iii. Median score: 623iv. Range: 300-850v. Below 500 is considered subpar1. Considered a risk vi. Employers look at vii. Mortgage lenders look at viii. Don’t request too many reportsG. Manage Credita. Use when necessary b. Know the agreementi. interest rates c. Make your payments on time d. Pay it off each month, in full if you cani. Only 6% of cardholders do this e. Inform creditors if you cannot make paymentsH. College Students and Credita. 80 percent of full time undergrads have credit cardsi. Probably higher now b. 54 percent of students expect parents to help them financially after they graduate i. Way higherc. Affinity Cardsi. Cards have special pictures on them 1. A cause, Florida State, whoeverii. Whoever’s picture it is, gets money backiii. Just make sure you aren’t getting charged extra d. Credit cards target students to get brand loyalty early one. Trendsi. Students pursued by credit card companiesii. Debt can build in collegeiii. Debt affects students’ career choices I. How much credit is affordable a. Most people can handle 10 to 15 percent, per monthi. Debt safety ratio1. The proportion of total monthly consumer credit obligations to monthly take home payJ. Types and Sources of Credita. 3 types:i. Open Ended Credit 1. Discover, Visa, MasterCard ii. Installment Credit1. Pay the same each montha. Car payment, furniture payment iii. Noninstallment b. Open Ended Credit i. Most commonly used of consumer creditii. Credit extended in advance of any transactioniii. Bank credit cards c. Bank credit cardsi. Can be used in a variety of placesii. Cash advance1. Loans on the cards2. Can be very expensive interest rates iii. Credit limitiv. Credit statement d. Consumer alerti. Department stores notoriously have high interest rates on their credit cards1. Can be 21 or 22 percent interest if you do not pay monthly bille. Installmenti. An agreement that requires a fixed number of regular payments of principle and interestf. Noninstallmenti. Single-payment systemii. This is rare K. Costs of Credit a. Good interest ratei. Lowest you can find that offers both the services and benefits you are looking forii. Credit cards range anywhere from 4 to 21%iii. Usury lawsiv. Prime rate1. What is happening nationally will affect individuals 2. Bigger picturev. Grace periodsL. Additional Feesa. Feesi. How money is made by the issuer other than interest1. Overlimit feea. If you spend too much, they will charge you 2. Late payment fee3. Cash advance fee4. Annual fee5. Foreign ATM fees6. Foreign Exchange fees M. Annual Percentage Ratea. APRi. The true rate of interest paid over the life of credit (or a loan) ii. Must be disclosed and the method of computingiii. The lower the APR the lower the cost of credit N. Average Daily Balancea. ADB Method i. A way finance charges are determinedii. Four ways1. ADB excluding new purchase2. ADB including new purchase with a grace period3. ADB including new purchase with no grace period4. Two cycle average daily balance including new purchases O. Best deals a. Look at the basics b. Rate of Interest (APR) is the most important featurec. Rebates and giftsd. Feese. Length of grace periodf. Method of calculating balances P. Consumer Credit Legislation a. Right of rescissioni. The right to cancel a contract or agreement after it is signedii. Gives consumers three business days to rescind a credit transaction Q. Loans a. Managing loans i. Personal loansii. Collateraliii. Cosigner1. If you cosign for someone and then they can’t pay, it falls on you2. Do not do it for friends, family is more trustworthyiv. Defaults liens1. Can’t pay it b. Types i. Autoii. Durable goodsiii. Personal (cash) loansiv. Home equity loansv. Home equity line of creditvi. Home improvement loansvii. Education
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