unit 3 spending and credit 1. compare the benefits and costs of alternatives in spending decisions....
TRANSCRIPT
Unit 3 Spending and Credit
1. Compare the benefits and costs of alternatives in spending decisions. 2. Evaluate information about products and services. 3. Compare the advantages and disadvantages of different payment methods. 4. Analyze the benefits and cost of consumer credit. 5. Compare sources of consumer credit (e.g., credit cards, consumer loans, auto loans, student loans). 6. Evaluate the terms and conditions of credit cards and consumer loans. 7. Evaluate factors that affect creditworthiness. 8. Explain the purpose and components of credit records. 9. Demonstrate awareness of consumer protection and information (e.g., identity theft, phishing, scams). 10. Propose ways to avoid or correct credit problems. 11. Describe the rights and responsibilities of buyers and sellers under consumer protection laws.
Types of Checking Accounts & Using Checking Accounts
Section 1
Types of Checking Accounts
Regular Checking AccountsO Usually no minimum balanceO If there is, monthly service charge if
you drop below
Types of Checking Accounts
Activity AccountsO No minimum balanceO Fee for each check writtenO Sometimes a fee for each depositO Usually monthly service fee
Types of Checking Accounts
Interest-Earning Checking AccountsO Combination of checking and savings
accountO Earns interest if you maintain a
minimum balance
Evaluating Checking Accounts
O Restrictions –minimum balanceO Fees and Charges – service charges,
check printing, overdrafts and stop-payment orders
O Interest – rates and frequency of compounding
Checking Account Special Services
O ATMs-quick cash with debit cardO Online banking-24 hour access to
your account
Checking Account Special Services
O Overdraft protection- an automatic loan made to an account if the balance will not cover the checks writtenO May transfer money from your
savingsO Stop-Payment Order – a request to
not cash a particular checkO Fee for this service
Using a Checking Account
O Opening a checking accountO Individual or joint accountO Must sign signature card
Using a Checking Account
Writing Checks1. Enter in checkbook register
O Checks, deposits, ATM withdrawals, debit card purchases, interest earned or service fees
O Keep an accurate current balance
Using a Checking Account
2. Writing a check-fill in:O Current dateO Payee – name of party getting the checkO The amount in numeralsO The amount in wordsO Sign the check-as your signature card is signedO Memo-reason for the check
Using a Checking Account
O Tips:O Use ink onlyO If you make a mistake, Void the
check in the check registerO Tear up the checkO Small error – correct and initial next
to it
Making DepositsTo Your Accounts (Savings & Checking)1. Complete a deposit slip2. Endorse the check
O An endorsement is the signature of the Payee
Making Deposits-Endorsements
Types of EndorsementsO Blank – signature on back of checkO Restrictive – restriction on how check
is used; “for deposit only”O Special Endorsement – transfer to
another person; you sign and they sign under your signature
Deposits-Endorsement Tips
O Do not endorse until ready to cash or deposit it
O Write your signature at the top left end on the back
O Sign your name exactly as it appears on the front of the check
O Use a penO By mail, use “for deposit only”
Using a Checking Account
O Check Clearing – ensures that your money is available for withdrawalO Deposits are held until check clears
bank on which it was drawnO Usually 2 business days
Using a Checking Account
O Bank Statement – shows all activity of the account for the monthO DepositsO Checks written and clearedO ATM chargesO Debit card chargesO Interest earnedO Service Fees
Using a Checking Account
O Bank Reconciliation – a report that accounts for the differences between the bank statement and the checkbook register balancesO Often referred to as balancing your
checkbook
Bank ReconciliationO Step 1: Compare the checks that
you have written to the ones listed on the bank statementO List the ones that are outstanding-
checks that you wrote but have not cleared
O Subtract the total of these checks from the bank statement balance
Bank ReconciliationO Step 2: Look for deposits that you
have made but are not on the bank statementO Add those deposits to the bank
statement balance
Bank ReconciliationO Step 3: Subtract fees and charges
that are listed on the bank statement from your checkbook register balance
O Step 4: Add any interest earned to your checkbook register balance
Other Payment Methods
O Certified Check – personal check that is guaranteed by the bank
O Cashier’s Check or Money Order – purchase for the amount of the check or money order plus a fee
O Travelers’ checks – purchased in varying amounts, sign once when purchased and once when cashed
All About CreditSection 2
Consumer CreditO What is credit?O Is using credit good or bad? Why?O What are some risks of using credit?O Should high school students be allowed
to have credit cards? Why or why not?O What should you consider before using
credit?O What is your credit rating/report? Why
is it important?
What is credit?O Buying something now and paying
for it later using borrowed money through loans or credit cards
O Creditor: an entity (financial institution, merchant, or individual) to whom money is owed
Is using credit a good or bad idea?
Is credit free?O NO!!
O People pay a price for using credit
O Interest: price of using someone else’s moneyO Must be repaid along with the principal
amount
O Lenders may also charge fees for using credit
Advantages of CreditO Lets you enjoy goods and services now while
paying for them laterO Not having to carry large sums of cash when
traveling or shoppingO Being able to pay for emergenciesO Purchasing goods or services you couldn’t
otherwise affordO Convenience – allows you to make several
purchases but only one monthly paymentO Record of purchasesO Builds a credit history (rating), allowing you to
borrow additional credit in the future
Disadvantages of Credit
O Possible identity theftO Can cost more than paying in cashO May lose income/property (collateral) if
you don’t pay a secured loanO Poor use can limit future borrowing by
damaging credit historyO Easy to spend even though you don’t
have the money to pay for the item
USE CREDIT WITH CAUTION!!
Types of Credit – Closed-End Credit
O Closed-End Credit (Installment Loan): one-time loan for specific purpose that you pay back in equal payments for a specific period of time
O Examples: Mortgage, Car Loan, Student Loan
O Lower interest rate than open-end credit
Types of Credit – Open-End CreditO Open-End Credit (Revolving): loan with a
specified limit on the amount of money you can borrow, but no payoff deadlineO Billed periodically based on amount
borrowed
O Can “respend” once paid backO Examples: Credit Card, Home Equity Line
of CreditO Higher interest rate than closed-end creditO Credit Limit: maximum amount of money
a creditor will allow a credit user to borrow
Sources of Credit – Loans
O Loan: borrowed money with an agreement to repay with interest in a specified period of time (closed-ended)
O Secured Loan : loan that has a form of collateral as security toward repaymentO Collateral: form of security to help
guarantee the creditor will be repaidO Usually lower interest rateO Can take collateral if you miss multiple
payments
O Unsecured Loan: no specific collateral secures the loan
Sources of Credit – Credit Cards
O Issued by banks, savings & loans, credit unions, retail stores and other businesses
O Represent an agreement between a lender (the institution issuing the credit card) and the cardholder
O May be used repeatedly to buy products or services or to borrow money on credit (open-ended)
Cost of CreditO APR (Annual Percentage Rate): total cost of
credit on an annual basis, expressed as a percentageAPR of 18% = $18/year on each $100 owed
O Lenders are required by law to disclose the APR to borrowers
O May be different from the stated interest rate
O APR is the total cost of credit
O Combines the interest paid over the life of the loan as well as any upfront fees
O Use to compare different credit optionsO Does NOT affect the monthly payment on the loan…
those are calculated based on the interest rate , length of loan and lender risk
Cost of a Credit CardO Required payment amount varies each month
based on total amount owedO Finance Charge: dollar amount you pay to
use credit if you do not pay the full amount each month
O Grace Period: number of days you have to pay for new purchases without having a finance charge
O Minimum Monthly Payment TrapO Avoid making smallest amount you are
required to pay each month or you will never pay off balance
Additional Credit Card Fees
O Annual Fee: amount charged just for having the card
O Cash Advance Fee: charged when you use the card for a cash in hand
O Balance Transfer Fee: charged when you transfer a balance from another credit card
O Late-payment Fee : charged for paying after due date
Credit Card Incentives/Features
O RebatesO Frequent flier milesO Additional warranty coverageO Car rental insuranceO Travel accident insuranceO Liability limits
O If card is lost or stolen, your liability is limited to $50
O Keep your account number in a safe place—report immediately if lost or stolen
What is a Credit Report/History?
O Credit History: record of people’s payment behavior over 7-10 year period
O There are three organizations that compile credit information on individuals and makes it available to businesses for a feeO EquifaxO ExperianO TransUnion
O www.annualcreditreport.com provides free credit reports to consumers (one per bureau per year)
FICO ScoreO A calculated score that tells potential
lenders the likelihood of you paying your debts back on time
O Range between 350 - 850O Based on:
O Type of credit (installment vs revolving)O Length of creditO Amount owedO Repayment historyO InquiriesO Public records
Your Credit HistoryO Establishing and Maintaining Good Credit
O Start with a secured or co-signed credit card
O Pay all bills on time to avoid expensive late fees and collection status reporting on your credit report
O Don’t apply for too many credit card accounts
O Pay credit card balances in full each monthO Don’t use credit to live beyond your
means!
Applying for CreditO Creditor: the person, financial institution or
business that lends a borrower moneyO Creditors will research information about
potential borrowers before agreeing to loan and to determine interest rate
O Three C’s of CreditOCapacityOCharacterOCollateral
O All lenders have their own guidelines for determining creditworthiness
Applying for Credit
1. CapacityO Does the borrower have the ability
to repay the loan?OIncomeOLength of time at his/her current
jobOHow much debt the borrower
already owe
Applying for Credit
2. CharacterO Will the borrower repay the loan?
OBorrower’s past bill-paying history
OHas he/she paid bills on time?OResidence historyOEmployment history
Applying for Credit
3. CollateralO Is there a financial asset or piece
of property that a creditor can take if the borrower fails to repay the loan?OProvides protection for the
creditor if borrower does not repay loan
OCreditor may repossess the collateral
Reasons for Denying Credit
O Too little time in current job or at current residence
O Too much outstanding debtO Too little income to support new debt
paymentO Unreasonable purpose for requesting creditO Limited credit experienceO Foreclosure or repossessionO Delinquent past or present credit
obligations
Why Does My Credit Score Matter?
O Loans/Credit CardsO UtilitiesO RentO Employment
Credit will follow you for 7-10 years!!!!
Warning SignsO Make only minimum monthly paymentsO Having trouble meeting payments on
timeO Total balance on credit cards increases
every monthO Borrow money to pay off other debtsO Exceeded your credit limitsO Regularly use savings/emergency fund to
pay for necessitiesO You have been denied credit
Debt ManagementO Consumer Credit Counseling
Service: nonprofit organization that provides credit counselors to help individuals reduce debt and follow debt repayment programs
BankruptcyO Personal Bankruptcy: legal process in which
some or all of your assets are distributed among your creditors in order to pay back debts
O Chapter 7 – “straight bankruptcy” where many debts are forgiven and assets may be sold to pay creditors
O Chapter 13 – “wage-earner plan” where payment plan is established and assets typically retained
O Debts NOT discharged include student loans, child support, alimony, penalties, and fines
O LAST RESORT!!!
Protecting Your CreditO Notify lenders to close accounts immediately if you
suspect identity theft or card is lost /stolenO Flag credit bureau records with fraud/security alert
if you suspect identity theftO Safeguard your credit, debit, and ATM cards; keep
record of card numbersO Protect your PIN O Stop payment on lost checksO Open password-only access accountsO Carry only the credit cards you expect to use and
keep the others in a safe placeO Shred statements before throwing them out
Protecting Your CreditO Cosigning a loan – agreeing to be
responsible for loan payments if the other person fails to make them
O Parents may be asked to co-sign for their kids’ apartment leases, car loans, student loans, etc. since young adults do not have high credit scores or have any credit history at all
Fair Credit Billing Act
O When billing errors are discovered:O Write to the credit card company within 60
days, explain the error on the billO Pay all other parts of the bill; you do not
have to pay the disputed amountO You will not have to pay finance charges on
the disputed amountO must adjust account or prove bill is correct
within two billing periods (90 days)
Credit & Equal Opportunity
O Equal Credit Opportunity Act (ECOA): gives all applicants the same rights in credit decisions regardless of:O AgeO RaceO NationalityO SexO Marital status
O Provides right to know why credit is deniedO If based on credit report, you are entitled to a free copy
of the reportO If credit report is inaccurate it is YOUR responsibility to
contact credit bureausO Credit bureaus are responsible for proving
accuracy/inaccuracy
Other Credit Protection Laws
O Truth in Lending Act: creditor must disclose to the customer how finance charge and APR affects total cost of creditO “Schumer Box”
O Fair Credit Opportunity Act & Fair Credit Reporting Act: creditor must follow rules regarding correcting billing errors and use of credit reports for credit decisions
O Consumer Credit Reporting Reform Act: places burden of proof for accurate credit report information on the credit bureaus