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UA CSM 204 - Choosing a source of credit: the cost of alternatives
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CSM 204 Chapter 7 LectureOutline of Previous LectureI. Consumer CreditII. Consumer Credit QuestionsIII. Advantages of CreditIV. Disadvantages of CreditV. Types of CreditVI. Protecting Against FraudVII. Online PurchasesVIII. Measuring Credit CapacityIX. Your Credit ReportX. Fair Credit Reporting ActXI. Applying for CreditXII. FICO Credit ScoringXIII. Other Credit Scoring SystemsXIV. Correcting Credit ErrorsXV. Quiz 2-1Outline of Current LectureI. What kind of loan should you seek?II. Student loans – appendixIII. The cost of creditIV. Tackling the Trade-OffsV. Calculating the cost of creditVI. Cost of open-ended creditVII. Other cost factorsVIII. Credit card accountability- Responsibility and Disclosure Act of 2009IX. Why consumers don’t payX. Reasons for debtXI. Debt warning signsXII. Getting helpXIII. What if you become overextendedXIV. What if you don’t pay?XV. Quiz 2-2Current LectureThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Chapter 7- Choosing a Source of Credit: The Cost of AlternativesWhat Kind of Loan Should You Seek?Inexpensive loansFamilyIf worst comes to worst, would I be willing to give this person the money if they cannot pay me back?Secured with SavingsMedium Priced LoansBanks, savings and loans, credit unionsExpensive LoansFinance companiesCheck cashing servicesRetailersCredit cardsCash advancesPredatory LendingPayday loan, easy moneyStudent Loans – AppendixUsually lower interest rateLegal obligationAll come from U S Department of EducationMust be paid backNow not discharged in bankruptcyThe Cost of CreditFinance chargeThe total dollar amount you pay to use creditAnnual Percentage Rate (APR)The percentage cost of credit on a yearly basisTrue rate of interest so that you can compare rates with other sources of creditTackling the Trade-OffsTerm vs. Interest costsLonger loansLower payments bus more total interestLender risk vs. Interest rateTo reduce the lender’s risk and the interest rateAccept a variable interest rate2% below the rate of a fixed rate loanAt a time when rates are high and are going to go down as opposed to vice versaProviding collateral to secure the loanMake a large down payment up frontHave a shorter loan termCalculating the Cost of CreditSimple interestSimple interest on the declining balanceThis is the kind of interest you wantAdd-on interestCost of Open-Ended CreditAdjusted balance methodAverage daily balance methodThis is what you wantTwo cycle average daily balancePrevious balance methodOther Cost FactorsInflationTaxesMinimum PaymentEarly RepaymentCredit insurancePays the loan in full if you die while you still have the loanVery expensive insuranceBUY ENOUGH LIFE INSURANCE TO COVER LOANS INSTEADCredit Card Accountability – Responsibility and Disclosure Act of 2009Limits rate increases in year oneRestricts rate increases to new purchasesMust inform of rate increases 45 days in advanceTeaser rate for at least 6 monthsStatement 21 days prior to due dateStatement mustDisplay due date and late fee prominentlyDisclose length of repayment if only minimum is paidDisclosure must be on internetRestricts over limit penaltiesNo cards issued to consumer under 21 without cosignerWhy Consumers Don’t PayExcessive use of credit – 39%Unemployment/reduced income – 24%Poor money management – 15%Divorce/separation – 8%Medical expenses – 7%Other – 7%Reasons for DebtEmotional problemsThe use of money to punish or get evenThe expectation of instant comfortKeeping up with the JonesesAlthough one of your friends can afford X service, and one of your other friends can afford Y service, it does not mean that they are trying to keep up with each other’s services as well. You should only focus on Z service that is important to you, and try to avoid trying to keep up with your friends on what they pay for their X and Y services too.Overindulgence of childrenMisunderstanding or lack of communicationMake sure all the people in your budget are aware of all expenses.Example: You have a secret credit card with $5,000 of charges. You feel confident that you can pay that debt back with you and your spouse’s joint income. However, your spouse also has a secret credit card with $7,000 of charges that he/she feels confident he/she can pay back with your and his/her joint income. Unfortunately, with the two debts combined, y’all owe $12,000 total. Since y’all were both relying on each other’s income to pay back y’all’s individual debts. Suddenly, there is not enough money to pay back the $12,000 total debt.Amount of finance charges makes it difficult to repaySimilar to the example above, although you may be able to pay for a $500 charge here and a $500 charge there, you may lose track of the smaller charges and not be able to pay for the total charge in the end.Debt Warning SignsPaying only the minimumThe charges you made during the month did not pay for at the end of the month incur debt you may not be able to pay for in the long runGrowing BalancesMissing or late paymentsIntentionally using overdraft protectionOverdraft protection is a line of credit that banks offer to their customers to cover their overdrafts. It kicks in when a customer writes a check for more than the money in their account.Dipping into savings regularlyNot discussing money or only discussing moneyGetting HelpConsumer Credit Counseling ServicesYour financial institutionUniversities, Extension, military basesWhat if you become overextendedDetermine how much is owed and to whomDevelop a budget focused on debt reduction and stick to itContact creditors and seek extension of repayment periodsTake on no new creditRefinance if better rate is availableSeek good helpAvoid bad helpPay off smallest balances firstWhat if you don’t pay?Phone calls and noticesDemand letterAcceleration clauseRepossessionSale of AssetsJudgment for Deficiency BalanceQuiz 2-21. finance companies2. true3. true4. all of the above5. Pay off your largest balances


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UA CSM 204 - Choosing a source of credit: the cost of alternatives

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