Chapter 7 Managing Your Credit
Chapter Objectives <ul><li>Provide a background on credit </li></ul><ul><li>Explain the key characteristics  of credit car...
Background on Credit <ul><li>Credit:  funds provided by a creditor  to a borrower that will be repaid by  the borrower in ...
Background on Credit <ul><li>Disadvantages of using credit </li></ul><ul><ul><li>Difficulty making payments </li></ul></ul...
Financial Planning Online: Personal Credit Counseling <ul><li>Go to  http://www. phil . frb .org/consumers/establish.html ...
Background on Credit Exhibit 7.1: Impact of Credit Payments on Saving
Background on Credit <ul><li>Establish a credit history </li></ul><ul><ul><li>Often begins with timely payment  of utility...
Background on Credit Exhibit 7.2: How Interest Payments Are Influenced by Interest Rates
Background on Credit Exhibit 7.2: How Interest Payments Are Influenced by Interest Rates
Background on Credit <ul><ul><li>Annual percentage rate (APR):  the simple interest rate including any fees charged  by th...
Credit Cards <ul><li>Applying for a credit card — potential creditors obtain information from you, about you, and about th...
Credit Cards <ul><li>Credit check </li></ul><ul><ul><li>Credit report:  a statement of creditworthiness based on informati...
Credit Cards <ul><ul><li>Interpreting credit ratings </li></ul></ul><ul><ul><ul><li>High ratings usually provide easy cred...
Financial Planning Online: Your Credit Card Report <ul><li>Go to:  http://loan.yahoo.com/c/index.html </li></ul><ul><li>Th...
Credit Cards <ul><li>Focus on Ethics:  Guarding your financial information </li></ul><ul><ul><li>Financial institutions mu...
Credit Cards <ul><ul><li>The credit decision </li></ul></ul><ul><ul><ul><li>You should receive a reply within 30 days </li...
Credit Cards <ul><li>Types of credit cards </li></ul><ul><ul><li>Visa, MasterCard and American Express most popular </li><...
Credit Cards <ul><ul><li>Retail (or proprietary) credit card:  a credit  card that is honored by a specific retail establi...
Financial Planning Online: Estimating Your Future Credit Card Payments <ul><li>Go to:  http://www. financenter .com/produc...
Credit Cards <ul><li>Prestige cards:  credit cards, such as gold or platinum cards, issued by a financial institution to i...
Credit Cards <ul><li>Interest rate — usually between 15 and 20 percent </li></ul><ul><ul><li>Finance charge:   the interes...
Credit Cards <ul><li>Comparing credit cards </li></ul><ul><ul><li>Acceptance by merchants </li></ul></ul><ul><ul><li>Annua...
Financial Planning Online: Your Rights When Using Credit <ul><li>Go to:  http://www. chicagofed .org </li></ul><ul><li>Cli...
Tips on Using Credit Cards <ul><li>Use a credit card only if you can cover  the bill </li></ul><ul><li>Impose a tight cred...
Tips on Using Credit Cards <ul><li>Avoid credit repair services </li></ul><ul><li>Avoid credit card fraud </li></ul><ul><l...
Financial Planning Online: The Best Credit Card for You <ul><li>Go to:  http://www. bankrate .com/ brm /rate/cc_home.asp <...
Tips on Using Credit Cards Exhibit 7.3: Self-Imposed Credit Limit Based on Monthly Cash Inflows
Tips on Using Credit Cards Exhibit 7.4: Self-Imposed Credit Limit Based on Monthly Cash Inflows and a Monthly Savings Goal
Dealing With Credit Debt <ul><li>If you find yourself with excessive credit card debt </li></ul><ul><ul><li>Spend as littl...
Dealing With Credit Debt <ul><ul><li>If all else fails you may need to file for personal bankruptcy </li></ul></ul><ul><ul...
Financial Planning Online:  Establishing and Protecting Credit <ul><li>Go to:  http://www. chicagofed .org </li></ul><ul><...
Financial Planning Online: Estimating the Time Necessary to Pay Off Your Balance <ul><li>Go to:  http://www. financenter ....
Financial Planning Online: Identity Theft <ul><li>Go to:  http://www.consumer. gov / idtheft / </li></ul><ul><li>This Web ...
How Credit Management Fits Within Your Financial Plan <ul><li>Key credit management decisions  for your financial plan are...
Integrating Key Concepts
Integrating Key Concepts <ul><li>Part 1: Financial Planning Tools </li></ul><ul><li>Part 2: Liquidity Management </li></ul...
Finance Payment Methods <ul><li>Previous Balance Method </li></ul><ul><ul><li>Interest charged on the balance at the begin...
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  1. 1. Chapter 7 Managing Your Credit
  2. 2. Chapter Objectives <ul><li>Provide a background on credit </li></ul><ul><li>Explain the key characteristics of credit cards </li></ul><ul><li>Offer tips on using credit cards </li></ul>
  3. 3. Background on Credit <ul><li>Credit: funds provided by a creditor to a borrower that will be repaid by the borrower in the future with interest </li></ul><ul><li>Advantages of using credit </li></ul><ul><ul><li>Ability to purchase when price exceeds available cash </li></ul></ul><ul><ul><ul><li>Purchase home, car, pay tuition </li></ul></ul></ul><ul><ul><li>Convenience </li></ul></ul>
  4. 4. Background on Credit <ul><li>Disadvantages of using credit </li></ul><ul><ul><li>Difficulty making payments </li></ul></ul><ul><ul><li>Temptation for impulse purchases </li></ul></ul><ul><ul><li>Hinders ability to save </li></ul></ul><ul><ul><li>Expensive </li></ul></ul>
  5. 5. Financial Planning Online: Personal Credit Counseling <ul><li>Go to http://www. phil . frb .org/consumers/establish.html </li></ul><ul><li>This Web site provides information on how to establish, use, and protect credit. </li></ul>
  6. 6. Background on Credit Exhibit 7.1: Impact of Credit Payments on Saving
  7. 7. Background on Credit <ul><li>Establish a credit history </li></ul><ul><ul><li>Often begins with timely payment of utility bills </li></ul></ul><ul><li>Impact of the interest rate on credit payments </li></ul><ul><ul><li>Simple interest rate: the percentage of credit that must be paid as interest on an annual basis </li></ul></ul>
  8. 8. Background on Credit Exhibit 7.2: How Interest Payments Are Influenced by Interest Rates
  9. 9. Background on Credit Exhibit 7.2: How Interest Payments Are Influenced by Interest Rates
  10. 10. Background on Credit <ul><ul><li>Annual percentage rate (APR): the simple interest rate including any fees charged by the creditor </li></ul></ul><ul><ul><ul><li>Allows comparison among potential lenders </li></ul></ul></ul>
  11. 11. Credit Cards <ul><li>Applying for a credit card — potential creditors obtain information from you, about you, and about the economy </li></ul><ul><ul><li>Personal information </li></ul></ul><ul><ul><ul><li>Cash inflows </li></ul></ul></ul><ul><ul><ul><li>Cash outflows </li></ul></ul></ul><ul><ul><ul><li>Credit history </li></ul></ul></ul><ul><ul><ul><li>Capital </li></ul></ul></ul><ul><ul><ul><li>Collateral </li></ul></ul></ul>
  12. 12. Credit Cards <ul><li>Credit check </li></ul><ul><ul><li>Credit report: a statement of creditworthiness based on information such as whether you have made late payments, and any unpaid current bills </li></ul></ul><ul><ul><li>Credit scoring often determines whether or not you are approved for credit </li></ul></ul>
  13. 13. Credit Cards <ul><ul><li>Interpreting credit ratings </li></ul></ul><ul><ul><ul><li>High ratings usually provide easy credit approval </li></ul></ul></ul><ul><ul><ul><li>How ratings make obtaining credit difficult </li></ul></ul></ul>
  14. 14. Financial Planning Online: Your Credit Card Report <ul><li>Go to: http://loan.yahoo.com/c/index.html </li></ul><ul><li>This Web site provides a credit report that assesses your creditworthiness. The report is available to you online for a small fee. </li></ul>
  15. 15. Credit Cards <ul><li>Focus on Ethics: Guarding your financial information </li></ul><ul><ul><li>Financial institutions must provide privacy policies telling what information they collect and what information they intend to share </li></ul></ul><ul><ul><li>Evaluate your credit report regularly </li></ul></ul><ul><ul><li>Creditors may also consider debt level and economic situation </li></ul></ul>
  16. 16. Credit Cards <ul><ul><li>The credit decision </li></ul></ul><ul><ul><ul><li>You should receive a reply within 30 days </li></ul></ul></ul><ul><ul><ul><li>If you are rejected, the creditor must give an explanation </li></ul></ul></ul><ul><ul><ul><li>Laws prohibit discrimination in credit based on race or gender </li></ul></ul></ul><ul><ul><ul><li>Creditors may not consider criminal records, political preferences, or religion </li></ul></ul></ul>
  17. 17. Credit Cards <ul><li>Types of credit cards </li></ul><ul><ul><li>Visa, MasterCard and American Express most popular </li></ul></ul><ul><ul><li>Visa and MasterCard allow partial payments </li></ul></ul><ul><ul><li>American Express requires full payments </li></ul></ul>
  18. 18. Credit Cards <ul><ul><li>Retail (or proprietary) credit card: a credit card that is honored by a specific retail establishment </li></ul></ul><ul><ul><ul><li>Retail stores and gas stations </li></ul></ul></ul><ul><ul><ul><li>Limits purchases to a single merchant </li></ul></ul></ul><ul><li>Credit limit — maximum amount of credit allowed </li></ul><ul><li>Annual fee </li></ul><ul><li>Incentives to use the card </li></ul>
  19. 19. Financial Planning Online: Estimating Your Future Credit Card Payments <ul><li>Go to: http://www. financenter .com/products/ sellingtools /calculators </li></ul><ul><li>Click on: “Credit Card” then “How Important is the Interest Rate?” </li></ul><ul><li>This Web site provides estimates of your future credit card payments. </li></ul>
  20. 20. Credit Cards <ul><li>Prestige cards: credit cards, such as gold or platinum cards, issued by a financial institution to individuals who have an exceptional credit standing </li></ul><ul><li>Grace period — period between time of purchase and when payment is due </li></ul><ul><li>Cash advances </li></ul><ul><ul><li>Usually charge high interest plus a fee </li></ul></ul>
  21. 21. Credit Cards <ul><li>Interest rate — usually between 15 and 20 percent </li></ul><ul><ul><li>Finance charge: the interest that you must pay as a result of using credit </li></ul></ul><ul><li>Credit card statement details differences in new balance and previous balance </li></ul>
  22. 22. Credit Cards <ul><li>Comparing credit cards </li></ul><ul><ul><li>Acceptance by merchants </li></ul></ul><ul><ul><li>Annual fee </li></ul></ul><ul><ul><li>Interest rate </li></ul></ul><ul><ul><ul><li>Watch for “teaser rates” </li></ul></ul></ul><ul><ul><li>Maximum limit </li></ul></ul>
  23. 23. Financial Planning Online: Your Rights When Using Credit <ul><li>Go to: http://www. chicagofed .org </li></ul><ul><li>Click on: “Project Money $mart,” then “Your Credit Rights: How the Law Protects You” under the heading “Using Credit Wisely.” </li></ul><ul><li>This Web site provides information about various laws that protect your rights when using credit. </li></ul>
  24. 24. Tips on Using Credit Cards <ul><li>Use a credit card only if you can cover the bill </li></ul><ul><li>Impose a tight credit limit </li></ul><ul><li>Pay credit card bills before investing money </li></ul><ul><li>Use savings if necessary to pay the credit card bill on time </li></ul><ul><li>If you cannot avoid credit card debt, pay it off before other debt </li></ul>
  25. 25. Tips on Using Credit Cards <ul><li>Avoid credit repair services </li></ul><ul><li>Avoid credit card fraud </li></ul><ul><li>Deter identity theft </li></ul>
  26. 26. Financial Planning Online: The Best Credit Card for You <ul><li>Go to: http://www. bankrate .com/ brm /rate/cc_home.asp </li></ul><ul><li>This Web site provides links to help you get the best overall credit card rate, the lowest introductory rate, frequent flier credit cards, and other special features. </li></ul>
  27. 27. Tips on Using Credit Cards Exhibit 7.3: Self-Imposed Credit Limit Based on Monthly Cash Inflows
  28. 28. Tips on Using Credit Cards Exhibit 7.4: Self-Imposed Credit Limit Based on Monthly Cash Inflows and a Monthly Savings Goal
  29. 29. Dealing With Credit Debt <ul><li>If you find yourself with excessive credit card debt </li></ul><ul><ul><li>Spend as little as possible </li></ul></ul><ul><ul><li>Consider ways to increase income </li></ul></ul><ul><ul><li>Borrow from a family member </li></ul></ul><ul><ul><li>Get a debt consolidation loan </li></ul></ul><ul><ul><li>Sell assets for cash </li></ul></ul><ul><ul><li>Reduce everyday expenses </li></ul></ul>
  30. 30. Dealing With Credit Debt <ul><ul><li>If all else fails you may need to file for personal bankruptcy </li></ul></ul><ul><ul><ul><li>Chapter 7 allows the discharge of almost all debts, but also have to surrender assets to pay debt </li></ul></ul></ul><ul><ul><ul><li>Chapter 13 allows you to keep your assets, but the court takes control of your finances and devised a 3 – 5 year repayment plan </li></ul></ul></ul>
  31. 31. Financial Planning Online: Establishing and Protecting Credit <ul><li>Go to: http://www. chicagofed .org </li></ul><ul><li>Click on: Project Money $mart, then Spend Wisely on the right hand side of the page </li></ul><ul><li>This Web site provides information about establishing, using, and protecting your credit. </li></ul>
  32. 32. Financial Planning Online: Estimating the Time Necessary to Pay Off Your Balance <ul><li>Go to: http://www. financenter .com/products/ sellingtools /calculators </li></ul><ul><li>Click on: “Budget,” then “What will it take to pay off my balance?” </li></ul><ul><li>This Web site provides an estimate of the number of payments you need to make to pay off your credit card balance. </li></ul>
  33. 33. Financial Planning Online: Identity Theft <ul><li>Go to: http://www.consumer. gov / idtheft / </li></ul><ul><li>This Web site provides information on how thieves can steal your identity and how you can prevent identity theft. </li></ul>
  34. 34. How Credit Management Fits Within Your Financial Plan <ul><li>Key credit management decisions for your financial plan are: </li></ul><ul><ul><li>What limit should you impose on your credit card? </li></ul></ul><ul><ul><li>When should you use credit? </li></ul></ul>
  35. 35. Integrating Key Concepts
  36. 36. Integrating Key Concepts <ul><li>Part 1: Financial Planning Tools </li></ul><ul><li>Part 2: Liquidity Management </li></ul><ul><ul><li>In Chapter 5 we learned about banking and interest rates </li></ul></ul><ul><ul><li>In Chapter 6 we learned about managing your money </li></ul></ul><ul><ul><li>In Chapter 7 we learned about managing your credit </li></ul></ul><ul><li>Part 3: Financing </li></ul><ul><li>Part 4: Protecting Your Wealth </li></ul><ul><li>Part 5: Investing </li></ul><ul><li>Part 6: Retirement and Estate Planning </li></ul>
  37. 37. Finance Payment Methods <ul><li>Previous Balance Method </li></ul><ul><ul><li>Interest charged on the balance at the beginning of the new billing period </li></ul></ul><ul><li>Average Daily Balance Method </li></ul><ul><ul><li>Interest charged on average daily balance at the end of every day in the billing period </li></ul></ul><ul><li>Adjusted Balance Method </li></ul><ul><ul><li>Interest is charged based on the balance at the end of the new billing period </li></ul></ul>

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