using credit
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Using Credit. #6. 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. - PowerPoint PPT PresentationTRANSCRIPT
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Using Credit#6
04/20/23
The Basic Concepts of Credit
Why we use credit• Avoid paying cash for large outlays• Meet financial emergencies• Convenience• Investment purposes
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Improper Uses of Credit
• Meet basic living expenses
• Make impulse purchases
• Purchase non-durable goods
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Rule of Thumb!
Product should outlive the payment schedule
Watch your use of increasingcredit!
Minimum Payments means Maximum Years
Calculations here are based on a minimum 3 percent payment and 15.0 percent annual interest rate.
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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
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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
Monthly Consumer Loan Payments and Debt Safety Ratio
Monthly Consumer Loan Payments and Debt Safety Ratio
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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
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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
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Other Fees
• High interestPrime rate + a percentage
• Annual fees• Transaction fees• Late-payment fees• Over-the-limit fees• Balance transfer fees• Foreign transaction fees
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Special Types of Bank Credit Cards
• Reward cards– Frequent flyer programs– Auto rebate programs– Other merchandise rebates
• Affinity cards• Secured credit cards• Student credit cards
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Retail Charge Cards
• Second largest category– Department stores– Oil companies
• Build loyalty• Preset credit limits
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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
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Revolving Credit Lines
• Open account credit offered by banks or other financial institutions
• Usually offer higher credit lines and lower interest rates than credit cards
• Access money by writing checks
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Forms Of Revolving Credit
• Overdraft protection lines
• Unsecured personal credit lines– Available on as-needed basis
• Home equity credit lines– Secured by equity in owner’s home– Interest tax deductible (if deductions are
itemized)
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Obtaining and Managing Open Forms of Credit
Steps in opening an account:
1. Credit card application
2. Credit investigation
3. Credit bureau
Computing Finance Charges
Lenders must disclose• Annual percentage rate (APR)
– true rate of interest over life of loan– includes all fees and costs
• Method used in computing finance charges
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Average Daily Balance (ADB) - balance to which interest rate is applied is determined by
• ADB excluding new purchases - most consumer friendly
• ADB including new purchases - most frequently used, no grace period on new purchases balance is carried
Computing Finance Charges
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Managing Your Credit Cards
• Review statements monthly to verify entries
• Pay by due date– minimum monthly payment – entire amount to avoid
finance charges
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Shop Around for the Best Deal
• Annual fees
• Rate of interest
• Length of grace period
• Method of calculating balances
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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
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Credit Card Fraud
• Don’t give account number to someone who calls you
• Use secure internet sites • Never put credit card info
on checks • Destroy old cards and
shred old statements• Report lost or stolen cards immediately
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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!