9 Obtaining Affordable HousingYOU MUST BE KIDDING, RIGHTKel.docx

9 Obtaining Affordable Housing
YOU MUST BE KIDDING, RIGHT?
Kelvin Lattimore bought a new home and borrowed $230,000 at
4.75 percent interest for 30 years. His monthly payment for
interest and principal will be $1200. A friend suggested that
Kelvin should have been able to find a loan at 4.5 percent with
a monthly payment of $1165. Kelvin dismissed his friend's
comments, arguing that the difference in the monthly payments
was no big deal. His friend replied, “Kelvin, it's not the monthly
payment, it's the interest.” How much more in interest will
Kelvin pay over the life of the loan because he took a loan with
the higher rate?
A. $3600
B. $6600
C. $9600
D. $12,600
The answer is D. Kelvin will be making a higher payment each
and every month for 30 years. While the difference in the
monthly payment seems small [$35 ($1200 − $1165) per month
in this example], even such a little difference in the interest
rates on mortgage loans can add up to thousands of dollars in
extra interest over the life of the loan. Searching for the lowest
possible interest rate is very important when buying a home!
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
Decide whether renting or owning your home is better for you.
Explain the up-front and monthly costs of buying a home.
Describe the steps in the home-buying process.
Understand the mathematics of mortgage loans and distinguish
among ways of financing the purchase of a home.
Identify some key considerations when selling a home.
WHAT DO YOU RECOMMEND?
Shelby Clark has worked for a major consumer electronics

retailer since graduating from college. The company has
operations across the country with regional headquarters in
Atlanta, Denver, Minneapolis, and Boston. She has been based
in the Atlanta area for the past three years, and has begun to
think about buying a home rather than renting her townhouse
apartment. Then, last month, Shelby was promoted to deputy
regional director for the Denver office. The promotion
represents a key step for becoming a regional director in four or
five years.
What do you recommend to Shelby on the subject of buying a
home regarding:
1. Buying or renting housing in the Denver area?
2. Steps she should take prior to actively looking at homes?
3. Finding a home and negotiating the purchase?
4. The closing process in home buying?
5. Selecting a type of mortgage to fit her needs?
6. Things to consider regarding the sale of her new home should
she ultimately be promoted to a position in another of the four
regions?
YOUR NEXT FIVE YEARS
In the next five years, you can start achieving financial success
by doing the following related to obtaining affordable housing:
1.Read your leases and other real estate contracts thoroughly
before signing.
2.Save the money for a home down payment within a tax-
sheltered Roth IRA account.
3.Get your finances in order before shopping for a new home by
reducing debt, budgeting better, and clearing up anything that
keeps you from having a high credit score.
4.Buy a home as soon as it fits your budget and lifestyle so you
can take advantage of special income tax deductions and price
appreciation over time.
5.If you make a down payment of less than 20 percent on a
home, cancel private mortgage insurance as soon as the equity

in your home pushes the loan-to-value ratio down to 80 percent.
The housing market bubble of the last decade was the largest in
history. A housing bubble is a run-up in housing prices fueled
by demand, speculation and the belief that recent history is an
infallible forecast of the future. It can be identified through
rapid increases in valuations of real property until they reach
unsustainable levels and then decline.
Housing prices rose 50 to 100 percent or more in just a few
years and then sharply crashed. This occurred partly because
millions of Americans took out complicated mortgages that they
did not understand. And they often bought too expensive a
home. Mortgages that seemed affordable at first turned out later
to be unaffordable as the monthly repayment amounts increased
because the contracts allowed for increasing interest rates. The
resulting rising payments and declining home values were a
disaster and especially for those who lost their jobs in the Great
Recession. Only recently has the housing market rebounded in
most communities to pre-bubble prices.
The lingering effects of the economic downturn include the fact
that today three in ten people in their 20s and early 30s are
currently living with their parents. And 60 percent of all young
adults are receiving financial assistance from them. This
contrasts to a generation ago when only one in ten young adults
moved back home and very few received financial support.
About 90 percent of all independent young adults rent their
housing. In contrast, approximately 80 percent of people aged
55 to 64 are homeowners. Given these statistics, it is likely that
one day you will want to buy a home. At that point, you should
be able to mathematically evaluate the financial benefits of
renting versus buying and take a hard look at what it really
costs to buy a home. If you decide to buy, you will likely obtain
a mortgage loan—a loan to purchase real estate in which the
property itself serves as collateral. There are many types of
mortgage loans, and you will need to fully understand your
mortgage options before you obligate yourself for 15 to 30
years.

mortgage loanLoan to purchase real estate in which the property
itself serves as collateral.
9.1 SHOULD YOU RENT OR BUY YOUR HOME?
LEARNING OBJECTIVE 1
Decide whether renting or owning your home is better for you.
Whether to rent or buy depends on your preferences and what
you can afford. In the short run, renting is usually less
expensive than buying. In the long run, the opposite is usually
true.
9.1aRenting Housing May Be Less Expensive in the Short Term
People may choose to rent their housing for many reasons. The
large down payment and high monthly loan payments are
barriers to buying a home. Some may simply prefer the easy
mobility of renting or want to avoid many of the responsibilities
associated with buying. Prospective renters need to consider the
monthly rental fees, damage and security deposits, the lease
agreement and restrictions, and tenant rights.
Rent, Deposit, and Related ExpensesRent is the cost charged for
using an apartment or other housing space. It is usually due on a
specific day each month, with a late penalty being assessed if
the tenant is tardy in making the payment. Other fees could be
assessed for features such as use of a clubhouse and pool,
exercise facilities, WIFI, cable television, Internet service, and
space for storage and parking.
rentCost charged for using an apartment or other housing space.
A damage deposit is an amount given in advance to a landlord
to pay for repairing the unit beyond the damage expected from
normal wear and tear. It is often charged before the tenant
moves in, is often equal to one month's rent, and is refundable if
at the end of the lease the tenant leaves the home in good
condition. You may also be required to pay a security deposit to
provide some assurance that you will not move without paying
your rent. Again, this amount is often equal to the last month's
rent payment. It too is refundable or is applied to the last
month's rent. Thus, to rent an apartment might require payment
of $900 for the first month's rent, a $900 security deposit, and a

$900 damage deposit for a total of $2700.
DID YOU KNOW
How to Make Sure Your Damage Deposit Is Returned
If you leave a rental unit clean and undamaged, you have a legal
right to a refund of your damage deposit when you move out.
Several steps will help ensure that you receive a full refund:
• Make a list of all damages and defects when you first move
into the unit. Have the landlord sign this list.
• Maintain the unit and keep it clean.
• Notify the landlord promptly (in writing, if necessary) of any
maintenance problems and malfunctions.
• Give proper written notice of your intention to move out at
least 30 days in advance of the lease expiration.
• Make a written list of all damages and defects after moving
out but prior to turning over the keys. Have the landlord sign
this second list.
• Use certified mail (with a return receipt) to request the return
of your security deposit and to inform the landlord of your new
address.
• Use small-claims court (see Chapter 8, page 243), if
necessary, to obtain a court-ordered refund.
Written Lease Contracts Protect All Parties A lease is a contract
specifying the legal responsibilities of both the tenant and the
landlord. It identifies the amount of rent and security deposit,
the length of the lease (typically one year), payment
responsibility for utilities and repairs, penalties for late
payment of rent, eviction procedures for nonpayment of rent,
and procedures to follow when the lease ends. Leases often state
whether the security deposit accumulates interest, how soon the
unit must be inspected for cleanliness after the tenant vacates
the premises, and when the security deposit (or the balance) will
be forwarded to the tenant. Illustrative leases may be found at
Nolo. com. Renting housing without a formal, written lease may
seem like an easy and congenial way to do business, but it is
fraught with potential for disagreements later.
leaseIn this context, a contract specifying both tenant and

landlord legal responsibilities.
Two Types of Leases Two types of leases generally govern
tenant-landlord relationships. The first provides for periodic
tenancy (for example, week-to-week or month-to-month
residency), where the agreement can be terminated by either of
the parties if they give proper notice in advance (for example,
one week or one month). Without such notice, the agreement
stays in effect. This arrangement also typically applies in
situations in which no written lease is established. The second
type of lease provides for tenancy for a specific time, usually
for one year. When this period expires, the agreement
terminates unless prior notice is given by both parties that the
agreement will be renewed.
Lease Restrictions Lease agreements may contain a variety of
restrictions that are legally binding on tenants. For example,
pets may or may not be permitted; when they are permitted,
landlords often require a larger security deposit. Excessive
noise from home entertainment systems or loud parties may be
prohibited as well. To protect renters from overcrowding, a
clause may limit the number of overnight guests.
An important restriction applies to subleasing (wherein an
original tenant leases the property to another tenant). Here a
tenant who moves before the lease expires may need to obtain
the landlord's permission before someone else can take over the
rental unit. The new tenant may even have to be approved, and
the original tenant often retains some financial liability until the
term of the original lease expires.
subleasingAn arrangement in which the original tenant leases
the property to another tenant.
9.1bTenants Have Rights Even in the Absence of a Written
Lease
Tenants have a number of legal rights under laws in most states
and many local communities. Some important rights are as
follows:
• Prohibitions against retaliatory actions such as rent increases,
eviction, or utility shut-off for reporting building-code

violations or otherwise exercising a tenant's legal rights.
• Assurances of some legally prescribed minimum standard
of habitability for items such as running water, heat, and a
working stove and the safety of access areas such as stairways.
• The right to make minor repairs and deduct the cost from the
tenant's next rent payment. This right is subject to certain
restrictions, such as giving sufficient prior written notification
to the landlord.
• Prompt return of a security deposit, with limits placed on the
kinds of deductions that can be made. Landlords must explain
specific reasons for deductions. Some state laws require that
interest be paid on security deposits.
• The right to file a lawsuit against a landlord for
nonperformance. Such suits can be brought in a small-claims
court.
9.1cOwned Housing May Be Less Expensive in the Long Term
Americans have historically chosen single-family dwellings to
satisfy their owned-housing desires. Other alternatives are
popular, too, such as condominiums, cooperatives,
manufactured housing, and mobile homes.
Single-Family Dwellings A single-family dwelling is a housing
unit that is detached from other units. Buyers have many
choices available for both new and existing homes with varying
floor plans and home features. Some people prefer the modern
kitchens and other features found in newer homes; others prefer
the larger rooms, higher ceilings, and completed landscaping of
older homes.
single-family dwellingHousing unit that is detached from other
units.
Condominiums and Cooperatives The terms condominium and
cooperative describe forms of ownership rather than types of
buildings. These forms of ownership typically cost less than
single-family dwellings, offer recreation facilities, and have few
if any resident maintenance obligations.
Be sure to factor homeowners association fees into the monthly
income needed to purchase a condominium.

With a condominium (or condo), the owner holds legal title to a
specific housing unit within a multiunit building or project and
owns a proportionate share in the common grounds and
facilities. The entire development is run by the owners through
a homeowners association. Besides making monthly mortgage
payments, the condominium owner must pay a
monthly homeowners association fee that is established by the
homeowners association. This fee covers expenses related to the
management of the common grounds and facilities and
insurance on the building.
condominium (condo)Form of ownership with the owners
holding legal title to their own housing unit among many, with
common grounds and facilities owned by the developer or
homeowners association.
Some areas of concern for condominium owners include
potential increases in homeowner's fees and limited resale
appeal of the unit. Condo market prices are much more volatile
than for single-family dwellings and condos don't increase as
much in value as single-family dwellings. In addition, during a
housing downturn, their values decline more than single-family
homes.
FINANCIAL POWER POINT
Understand Your Deed Restrictions
Most communities, new housing developments, and cooperative
and condominium associations have deed
restrictions established by local zoning laws, by the developer,
and by the owners themselves. These rules govern such things
as minimum lot size, the outside appearance and landscaping of
the property, allowable secondary buildings, parking of
vehicles, and other aspects of the use and appearance of the
property. You should ask for and read the deed restrictions very
carefully before buying.
With a cooperative (or co-op), the owner holds a share of the
corporation that owns and manages a group of housing units.
The value of this share is equivalent to the value of the owner's
particular unit. The owner also holds a proportional interest in

all common areas. A monthly fee for the cooperative covers the
same types of items as does a condominium fee and also
includes an amount to cover the professional management of the
complex as well as payments on the cooperative's mortgage
debt. (The pro rata share for interest and property taxes is
deductible on each shareholder's income tax return.)
cooperative (co-op)Form of ownership in which the owner holds
a share of the corporation that owns and manages a group of
housing units as well as common grounds and facilities.
Manufactured Housing and Mobile HomesManufactured
housing consists of fully or partially factory-built housing units
designed to be transported (often in portions) to the home site.
Final assembly and readying of the housing for occupancy
occurs at the home site. Mobile homes, in contrast, are fully
factory-assembled housing units that are designed to be towed
on a frame with a trailer hitch. Mobile homes depreciate in
value every year just like automobiles.
9.1dSo Who Pays More—Renters or Owners?
According to conventional wisdom, homeowners enjoy a
financial advantage over renters when total housing costs are
calculated over many years. Renters generally pay out less
money in terms of annual cash flow, but owners receive annual
income tax advantages and they can see increases in the value
of their homes over time that can improve their financial
situation. However, as evidenced by events of recent years,
there is no guarantee that housing values will increase in a
uniform fashion over time; they might even decline.
Ask your real estate agent for the price-to-rent ratio in your
community. This ratio shows the average home price divided by
annual rent in a community. The national average is 11. The
higher the ratio number, especially above 15, is more attractive
for renting a home versus buying similar housing. (See Chapter
16, page 483 for more information on price-to-rent ratios.)
FINANCIAL POWER POINT
Should 20-Somethings Buy Their Own Home?
The prevailing wisdom is to buy a home as soon as you can

afford to do so. However, the most critical factor for a potential
first-time buyer is their job situation. You want to be confident
that your job is secure before buying a home. Plus you don't
want to be forced to sell a home you recently purchased if you
are going to be transferred by your employer to another
community because that would likely result in a financial loss
on the sale. Assess your situation carefully.
Based on Initial Cash Flow, Renters Appear to Win The Run the
Numbers worksheet “Should You Buy or Rent?” on page 254
illustrates a comparison between a condominium and an
apartment with similar space and amenities. For the apartment,
rent would total $1000 per month. Assume you could buy the
condominium for $180,000 by using $36,000 in savings as a
down payment and borrowing the remaining $144,000 for 30
years at 6.0 percent interest. As the worksheet shows, renting
would have a cash-flow cost of $11,640 after a reduction for the
interest that could be earned on your savings (after taxes).
Buying requires several expenses beyond the monthly mortgage
payment, including a monthly $150 homeowner's fee ($1800
annually) in our example. In this case, the cash-flow cost of
buying is $16,485, or $4,845 more than renting.
After Taxes and Appreciation, Owners Usually Win To make
the comparison more accurate, you must also consider the tax
and appreciation aspects of the two options. If you rent, you
would pay $180 ($720 × 0.25) in income taxes on the interest on
the amount in your savings account ($36,000) not used for a
down payment. If you buy the condominium, $1768 of the
$10,360 in annual mortgage loan payments during the first year
will go toward the principal of the debt, and the remainder—
$8592 ($10,360 −$1768)—will go toward interest. Both
mortgage interest and real estate property taxes qualify as
income tax deductions. If you are in the 25 percent marginal tax
bracket, your taxes would be reduced by $2148 ($8592 × 0.25)
as a result of deducting the mortgage interest and by $750
($3000 × 0.25) as a result of deducting the real estate tax. In
effect, every time you make a payment you will get some of it

back from the government.
Condominiums also have a possibility of appreciation, or
increase, in the home's value. A conservative assumption would
be that the condominium will increase in value by 1 percent per
year since condo values do not usually rise as fast as single
family dwellings. A condominium valued at $180,000 would,
therefore, be worth $181,800 ($180,000 × 1.01) after one year, a
gain of $1800. In this case, buying is financially better than
renting by approximately $1801 ($11,820−$10,019).
RUN THE NUMBERS
Should You Buy or Rent?
This worksheet can be used to estimate whether you would be
better off renting housing or buying. If you are renting an
apartment and planning to buy a house, qualitative differences
will enter into your decision. This worksheet will put the
financial picture into focus. A similar worksheet can be found
at www.finance.yahoo.com/calculator/real-estate/hom06/
DO IT IN CLASS
DID YOU KNOW
Walking Out on a Mortgage Is Usually a Bad Idea
In recent years some home borrowers have decided to take
a strategic default. When the value of their homes decreased,
they found themselves horribly upside down (also known
as under water) meaning that they owed more than the homes
were worth. Some financially strapped borrowers in such a
situation choose to stop paying on their mortgage and let the
lender take back the home. This is attractive because mortgages
are nonrecourse loans. With such loans, the lender may not go
after other assets if the foreclosed home brings an insufficient
amount to cover the outstanding debt when sold at auction.
Given the moral issue this is a difficult decision for the
underwater homeowner.
Note that the calculations above compare somewhat equivalent
housing types. The process is more complicated when you want

to compare renting an apartment with buying a house. You
definitely should still do the math but recognize that you are
comparing unlike properties. It is probable that you will find
that buying a home is significantly more expensive than renting
for the first few years. But if you stay in the home for five years
or longer, the financial situation generally improves for the
homeowner, especially for one with a fixed interest rate loan.
This assumes you do not pay too much for it in the first place.
DID YOU KNOW
About Buying a Foreclosed Property
Any slip-up in making mortgage repayments may result
in foreclosure. This is a specific legal process in which a lender
attempts to recover the balance of a loan from a borrower who
has stopped making payments to the lender by forcing the sale
of the asset used as the collateral for the loan. Foreclosed
properties are sometimes viewed as a way to buy a home for a
low price. If interested in buying such a property you should
understand the basic aspects of foreclosed properties:
foreclosureProcess in which the lender sues the borrower to
prove default and asks the court to order the sale of the property
to pay the debt.
1.Short Sale. A short saleoccurs when a home sale is negotiated
with the owner at a price below the actual balance of the debt.
The property may or may not be in foreclosure as yet but the
seller is trying to get out from under the debt. The lender must
approve the short sale. Lenders are tough negotiators as they
want to get as much money as possible for the property but may
be willing to waive closing costs and other fees, making the
overall cost more affordable.
2.Preforeclosure. Preforeclosureis the time between when the
homeowner has been notified by the lender that he or she is in
default and the actual foreclosure has been completed. To
purchase such a property, you would negotiate a price directly
with the owner The owner may be willing to take a price lower
than the market value especially if the offer is above the
mortgage balance. Here the owner can get out of the loan and

avoid foreclosure and perhaps still recoup some money. Or the
purchase may be a short sale.
3.Bank-owned property.Once the foreclosure process has been
completed, the lender typically takes ownership of the property.
The lender then will attempt to sell the property on its own,
through a real estate agent, or at aforeclosure auction. Most of
the people bidding on these homes at auction are professionals
and the buyer must come up with the cash immediately.
There are many potential pitfalls when buying a foreclosed
residence. The property is likely to need repairs, so insist upon
a professional home inspection. Also, taxes and other
assessments may be owed. Foreclosure properties can be found
on such websites
as www.Foreclosure.com, www.Foreclosures.com,
and www.RealtyTrac.com, which charge monthly subscription
fees for access to their databases. Use a licensed real estate
agent and hire a real estate attorney to help when making an
offer and for the closing process.
CONCEPT CHECK 9.1
1. Explain the purpose and value of a lease for both the renter
and the landlord.
2. Distinguish between periodic tenancy and tenancy for a
specific time when renting housing.
3. Identify three ways that home buyers can save on their
income taxes.
4. Illustrate how housing buyers can pay less than renters when
taxes and appreciation of housing values are considered.
9.2 WHAT DOES IT COST TO BUY A HOME?
Explain the up-front and monthly costs of buying a home.
Buying housing represents the largest outlay of funds over most
people's lifetime. Some of these costs occur up front. The
largest of these is usually the down payment. Others, such as
the mortgage payment, occur monthly. A few items, such as real
estate property taxes, require both an initial outlay and
recurring monthly payments. Table 9-1 illustrates these outlays

for the purchase of a $185,000 single-family dwelling with
$25,000 down financed by a 30-year mortgage at 6.0 percent
interest. (We have used a 6.0 percent rate for illustration
purposes. Rates may be lower or higher depending on your
credit score and market conditions.) This same example is used
repeatedly throughout this chapter to illustrate the costs of
home buying as it is near the median price for firsttime buyers.
9.2aPay Up-Front Costs at the Closing
First-time home buyers are faced with substantial initial costs
when buying a home. These include the down payment and
closing costs. Closing costs include fees and charges other than
the down payment and typically vary from 2 to 7 percent of the
mortgage loan amount. The down payment and closing costs
must be paid at a meeting called the closing at which ownership
of the property is transferred. All the parties to the purchase,
sale, and the mortgage loan are represented at the closing. Up-
front costs are indicated on page 257 in Table 9-1.
closing costsInclude fees and charges other than the down
payment and typically vary from 2 to 7 percent of the mortgage
loan amount.
The Down Payment The down payment is an initial payment
made in the context of buying expensive items on credit, such
as a vehicle or home. When buying a home, the buyer actually
writes a check to the seller for that amount. In this example, we
assume that the prospective homeowner has $25,000 saved to
use as a down payment on a $185,000 home and will, therefore,
need to borrow $160,000.
down paymentAn initial payment made in the context of buying
expensive items on credit, such as a vehicle or home.
Points A point (or interest point) is a fee equal to 1 percent of
the total loan amount. Any charges for points must be paid in
full when the home is bought, although sometimes they can be
added to the amount borrowed. Lenders use points to increase
their income return on loans. For example, a lender might
advertise a loan as having an interest rate 0.25 percentage point
below prevailing rates but then charge 1 point. Points are, in

effect, prepaid interest and compensate the lender for having a
lower interest rate. In our example, the lender charged 1 point
on the $160,000 loan, resulting in a charge of $1600. By law,
interest points must be included when calculating the APR for
the loan because they really are interest. Interest points are
deductible on federal income tax returns.
point/interest pointFee equal to 1 percent of the total mortgage
loan amount.
Attorney Fees Home buyers should hire an attorney to review
documents and advise and represent them prior to and during
closing. Attorney fees commonly amount to 0.5 percent of the
purchase price of the home, although some attorneys do this
work for a flat fee ($500 in our example).
Table 9-1Illustrated Up-Front and Monthly Costs When Buying
a Home (Purchase Price of a Home, $185,000 with $25,000
Down; Closing on July 1)
Home-Buying Costs
At Closing
Monthly
Payments RequiredUp Front
Down payment
$25,000
Points (1)
1,600
Attorney's fee
500
Title search
200
Title insurance (to protect lender)
320

Title insurance (to protect buyer)
320
Loan origination fee
800
Credit reports
60
Home inspection
400
Deed recording fees
…
Discussion 4
Complete Learning Exercise E on p. 177.
Strategy Definition
Forward Integration Gaining ownership or increased control
over distributors or
retailors
Backward Integration Seeking ownership or increased control of
a firm’s suppliers
Horizontal Integration Seeking ownership or increased control
over competitors
Market Penetration Seeking increased market share for present
products or

services in present markets through greater marketing efforts
Market Development Introducing present products or services
into new geographic
area
Product Development Seeking increased sales by improving
present products or
services or developing new ones
Related Diversification Adding new but related products or
services
Unrelated Diversification Adding new, unrelated products or
services
Retrenchment Regrouping through cost and asset reduction to
reverse
declining sales and profit
Divestiture Selling a division or part of an organization
Liquidation Selling all of a company’s assets, in parts, for their
tangible
worth
1. Amazon started producing and selling its own line of
diapers.- Product Development
2. MillerCoors offers free delivery of Miller Lite in four U.S.
cities for customers who order through its
online store.- Forward Integration
3. Sears is closing about 235 stores annually.- Retrenchment

4. The largest toymaker in the United States, Mattel, is
struggling; therefore, it is introducing flashier
and more educative toys. – Related Diversification
5. German power utility E.ON SE sold its Spanish assets to
Australia’s Macquarie Group and Kuwait’s
sovereign-wealth fund for $3.1 billion. – Divestiture Strategy
6. Target Corporation is closing all of its 133 stores in Canada
and China. - Retrenchment
7. Coca-Cola recently axed 1,600 white-collar jobs globally as
part of a cost-cutting move. -
Retrenchment
8. Nissan has totally revamped its Titan full-size pickup truck
with new features and options and style. –
Product Development
9. General Motors just introduced a sports car version of its
electric car, the Chevrolet Volt, and is
introducing an all-electric vehicle in 2017 called the Chevrolet
Bolt, capable of driving 200 miles without
recharging. – Product Development
10. SolarWinds acquired Pingdom, Confio, and N-Able
Technologies to obtain different products and
services since the solar business has slowed as oil prices have
dropped. – Unrelated Diversification
11. Amazon Studios is branching out from television series to
movies, with plans to begin producing and
acquiring original movies for theatrical release and video
streaming. – Related Diversification

12. ZF Friedrichshafen AG of Germany recently acquired TRW
Automotive Holdings in the United States
to create the world’s second-largest auto-parts supplier behind
Germany’s Robert Bosch GmbH and
ahead of Japan’s Denso Corp. – Horizontal Integration
13. Southwest Airlines recently began flying outside the United
States, with flights to the various
Caribbean, Central America, and Mexico destinations. – Market
Development
14. Amazon is pushing aggressively into the same-day grocery
delivery service with its Amazon Fresh
business along the west coast of the United States. – Forward
Integration
15. USPS has begun delivering groceries for Amazon.com
within the Amazon Fresh grocery-delivery
service, especially in San Francisco and other markets. –
Backward Integration
16. USPS also recently launched Access Point, a strategy that
allows customers to pick up their packages
at dry cleaners, convenience stores, and pharmacies. – Market
Development
17. The huge food company General Mills recently acquired
Annies’ Inc. for $820 million, paying a 37
percent premium for the firm, in order to expand its presence in
the rapidly growing organic and natural
foods category. – Horizontal Instructional
18. Google recently entered the hotel-booking industry by
acquiring the firm called Room 77 and
expanding its ties with big hotel firms such as Hilton

Worldwide Holdings and Radisson Hotels that now
offer virtual tours on Google. Google now allows hotels to list
their rooms on their site, in effect
bypassing travel search sites such as Priceline Group, Expedia,
and TripAdvisor. Unrelated
Diversification
19. Google recently partnered with the medical firm Novartis to
develop high-tech contact lenses that
monitor glucose levels and other body functions. – Unrelated
Diversification
20. Amazon recently entered the mobile payments business and
is now competing with PayPal,
ApplePay, and all charge cards. – Related Diversification
21. The world’s largest furniture retailer, IKEA, recently
diversified into the insurance business, providing
child, pregnancy, and home insurance products at its stores. –
Unrelated Diversification
22. Office Depot closed nearly 500 stores in the last three years.
- Retrenchment
23. The drugmaker, Dendreon Corporation, recently filed for
Chapter 11 bankruptcy. Its major drug,
Provenge, which treats prostate cancer, never gained traction in
the market. - Liquidation
24. Symantec Corporation, known for its antivirus software,
recently split its $4.2 billion cybersecurity
business away from its $2.5 billion management information
business, making them two publicly traded
companies. – Related Diversification

25. eBay recently split into two companies, with PayPal being
one and the eBay Marketplace segment
being the other. – Related Diversification
References:
David, F. R, & David, F. R. (2017). Strategic Management.
Concepts and Cases. A Competitive Advantage
Approach. (16th Ed.). Boston: Pearson Education, Inc.
5 Managing Checking and Savings Accounts
Kayla Patterson realized about two weeks ago that she had
misplaced her debit card. At first she was not worried because
she reasoned that it had to be somewhere at home. Last week
she received her account statement. She looked at her statement
today and found that $200 had been withdrawn from her account
on five different occasions ($1000 total). She immediately
called her bank to report the fraudulent withdrawals. How much
of this money will Kayla lose because of the unauthorized
withdrawals?
A. $0
B. $50
C. $500
D. $1000
The answer is C, $500. Because Kayla waited more than two
days after realizing the card was lost to report it to her financial
institution, federal law states that she is liable for the first $500
in unauthorized uses. If she had notified the bank within two

days, her loss would have been only $50. If Kayla failed to
notify her bank of the loss within 60 days, the law states that
she would lose all of the money taken fraudulently. Immediately
report a lost debit card!
LEARNING OBJECTIVES
Identify the goals of monetary asset management and sources
of such financial services.
Understand and employ the various types of accounts available
to meet the goals of monetary asset management.
Describe your legal protections when conducting monetary
asset management electronically.
Discuss your personal finances and money management more
effectively with loved ones.
Nathan Rosenberg and Alyssa Adams are to be married in two
months. Both are employed full time and currently have their
own apartments. Once married, they will move into Alyssa’s
apartment because it is larger. They plan to use Nathan’s former
rent money to begin saving for a down payment on a home to be
purchased in four or five years. Nathan has a checking account
at a branch of a large regional commercial bank near his
workplace where he deposits his paychecks. He also has three
savings accounts—one at his bank and two small accounts at a
savings and loan association near where he went to college.
Nathan pays about $30 per month in fees on his various
accounts. In addition, he has a $10,000 certificate of deposit
(CD) from an inheritance; this CD will mature in five months.
Alyssa has her paycheck directly deposited into her share draft
account at the credit union where she works. She has a savings
account at the credit union as well as a money market account at
a stock brokerage firm that was set up years ago when her father
gave her 300 shares of stock. She also has $9300 in an
individual retirement account invested through a mutual fund.
What would you recommend to Alyssa and Nathan on the

subject of managing checking and savings accounts regarding:
1.Where they can obtain the services that they need for
managing their monetary assets?
2.Their best use of checking accounts and savings accounts as
they begin saving for a home?
3.The use of an asset management account for managing their
monetary assets?
4.Their use of electronic banking?
5.How they can best discuss the management of their money and
finances?
by doing the following related to checking and savings
accounts:
1. Use a free, interest-earning checking account for your day-to-
day spending needs.
2. Start now to build an emergency fund sufficient to cover
three months of living expenses.
3. Use a pay-yourself-first approach as you begin to build other
savings and investments.
4. Secure your electronically accessible accounts with strong
user IDs, PINs and passwords.
5. Use all your checking and savings accounts appropriately by
never overdrawing the accounts and by reconciling them
monthly.
Your financial success will depend in part on how well you
manage your monetary assets. These assets were defined
in Chapter 3 as cash and low-risk, near-cash items that can be
readily converted to cash with little or no loss in value. If you
are a college student, your monetary assets are probably the
largest component of your net worth and are the major focus of
the activities you consider “personal finance.” Monetary assets
represent all your money.
People use monetary assets in one of two ways. First, they use
them for day-to-day spending. They buy food, clothing,

entertainment, and many products and services. Spending
usually requires cash or the use of a check or a debit card to
access funds in a checking account. (Using credit is covered
in Chapters 6 and 7.) Checking accounts are appropriate places
to keep money that you will spend within the next three to six
months or so. The second way that people use monetary assets
is to accumulate funds to meet needs that will occur six months
to, perhaps, three to five years in the future. You could keep
these funds in a checking account, but various types of savings
accounts pay more interest. With savings accounts, the focus is
on holding money safely until needed in the future for spending
or investing. The money in most checking and savings accounts
is fully insured by the federal government.
The third way that people use monetary assets is to make
investments. Investments are the best places to put money you
will not need for 5, 10, or even 20 years in the future. The
magic of the world of investments is that over long periods of
time, it is quite possible to watch your money triple or
quadruple over the original amount invested. Investments are
examined in Chapters 13 through 16.
5.1. WHAT IS MONETARY ASSET MANAGEMENT?
Identify the goals of monetary asset management and sources of
such financial services.
Monetary asset (cash) management encompasses how you
handle cash on hand, checking accounts, savings accounts and
certificates of deposit, money market accounts, and other
monetary assets.
monetary asset (cash) managementHow you handle your
monetary assets.
5.1a The Goals of Monetary Asset Management
The goals of monetary asset management are to maximize
interest earned and to minimize fees while keeping funds safe
and readily available for living expenses, emergencies, and
saving and investment opportunities. Successful monetary asset
management allows you to earn interest on your money while

maintaining reasonable liquidity and safety. Liquidity refers to
the speed and ease with which an asset can be converted to
cash. Safety means that your funds are free from financial risk.
liquidityEase with which an asset can be converted to cash.
5.1b Who Provides Monetary Asset Management Services?
The financial services industry comprises companies that
provide checking, savings, and money market accounts and
possibly credit, insurance, investment, and financial planning
services. These companies include depository institutions such
as banks and credit unions, stock brokerage firms, mutual funds,
financial services companies, and insurance companies. Table
5-1 matches these various types of firms with the financial
products and services that they offer. As you can see, there is
considerable overlap. For example, State Farm, which most
people recognize as an insurance company, also owns a mutual
fund and a bank.
financial services industryCompanies that provide monetary
asset management and other services.
Depository InstitutionsDepository institutions are financial
institutions in the United States that are legally allowed to
accept monetary deposits from consumers and make loans. They
all can offer some form of government account insurance on
deposited funds and are government regulated. They offer a
wide range of financial services, including loans. Examples of
depository institutions are commercial banks, savings banks,
and credit unions. Although each is a distinct type of
institution, people often call them all simply banks. Internet
banks are similarly regulated and operate entirely online, and
because they avoid the “bricks and mortar” costs of
conventional institutions they often pay higher interest rates.
depository institutionsOrganizations licensed to take deposits
and make loans.
Table 5-1Today’s Providers of Monetary Asset Management
Services
Providers
What They Sell

Examples of Well-Known Company Names
Depository institutions (banks, mutual savings banks, and credit
unions)
Checking, savings, lending, credit cards, investments, and trust
advice
Citibank, Chase, Bank of America, Wells Fargo
Mutual funds
Money market mutual funds, tax-exempt funds, bond funds, and
stock funds
Fidelity, T. Rowe Price, Vanguard
Stock brokerage firms
Securities investments (stocks and bonds), mutual funds, and
real estate investment trusts
Schwab, Fidelity
Financial services companies
Checking, savings, lending, credit cards, securities investments,
real estate investments, insurance, accounting and legal advice,
and financial planning
American Express, Edward Jones, Raymond James
Insurance companies
Property and liability, health and life insurance, credit services,
financial planning services
Allstate, Aetna, State Farm
Commercial banks are a type of bank that provides services
such as accepting deposits, making business loans, and offering
basic investment products. They are under federal and state
regulations. They offer numerous consumer services, such as
checking, savings, loans, safe-deposit boxes, investment
services, financial counseling, and automatic payment of bills.
commercial banksA type of bank that provides services such as
accepting deposits, making business loans, and offering basic
investment products.
Savings banks (or savings and loan associations-S&Ls) focus
primarily on accepting savings and providing mortgage and
consumer loans. They offer checking services through interest-
earning NOW accounts (discussed later in this chapter). Savings

banks generally pay depositors an interest rate about 0.10 to
0.20 percentage points higher than the rate found at commercial
banks.
Accounts in federally chartered commercial banks and savings
banks are insured against loss by the Deposit Insurance Fund
(DIF) of the Federal Deposit Insurance Corporation (FDIC),
which is an agency of the federal government. The regulator of
these banking entities is the office of the Comptroller of the
Currency.
A credit union (CU) also accepts deposits and makes loans.
Credit unions operate on a not-for-profit basis and are owned by
their members. The members/owners of the credit union all
share some common bond, such as the same employer, church,
trade union, fraternal association, or neighborhood. People in
the family of a member are also eligible to join.
credit union (CU)Member-owned, not-for-profit, insured
financial institutions that provide checking, savings, and loan
services to members.
Federally chartered credit unions have their accounts insured
through the national Credit Union Share Insurance Fund
(NCUSIF), which is administered by the National Credit Union
Administration (NCUA). State-chartered credit unions are often
insured by NCUSIF, and most others participate in private
insurance programs. Credit unions usually pay higher interest
rates and charge lower fees than commercial banks or savings
banks.
A Mutual Savings Bank (MSB) is similar to a savings bank in
that it also accepts deposits and makes housing and consumer
loans. State laws permit these banks to operate in only 17
states, primarily those in the eastern United States. They are
called “mutual” because the depositors own the institution and
share in the earnings. Generally, MSBs have the DIF insurance
coverage. Like savings banks, they offer interest-earning
checking accounts.
DID YOU KNOW
Bias Toward the Familiar and Comfortable

People engaged in managing checking and savings accounts
have a bias toward certain behaviors that can be harmful, such
as a tendency toward sticking with the familiar and comfortable.
Young adults often bank where their parents do and will stay
with that bank for years. What to do? Look for the depository
institution that charges the lowest fees and pays the highest
interest, which is probably a credit union.
DO IT IN CLASS
Deposit Insurance Protects Your Money Deposits in depository
institutions are insured against loss of both the amount on
deposit and the accrued interest by various insurance funds. Not
a single depositor has lost a dime of insured funds since the
inception of deposit insurance during the Great Depression of
the 1930s. This federal deposit insurance for your deposits at
any one institution works as follows:
federal deposit insuranceInsures deposits, both principal
amounts and accrued interest, up to $250,000 per account for
most accounts.
1. The maximum insurance on all of your single-ownership
(individual) accounts (held in your name only) is $250,000.
2. The maximum insurance on all of your joint accounts
(accounts held with other individuals) is $250,000.
3. The maximum insurance on all of your retirement accounts is
$250,000.
4. A maximum of $250,000 in insurance per beneficiary is
available on payable at death accounts (accounts set up so that
the funds go to a designated person[s] upon the death of the
account holder).
Thus, individuals might have several increments of insurance
for their accounts at any one institution. Funds on deposit at
other institutions will also have these same limits. So if your
rich uncle had $140,000 in individual accounts at each of two
different institutions, you would have a total of $280,000 of
deposit insurance.
Other Financial Services Providers Depository institutions are
not the only providers of monetary asset management services.

Mutual funds, stock brokerage houses, and insurance companies
provide some monetary asset management services as well. The
services they do not provide are government-insured checking
and savings accounts; however, many of these companies also
own banks and thus do provide insured deposits through their
banking entities.
Mutual funds are investment companies that raise money by
selling shares to the public and then invest that money in a
diversified portfolio of investments. Most have created cash
management accounts to provide a convenient and safe place to
keep money while awaiting alternative investment
opportunities. Money deposited in a mutual fund is not insured
by the federal government, although some mutual fund
companies purchase insurance privately for the noninvestment
portions of customers’ accounts. Mutual funds are the subject
of Chapter 15.
mutual fundsInvestment companies that raise money by selling
shares to the public and then invest that money in a diversified
investment portfolio.
Stock brokerage firms are licensed financial institutions that
specialize in selling and buying stocks, bonds, and other
investments and providing advice to investors. They earn
commissions based on the buy and sell orders that they process.
Stock brokerage firms typically offer cash or mutual fund
accounts into which clients may place money while waiting to
make investments. The noninvestment portion of an account (for
example, cash held in the account prior to making an
investment) is protected by the Securities Investor Protection
Corporation (SIPC), a nongovernment entity. Insurance
companies provide property, liability, health, life, and other
insurance products (These topics are covered in Chapters 10–
12.). Many offer monetary asset services, such as money market
accounts.
CONCEPT CHECK 5.1
1. Identify the primary goals of monetary asset management.
2. Explain the circumstances when it would be appropriate to

have funds in a checking account, a savings account, or in
investments.
3. Describe your insurance protections when you have funds on
deposit in a depository institution as opposed to other financial
services providers.
5.2 CHOOSE APPROPRIATE MONETARY ASSET
ACCOUNTS
Understand and employ the various types of accounts available
to meet the goals of monetary asset management.
There are various categories monetary asset accounts. Each has
its own costs and benefits. Depending on the complexity of your
mix of monetary assets you can select the tools that meet your
needs: (1) Low-cost, interest-earning checking accounts from
which to pay ongoing, current living expenses, and (2) Interest-
earning savings accounts in financial institutions in which you
accumulate and hold funds for upcoming expenditures or
investments.
5.2a Conduct Day-to-day Spending Using Interest-earning
Checking Accounts
A checking account at a depository institution allows you to
write paper checks against amounts you have on
deposit. Checks transfer your deposited checking account funds
to other people and organizations. Checking accounts also can
be accessed by using a debit card (or check card) in an
automated teller machine (ATM), a point-of-sale (POS) terminal
at a retail store or on your cell phone, tablet or computer. When
you use a debit card, funds are instantaneously removed from
your account.
checking accountAt depository institutions, allows depositors to
write checks against their deposited funds, which transfer
deposited funds to other people and organizations.
Whenever you deposit money into, withdraw funds from, or
make any payment out of a checking account, you should record
the transaction. To do so record the date, amount, and purpose
of the transaction in the check register provided with your paper

checks or in an electronic recordkeeping software program and
calculate your new account balance. Failure to know your
available account balance can lead to costly fees when you
overdraw your account.
Types of Checking Accounts at Depository
Institutions Checking accounts may or may not pay
interest. Demand-deposit accounts are checking accounts that
pay no interest. Instead, select an interest-earning checking
account (also called a negotiable order of withdrawal [NOW]
account). A share draft account is the credit-union version of a
NOW account. NOW accounts and share draft accounts may pay
higher interest rates on larger balances (such as amounts above
$1000). The combination of a base rate and a higher rate is
called tiered interest. For example, an account might pay 0.30
percent on the first $2000 and 0.50 percent on any additional
funds in the account. Super NOW accounts are also available,
and they pay slightly higher interest rates but place a limit on
the number of checks that can be written each month.
interest-earning checking accountAny account on which you can
write checks that pays interest.
tiered interestA way to calculate interest where the account that
pays lower interest on smaller deposits and higher interest on
larger balances.
Figure 5-1The Relationship Among Checking, Savings, and
Investment Accounts
ADVICE FROM A PROFESSIONAL
Protect Yourself from Overdraft Fees
An overdraft, or bounced check, occurs any time you write a
check or use a debit card when there are insufficient funds in
the account. If funds to cover the usage are not available, the
bank will charge you a fee that averages $33 nationally. And the
merchant to whom a bad check was written will charge you a
similar fee. The costs could total $60 to $80 for one bad check
or overdraft!
It is easy to fall victim to these charges if you are not careful.

One reason is that banks can choose the order in which they
process checks/debits. Let’s say you write a large check one
day. The next day you use your debit card for three small
purchases and the check shows up at your bank for payment.
There might be enough money in your account to cover the
three small items but not the check. The bank can choose to
process the check first. You are now overdrawn and the three
debit card items are overdrafts, as well. You now have four
overdrafts. If the bank had cleared the debits first you would
only have had one overdraft.
Almost $40 billion dollars in overdraft fees were collected by
banks in a recent year. Such fees are one of their biggest profit
centers. Don’t be part of this equation. Your financial
institution likely offers three ways to avoid overdraft fees:
1. Automatic funds transfer agreement. The amount necessary to
cover an overdraft will be transmitted from your savings
account to your checking account, as long as you keep sufficient
funds in your savings account. An automatic funds transfer
agreement is the least expensive of these alternatives.
2. Automatic overdraft loan agreement. The needed funds will
be automatically loaned to you by your bank if you have an
overdraft line of credit or will be charged as a cash advance to
your Visa or MasterCard credit card account with the same
bank. Note that the loan may be advanced in fixed increments of
$100. If you need only $10, for example, you will consequently
be responsible for paying interest on amounts not needed. A
cash advance fee of $10 or $20 may also be assessed by the
credit card company and a high interest rate starts just as soon
as you access the funds.
3. “Opt-in” overdraft/bounce protection. The bank will honor
overdrafts up to a certain limit, such as $1000, by loaning the
money to the account holder. In return, the customer must pay a
$25 to $40 fee for each overdraft. Then, the customer must
repay the funds usually within a month. With some plans, the
money is repaid as soon as any money is deposited back in the
account.

The Dodd-Frank Wall Street Reform and Consumer Protection
Act requires that you “opt in” for the opt-in protection. Think
twice before you do so. Many new users of checking accounts
rack up high levels of fees because they do not really
understand opting-in. Opting in means that the bank will not
alert or stop you when you use your debit card or write a check
when there are insufficient funds. Use of a debit card for $3.50
for a drink and some chips could trigger a fee ten times as high.
You must keep track of your own account balance and ensure
that you have enough in your account each and every time you
access the funds. Banks love it when people opt-in and they
receive about 25 percent of their revenue from overdraft fees.
Opting in is a high-risk and high-cost way to cover overdrafts.
You should be able to get by with options 1 or 2 above. If you
do want to opt in, read the rules of the plan before you make the
decision.
Of the billions of dollars in overdraft fees assessed each year,
most were to young and low-income customers. Will you be a
victim? The choice is yours. Consider these ways to deal with
overdrafts listed from best to worst:
Ways to cover your overdrafts
Examples of possible cost for each overdraft. You should know
what your bank charges
Practice good account management
$0; you have no overdrafts
Automatic funds transfer agreement
$0 to $5 transfer fee
Overdraft line of credit
$15 annual fee + 18% APR
Automatic overdraft cash advance from a credit card
$3 to $10 cash-advance fee + 18% APR
“Opt-in” overdraft/bounce protection
$20 to $30
Patti Fisher and Irene Leech
Virginia Tech, Blacksburg, Virginia
College students can sometimes benefit from a lifeline banking

account that offers access to certain minimal financial services
that every consumer needs—regardless of income—to function
in our society. An applicant’s income and net worth determine
acceptance into a lifeline program. The cost of lifeline banking
accounts is extremely low, often about $5 per month, although
they do not pay interest.
Checking Account Balance Requirements and Fees Most
interest-earning checking accounts have a balance requirement
that, if not met, will result in the assessment of a monthly fee
and, often, forfeiture of any interest earned for the month. An
account with no balance requirement is preferable but these are
increasingly rare in today’s banking world.
Balance requirements are structured as either a minimum-
balance or average-balance requirement. With a minimum-
balance account, the customer must keep a certain amount
(perhaps $500 or $1000) in the account throughout a specified
time period (usually a month or a quarter) to avoid a flat service
charge (usually $5 to $15). A fee is assessed whenever the
triggering event occurs—that is, when the balance drops below
the specified minimum. With an average-balance account, a
service fee is assessed only if the average daily balance of funds
in the account drops below a certain level (perhaps $800 or
$1200) during the specified time period (usually a month or a
quarter).
minimum-balance accountChecking account that requires
customers to keep a certain minimum amount for a specified
time period to avoid fees.
average-balance accountChecking account for which service
fees are assessed if the account’s average daily balance drops
below a certain level during a specified time.
DO IT IN CLASS
Most depository institutions will waive the assessment of
monthly fees for depositors who have their paychecks or other
regular deposits made electronically via direct deposit from the
payer into the depositor’s account. People interested in getting
their money’s worth in banking would be wise to avoid as many

of the charges shown in Table 5-2 as possible.
Free Checking Is Not Really Free Lots of banks offer “free”
checking accounts. What this typically means is that there is no
minimum-balance requirement or monthly maintenance fee on
the account. However, there can be fees for writing checks when
there are insufficient funds in the account, using another bank’s
ATM, inactivity on the account, and other events. Make sure
you understand how and when your bank assesses fees.
ADVICE FROM A PROFESSIONAL
Endorse Your Checks Properly
Endorsement is the process of writing on the back of a check to
legally transfer its ownership, usually in return for the cash
amount indicated on the face of the check. Choosing the proper
type of endorsement can protect you from having the check
cashed by someone else against your wishes.
A check with a blank endorsement contains only the payee’s
signature on the back. Such a check immediately becomes a
bearer instrument, meaning that anyone who attempts to cash it
will very likely be allowed to do so, even if the check has been
lost or stolen.
A special endorsement can be used to limit who can cash a
check. To make this kind of endorsement, you write the
phrase Pay to the order of [person’s name] on the back along
with your signature. The person named in such a “two-party
check” will likely only be able to deposit it in an account at a
financial institution.
A restrictive endorsement uses the phrase For deposit
only written on the back along with the signature and can only
be deposited into an account. For further safety, you can include
the name of your financial institution and account number as
part of the endorsement.
Mary Ann Whitehurst
Southeastern Crescent Technical College, Griffin, Georgia
Table 5-2Costs and Penalties on Checking and Savings
Accounts

Account Activity
Reasons for Assessing Costs or Penalties
Assessed on Checking or Savings
Automated teller machine (ATM) transactions
A customer’s account is assessed a fee (often $1 to $3) for each
transaction on an ATM; an additional fee may be charged for
using an ATM not owned by the financial institution.
Checking, savings
Telephone, computer, or teller information
Fees are assessed for access or requests for account information
by telephone, by computer, or in person (often $2 per
transaction) after a number of free requests (perhaps three) have
been made.
Checking, savings
Maintenance fees on a minimum-balance account (often waived
if paychecks are directly deposited electronically)
The account balance falls below a set minimum amount, such as
$300. A set fee of $10 to $20 per month is often charged.
Checking
Maintenance fees on an average-balance account (often waived
if paychecks are directly deposited electronically)
The average daily account balance for the month falls below a
set amount, such as $500. The cost is usually based on a set fee,
a scaled amount (the more the account falls below the average,
the greater the cost), or a percentage of the amount the account
falls below the average.
Checking
Stop-payment order
A customer asks the financial institution to not honor a
particular check; the fee is $25 to $30 per check.
Checking
Bad check “bounced” for insufficient funds
Charges of $25 to $40 or more are assessed for each check
written or deposited to your account marked “insufficient
funds.”
Checking

Early account closing
Charges are assessed if a customer closes an account within a
month or quarter of opening it. Charges range from $10 to $20.
Checking, savings
Delayed use of funds
Amounts deposited by check cannot be withdrawn until rules
allow it.
Checking, savings
Inactive …
College students have an average debt of about $3000 at
graduation. If they maintain that level of debt for ten years, how
much total interest will they pay over that decade?
A. $3000
B. $4500
C. $5400
D. $8400
The answer is C. A credit card with an 18 percent APR
translates to a 1.5 percent rate per month (18 ÷ 12). The $3000
debt multiplied by this rate equals $45 ($3000 × 0.015) per
month in interest. And $45 multiplied by 120 months equals
$5400. You must pay more than the required minimum monthly
amount plus any new charges in order to reduce a credit card
debt. Otherwise you will pay many thousands of dollars in
interest and be in debt for years and years!
LEARNING OBJECTIVES
Compare the common types of consumer credit, including
credit cards and installment loans.
Describe the types and features of credit card accounts.
Manage your credit card accounts to avoid fees and finance
charges.
Describe the important features of consumer installment loans.

Calculate the interest and annual percentage rate on consumer
loans.
Zachary Cochrane, a 31-year-old food scientist in Jackson,
Tennessee, made $62,000 last year. Zachary avoided using
credit and credit cards until he was 28 years old, when he
missed three months of work due to a water-skiing accident. He
made ends meet by obtaining two bank credit cards that,
because of his lack of a credit history, carry 19.6 and 24 percent
annual percentage rates (APRs). Zachary now has 11 credit card
accounts open: five bank cards and six retail store cards. He
uses them regularly, presenting whatever card a store will
honor. He owes $13,000 on the 24 percent APR card and $4400
on the 19.6 percent APR card. His other three bank cards carry
APRs of 11 percent, 12 percent, and 15 percent, and he owes
$500 to $700 on each one. For the past year, Zachary has been
making only the minimum payments on his bank cards. His
retail cards all carry APRs in excess of 21 percent. Although he
has managed to keep from running a balance on those cards
during most months, occasionally these accounts have balances
as well.
What would you recommend to Zachary on the subject of credit
cards and consumer loans regarding:
1. His approach to using credit cards, including the number of
cards he has?
2. Estimating the credit card interest charges he is paying each
month?
3. How he might lower his interest expense each month?
4. Consolidating his credit card debts into one installment loan?
by doing the following related to credit cards and consumer
loans:
1.Pay all your credit card balances in full each month, or

certainly no longer than two or three months later.
2.Move credit card balances you do carry to lower-interest
accounts and never make convenience purchases on the accounts
on which you carry a balance.
3.Use only credit cards with chip and pin technology as soon as
they become available.
4.Use student loans for direct education expenses only rather
than to maintain a better lifestyle.
5.Choose installment loans based on the lowest annual
percentage rate (APR) rather than monthly payment and years to
repay.
You cannot borrow your way to financial success. Using credit
requires deliberate thinking and planning so you do not become
overextended. You need to first consider whether the reason you
are borrowing is sound and then decide in advance how you will
repay the debt. This is especially true for credit cards. Credit
card usage can be managed so that you pay no interest at all.
This occurs if you pay your balance in full every month, and
more than 4 in 10 cardholders do it. Also, to succeed in
personal finance you might consider leading a life so that you
avoid getting into the situation that the average household
credit card holder face: over $7,000 in credit card debt.
Planning how to repay an installment loan is also important
because you commit to making a series of monthly payments for
one to seven or more years. Smart borrowers understand the
mathematics behind the calculation of the finance charges on
these installment loans. They always focus on the annual
percentage rate (APR) when comparing among various sources
of credit. The APR is the cost of credit on a yearly basis stated
as a percentage rate.
Consumer credit is nonbusiness debt used by consumers for
expenditures other than home mortgages. (Borrowing for
housing has investment aspects that result in a separate
classification and is discussed in .)
There are two types of consumer credit: installment credit and

noninstallment credit.
• With (also called ), the borrower must repay the amount owed
plus interest in a specific number of equal payments, usually
monthly. For example, an $18,000 used vehicle loan might
require monthly payments of $356 for 60 months at 7 percent
interest.
installment credit (closed-end credit)Credit arrangement in
which the borrower must repay the amount owed plus interest in
a specific number of equal payments.
• Noninstallment credit includes single-payment, open-ended
credit, and service credit. Single-payment loans are the easiest
of the three to understand. As an example, a borrower might
take out a loan of $2000 at 12 percent interest for one year. If
so, a single payment of $2240 ($2000 + $240 interest; $2000 ×
0.12) would be due at the end of one year.
Compare the common types of consumer credit, including credit
cards and installment loans.
Credit cards are an example of open-ended credit. With (also
called ), credit is extended in advance of any transaction so that
the borrower does not need to reapply each time credit is
desired. Any amounts owed will be repaid in full in a single
payment or via a series of equal or unequal payments, usually
made monthly. The borrower can use the account as long as the
total owed does not exceed his or her . This credit limit amount
is set by the lender and is the maximum outstanding debt
allowed on the credit account. Credit limits vary with the
perceived creditworthiness of the borrower.
open-ended (revolving) creditArrangement in which credit is
extended in advance of any transaction so that borrowers do not
need to reapply each time they need to use credit.
credit limitMaximum outstanding debt that a lender will allow
on an open-ended credit account.
Open-ended credit can be used to make purchases and, in some
cases, to obtain cash advances. It is the most convenient type of
credit, and it is also the most abused. Many open-ended

accounts—but not all—use a credit card.
A credit (or charge) card is a plastic card identifying the holder
as a participant in the charge account plan of a lender, such as a
retailer or financial institution.
A charge card charges no interest but requires the user to pay
his/her balance in full upon receipt of the statement, usually on
a monthly basis. The major benefit offered by a charge card is
that it has much higher, often unlimited, spending limits. Travel
and entertainment (T&E) cards are charge cards and are often
used by businesspeople for food and lodging expenses while
traveling; however, they are not accepted at as many outlets as
bank credit cards. Applicants must have higher-than-average
incomes to qualify, and applicants must pay an annual
membership fee of $90+ annually. Examples are American
Express and Diner's Club.
How to Avoid Using Credit Cards in College
Those who use credit card debt sometimes find that its use can
quickly spiral out of control. Instead some college students plan
ahead and find other ways to manage money. Consider using the
following: prepaid cards, a no-fee checking account, a charge
card, and gift cards.
Cash advances may be obtained at any financial institution that
issues the type of card (e.g., Visa, MasterCard, Discover) being
used. A cash advance is a cash loan from a credit card account.
The borrower can receive a cash advance from an ATM or the
funds may be transferred electronically into the cardholder's
checking account.
A personal line of credit is a form of open-ended credit that
allows the borrower access to a prearranged revolving line of
credit provided by the lender (usually a commercial bank,
savings bank, credit union, or brokerage firm). Like credit card
accounts, a personal line of credit includes a credit limit and a
flexible repayment schedule. The essence of a line of credit is
that borrowers can obtain a cash advance when needed and not
have to reapply for a loan each time they need money. Some

people use the equity in their home as collateral for a line of
credit. This arrangement is referred to as a home-equity line of
credit.
Service credit is granted to consumers by public utilities,
physicians, dentists, and other service providers that do not
require full payment when services are rendered. For example,
your electric company allows you to use electricity all month
and then sends you a bill that may not be due for 10 to 15 days.
Service credit usually carries no interest, although penalty
charges and interest may apply if payments are made late.
Service may be cut off for continued slow payment or
nonpayment of the debt.
CONCEPT CHECK 7.1
1. Distinguish between installment credit and open-ended credit.
2. Explain the basic features of revolving credit.
3. Describe how someone might use a personal line of credit.
Once a credit card account is opened, it can be used at any time.
Credit card accounts allow the borrower to pay the balance in
full at any time or carry over a balance owed from month to
month (travel and entertainment cards are an exception). If a
balance is carried over, a must be made each month to cover
interest and a small payment on the amount owed
(the principal). If at least the minimum payment amount is not
received by the payment due date (the specific day by which the
credit card company should receive payment from you), the
cardholder must pay a late payment fee and may be declared in .
Default occurs when a borrower has failed to make a payment of
principal or interest when due or failed to meet any other
requirement of a credit agreement. Credit card companies often
cancel the accounts of customers who are delinquent or in
default.
minimum paymentPayment that must be made to a credit
account each month to cover interest and a portion of the
amount owed.
defaultOccurs when a borrow fails to make a payment when due

or fails to meet other requirements of the credit agreement
(contract).
Describe the types and features of credit card accounts.
Cash Advances Are Very Expensive
Obtaining money via a credit card cash advance may seem easy.
It is also very expensive. It starts with a transaction fee. It is
usually a percentage of the amount taken (3 to 5 percent is
common), but there is often a minimum amount that makes the
percentage much higher on small advances. Then there is the
interest that begins to accrue immediately even if you are not
carrying a balance on the card. Plus, the interest rate on cash
advances is always higher than for purchases.
Credit cards are the primary source of consumer credit other
than home mortgages. About two-thirds of American adults
have a credit card account. About 18 percent repay the
minimum amount due each month and 40 percent pay a partial
amount but more than the minimum payment due. About 42
percent pay their monthly balances in full. Those who never pay
off the balance can do so for years, even as other charges and
interest are added to the account. As long as the total debt
remains below the credit limit, the user may continue to make
charges on the account. A credit card borrower may also ask a
creditor to increase his or her credit limit.
A is a credit card issued by a financial institution that allows
the cardholder to pay for goods and services based on the
holder's promise to pay for them. The issuer of the card creates
a revolving account and grants a line of credit to the user for
use in making purchases or to obtain a cash advance.
Bank credit card accountOpen-ended credit account with a
financial institution that allows the holder to make purchases
almost anywhere.
Visa, MasterCard, Discover, and Optima are the most commonly

recognized bank card names. However, the actual lender is the
bank, savings bank, or credit union through which the card is
offered. Visa and MasterCard are service providers that
maintain the electronic network through which transactions are
communicated.
Participating merchants pay fees that average 2 percent to these
companies based on the dollar amounts charged, although they
can be as high as 6 percent. Virtually all financial institutions
offer bank credit cards as do a number of consumer products
companies, such as AT&T, Allstate Insurance, and Verizon.
These companies contract with Visa, MasterCard, and a bank to
offer these cobranded credit cards.
Many bank credit card issuers periodically send (or ) to their
cardholders. These instruments are not genuine checks but
simply a check-equivalent way to take a cash advance.
Customers can use these “checks” to make payments to others
or themselves. If you receive convenience checks but do not
want to use them, either put them in a safe place or destroy
them immediately because they easily could be used
fraudulently by someone else.
cash advance (or convenience) checksA check-equivalent way to
take a cash advance on a credit card.
A allows a customer to make purchases on credit at any of the
outlets of a particular retailer or retail chain. Examples of credit
card accounts at retail stores include those offered by Kohl's,
REI, and Shell Oil. Many retailers have alliances with a
financial institution to offer a bank credit card that carries the
retailer's logo and can also be used anywhere the bank credit
card can be used.
retail credit cardsAllow customers to make purchases on credit
at any of the outlets of a particular retailer.
Some smaller retail establishments offer open-ended accounts
that do not use a credit card as the vehicle for using the
account. With these retail credit accounts, customers simply ask
to have the purchase put on their account for repayment at a

later date. Repayment may be required in full monthly or
allowed to be spread over time.
Federal Rule for Credit Card Applicants Age 18 to 20
Under the Credit Card Accountability, Responsibility and
Disclosure (CARD) Act, when a person age 18 to 20 applies for
a credit card, the lender must verify that the person has
sufficient independent income or require a cosigner.
Federal law requires credit card lenders to disclose all the rules
governing the account to borrowers before they sign up for any
card. Some of that information must be displayed in a uniform
manner, as illustrated in the sample credit card disclosure box
in . The remainder of the information appears in the credit card
agreement (contract).
Credit Card Security Chip Update
The increasing frequency of cases where hackers have stolen
consumers' credit card data from retailers and others has sped
up efforts to introduce “Chip and PIN technology” in the United
States. The standards leader is EMV, which is an abbreviation
for Europay, MasterCard, and Visa. Cards with this technology
cannot be counterfeited and are more secure than magnetic
stripe credit cards because personal data is encrypted on the
card rather than in a retailer's database and are accessible only
with a PIN.
Figure 7-1Sample Credit Card Disclosure Box
Federal law requires that key pieces of information be disclosed
in direct-mail advertising and when applying for credit cards
and any time the rules of an account are changed. To search for
the best offers on credit cards, you can visit www.bankrate.com
or www.cardtrack.com.
Credit Card Offers Often Come “Preapproved” Credit card
companies often send applications to consumers who have been
preapproved. It is important to understand that
being preapproved means only that you will be granted credit.

Both the credit card debt limit and APR will be determined after
you apply for an account.
How to Close a Credit Card Account Wisely
Credit card accounts can remain open for decades even if you
never use the card or stopped using it at some point. Accounts
are not closed if you cut up the cards. The lender must be
formally notified of your request before the account will be
officially closed. Here's what to do:
1.Pay off your balance in full.Accounts cannot be truly closed
until they are paid off. You can, however, ask an issuer to stop
honoring a card.
2.Obtain the customer service telephone numberfor the lender
from your most recent monthly statement. If you do not have a
recent bill, obtain a free copy of your credit report, which will
list the contact information for the lender.
3.Contact the lenderto request the address to which you should
send your cancellation request. It will not be the same address
to which you send your monthly payment. Confirm that there is
no longer a balance owed as sometimes a very small amount of
interest may still be owed for the last month when an account is
paid off.
4.Send a written requestto close the account and request that the
creditor send a confirmation that the account is, indeed, closed.
5.Obtain a copy of your credit report, after 90 days, from one of
the three national credit bureaus (pay if necessary). If the
account shows as closed, obtain free copies from the other two
bureaus as confirmation at the next opportunity. If the account
shows as still open at any of the bureaus use the procedures
outlined in on page 182 to correct the error.
Annual and Transaction Fees Can Be Avoided Some bank credit
card lenders assess ranging from $25 to $100+. In addition,
lenders may charge a (a small charge levied each time certain
types of transactions occur). The card illustrated in assesses
transaction fees for cash advances and , which are full- or
partial-payments on one credit card by using a cash advance

from another. Some lenders even charge a fee for printing the
monthly credit bill. As you can see, an apparently low-rate card
may turn into a higher-cost card when all fees are considered.
annual feesCharges levied against cardholders for the privilege
of having an open account but that are not included in the
advertised APR.
transaction feeA small charge levied each time certain types of
transactions occur, such as for cash advances and balance
transfers.
balance transferFull or partial payment on the balance of one
credit card using a cash advance from another.
Liability for Lost or Stolen Cards Is Limited The Truth in
Lending Act limits a cardholder's credit card liability for lost or
stolen credit cards. Under the law, if you notify the card issuer
within two days of a loss or theft, you are not legally
responsible for any fraudulent usage of the card. After two
days, your maximum liability for fraudulent usage of the card
prior to your notification is $50.
Although your financial liability is low, many companies
nevertheless sell credit card insurance (for an annual premium
ranging from $15 to $49) that will cover the first $50 of
unauthorized use of an insured person's lost or stolen credit
cards. Such insurance is profitable for the sellers but a wasteful
expense for you. If you are insistent and talk with a credit card
company supervisor, she/he will waive the $50 fee for
unauthorized use as a gesture of goodwill to keep you as a good
credit card customer. Also you should know that most
homeowner's and renter's insurance policies will pay the $50 fee
you might be charged for unauthorized use of a lost or stolen
credit card.
Late-Payment, Bounced-Check, and Over-the-Limit Fees Are
Very Costly The fees assessed by credit card issuers can be
expensive. Late-payment fees are limited by law to $25 in most
cases. Card issuers also assess fees if you write a bad check
when making your monthly payment or you exceed your credit
limit. This latter fee can only be assessed if the cardholder

agrees to allow the lender to accept over-the-limit usage. If this
agreement has not been given, over-the-limit usage will be
blocked. Each of these fees is much higher than necessary in
terms of the actual cost to the lender for these rule violations.
Indeed, they represent a significant source of profits for credit
card issuers. The account illustrated in assesses a maximum fee
of $25 for each of these offenses.
opt out to Avoid Unwanted Credit Card offers
Federal law states that consumers have the right to opt out of
receiving unsolicited credit card offers. To put a stop to such
mailings using the official system, call (888) 5-OPT-OUT or
visit .
Credit Card Rules Can Change at Any Time
When you open a credit card account, the account rules and
interest rate are determined based on two groups of factors. The
first consists of your credit history and information in your
application form. The second group relates to conditions in the
economy as a whole and the policies of the issuer of the card.
Over time, these sets of information can change, and as a result,
the card issuer may wish to make amendments to the interest
rate, credit limit, and other card rules or features. The law
requires card holders be given 45 days of advance notice.
However, interest rates cannot be changed on existing balances.
Therefore, the issuer must give you the option of rejecting or
accepting a change in interest rates. If you reject the change,
the card will be blocked for further usage, and you may repay
any balance according to the old rules. once you have repaid the
balance owed, your card is cancelled. If you accept the changes,
they will take effect 45 days after notification.
Teaser Interest Rates May Be Appealing Some cards carry a
temporarily low teaser rate (introductory rate) to entice
borrowers to apply for an account. Teaser rates must stay in
effect for six months after the account is opened unless the
cardholder violates a rule of the account such as being late with

a payment by more than 60 days. Teaser APRs of 0 to 3.9
percent are common. In , the teaser rate is 2.9 percent for
purchases and 0.0 percent for cash advances. The APR typically
reverts to a much higher fixed or variable interest rate (19.2%
in the example in ) after the introductory period ends. Some
credit card borrowers take advantage of teaser rates by opening
new accounts regularly and transferring the balances from other
accounts to the new account to take advantage of the low
introductory rate despite any high balance transfer fee that
might exist.
Higher Penalty APRs Can Be Assessed A serious downside to
many credit card accounts is the assessment of a penalty
APR that can be 8 to 10 percentage points higher that the
normal APR. The penalty APR is assessed whenever a borrower
fails to uphold certain rules of the account, such as being more
than 60 days late on the minimum payments or making a
payment by check that is returned for insufficient funds. The
disclosure notice in indicates a penalty APR of 28.99 percent
for violation of the listed rules. By law, penalty rates must be
reviewed after six months and rescinded if all payments have
been made on time in that period. Some credit card issuers
simply cancel the account when the rules are violated rather
than assess the penalty APR.
Variable Interest Rates Can Easily Go Up Credit card accounts
(and installment loans) carry either fixed or variable interest
rates. go up and down, usually monthly or annually, often
according to changes in interest rates in the economy as a
whole. The example in has a variable interest rate with the
prime rate used as a base rate. The prime rate is a key measure
of interest rates in the economy, and its fluctuations drive the
changes in rates for all types of variable-rate credit. In recent
years, the prime rate has ranged from 3 to 4 percent. As
indicated in , the card company uses the prime rate as published
in The Wall Street Journal to determine interest rates for
purchases, cash advances, and balance transfers on the card.
variable interest ratesInterest rates that change monthly or

annually according to general interest rate changes in the
economy as a whole.
Paying Cash Instead of Using a Credit Card Might Save You 2
or 3 Percent
The Federal Reserve says that merchants are allowed to give
discounts for those who pay cash or use a debit card rather than
use a credit card. If the availability of such a discount is not
obvious, just ask. You might save 2 to 3 percent on a purchase,
such as for gasoline purchases.
Be Smart When Using a Rewards Credit Card
Credit cards that provide airline miles or cash-back bonuses can
be a good idea. However, the benefits will be lost if the card has
a high APR and/or substantial fees. And it absolutely makes no
sense to use a rewards card if you are going to carry a balance
on the card.
Extremely low APRs are usually temporary. Read the rules of
your account carefully
Credit Card Insurance Is Overpriced Many lenders encourage
borrowers to sign up for credit life insurance that pays the
unpaid balance of a loan—to the lender—in the event of the
borrower's death. Credit life insurance is grossly overpriced
(and very profitable) and is a cost that can be avoided. The
same can be said for credit disability insurance, which repays
the outstanding loan balance if the borrower becomes disabled
(with “disability” usually being very narrowly defined). The
companies also sell unneeded credit unemployment insurance.
Some bank credit cards are a form of prestige card, often with a
precious metal in the brand name such as “gold,” “silver,” or
“platinum.” These accounts require that the user probably
possess high credit qualifications and they offer enhancements
such as higher credit limits. Prestige cards sometimes carry
higher annual fees.
Some Visa and MasterCard credit cards are identified as affinity

cards— that is, they are standard bank cards but with the logo
of a sponsoring organization imprinted on the face of the card.
The issuing financial institution often donates a portion of the
annual fee and a small percentage of the amounts charged
(perhaps 0.25, 0.5, or 1 percent) to the sponsoring organization.
Sponsors may include charitable, political, sports, or other
organized groups, such as the Sierra Club or Mothers Against
Drunk Driving. Supporters of the sponsoring organization may
be motivated to use an affinity card because the organization
receives money from each transaction. Creditors rightly
calculate that fewer delinquencies will occur among the
particular group of people, so they can afford to transfer some
income to the named organization.
Prepaid Cards Are Mainstream
Prepaid cards (or reloadable cards) are stored value cards that
are used like credit cards. These were once marketed to low-
income consumers but today they are mainstream. You choose
the dollar amount to put on the card and as you spend, your
purchases are deducted from the total balance. When the
balance gets low, you can reload with more money. People
without banking or a standard credit card account and those
with little or no credit history often choose to use prepaid cards
as an alternative to cash.
Since prepaid cards are associated with one of the major card
networks, such as Visa, MasterCard, and Discover, they can be
used anywhere those cards are accepted. They can be used to
purchase groceries, buy merchandise on eBay, pay bills online,
and withdraw cash from an ATM machine. Almost all of them
come with FDIC insurance as well as the full theft and loss
protections of the Fair Credit Billing Act. High fees can be
avoided if you shop carefully online for the best accounts.
CONCEPT CHECK 7.2
1. Distinguish among bank credit cards, retail credit cards, and
travel and entertainment cards.
2. What are the differences and similarities between a cash

advance and a balance transfer using a bank credit card?
3. Describe the positive and negative aspects of having a
variable interest rate on a credit card.
4. Briefly describe five common fees assessed on credit card
accounts and how they can be avoided.
Credit cards can be a positive tool in personal financial
management—but only when used appropriately. To do so, you
must understand and monitor your credit statements, correct any
billing errors quickly, and verify the computation of any finance
charges. Your goal should be to use the credit card in a manner
that avoids all fees, including finance charges. This means
paying your balance in full every month. Otherwise, credit card
debt likely will be your …
People with no prior credit history or those who show poor
repayment patterns in the past often wonder if they will ever be
able to get credit, especially during economic times when credit
is difficult to obtain. Simply put, will any lender want to trust
them? Which of the following is true about the availability of
credit for people in such situations?
A. Sadly, they will be doomed to a lifetime of no access to
credit.
B. There are a few lenders who will be happy to provide credit
to such borrowers.
C. Most of the “big name” banks will grant them credit.
D. Credit will be relatively easy to obtain for such borrowers
just about anywhere.
The answer is B. It is difficult for people with poor or no credit
to obtain credit from most banks and credit unions. But some
lenders do accept such applicants, and they will charge high
interest rates. Building and maintaining a good credit history
does more than get you access to credit. It will also get you low

interest rates!
LEARNING OBJECTIVES
Explain reasons for and against using credit.
Establish your own debt limit.
Achieve a good credit reputation.
Describe the common sources of consumer credit.
Identify signs of over indebtedness, and describe the options
that are available for debt relief.
Hanna Savarin, age 25, is a nurse practitioner with the local
health department in Collegedale, Tennessee. She earns $65,000
per year, with about $9000 of her income coming from overtime
pay. Her disposable income is about $3800 per month. Her
employer provides a qualified tax-sheltered retirement plan to
which Hanna contributes 4 percent of her salary and for which
she receives an additional 4 percent matching contribution from
her employer. (She could contribute up to 6 percent with an
equal employer match.) Hanna has $29,000 in outstanding
student loans on which she will pay $454 per month over the
next five years, and her total credit card debt is $3000 on which
she has been paying $120 per month. Otherwise, she is debt
free. Hanna would like to purchase a new or late-model used car
to replace the car she has been driving since her senior year in
high school. She has $2000 to use as a down payment.
What would you recommend to Hanna on the subject of building
and maintaining good credit regarding:
1.Factors she should consider regarding her ability to take on
additional debt?
2.The impact of her current debt on her ability to obtain a loan
to buy a vehicle?
3.Where she might obtain financing for a vehicle loan?
4.The effect of taking on a loan on her overall financial
planning?

by doing the following related to building and maintaining good
credit:
1.Protect your credit reputation as carefully as you would
safeguard your personal reputation.
2.Determine your own debt limit rather than relying on a lender
before deciding to take on any debt.
3.Obtain copies of your credit bureau reports regularly for free,
and challenge all errors or omissions you find.
4.Use complicated personal ID numbers and login passwords for
online credit account management.
5.Always repay your debts in a timely manner.
Your financial success depends heavily on your ability to make
the sacrifices necessary to spend less than you earn. This allows
you to save money for future uses. Yet, you are likely to use
credit to buy housing and vehicles as well as use . However,
paying high interest rates and overuse of credit impedes your
financial success.
credit cardsCards that allow repeated use of credit as long as the
consumer makes regular monthly payments.
The term describes an arrangement in which goods, services, or
money is received in exchange for a promise to repay at a future
date. Consumer credit usually takes the form of a that is repaid
in equal payments over a set period of time. You also are likely
to use revolving credit, which allows repeated use of credit as
long as regular, monthly payments are maintained. Credit cards
are an example of revolving credit.
creditAn arrangement in which goods, services, or money is
received in exchange for a promise to repay at a future date.
loanConsumer credit that is repaid in equal amounts over a set
period of time.
There are valid reasons for using credit. You should use credit
only when necessary, pay low interest rates, make repayments
on time, and repay amounts owed as quickly as possible.

Credit represents a form of trust established between a lender
and a borrower. If the lender believes that a prospective
borrower has both the ability and the willingness to repay
money, then credit will be extended. The borrower is expected
to live up to that trust by repaying the lender. For the privilege
of borrowing, a lender requires that a borrower pay interest and
sometimes other charges.
You can distinguish between good and bad uses of credit.
Among the good uses are a mortgage loan to buy a home, a loan
to open a business, and to finance education expenses. These
purposes have benefits because the funds are invested in ways
that can have a long-term payoff. Bad uses of credit include
using a credit card or student loans money to support a better
lifestyle than really needed and loans for extravagant homes and
vehicles.
Explain reasons for and against using credit.
There are good reasons for using credit:
1.For convenience. Using credit cards simplifies the process of
making many purchases. Convenience use is justified only if the
card balance is paid in full each month, however. You do not
want to be paying for today's restaurant meal for months or
years in the future.
2.For emergencies. Consumers use credit to pay for unexpected
expenses such as emergency medical services and automobile
repairs.
3.TO make reservations. Most motels, hotels, and car rental
agencies require some form of deposit to hold a reservation. A
credit card number can serve as such a deposit, allowing
guaranteed reservations to be made over the telephone. In many
cases, the hotel will notify the credit card issuer to put a hold
on your account for the anticipated total amount of the charge.
This common practice is called .
credit card blockingOccurs when hotel or other service
providers place a hold on a card holder's account to reflect the

anticipated cost of services.
4.TO own expensive products sooner. Buying big ticket items
such as a home or automobile on credit allows the consumer to
enjoy immediate use of the product. Many expensive items
would not be purchased (or would be bought only after several
years of saving) without the opportunity to pay for them over
time. The expected life of the product should be at least as long
as the repayment period on the debt.
5.To take advantage of free credit. Merchants sometimes offer
“free” credit for a period of time as an inducement to buy. Free
credit, however, should not be used to buy a more expensive
item than you can afford. Known as “same as cash” or “interest-
free” terms, these programs allow the buyer to pay later without
incurring finance charges.
The free credit lasts for a defined time period, but interest may
be owed for the entire time period if the buyer repays even one
day after the allotted free-credit period ends.
6.For protection against rip-offs and frauds. Internet and
telephone purchases made on a credit card can be contested with
the credit card issuer under the guidelines of the Fair Credit
Billing Act (FCBA), as discussed more fully in . The
protections afforded by the FCBA are not available when using
a debit card.
7.To obtain an education. The high cost of education has forced
many students to use student loans. This may be one of the
better uses of credit, as the borrower is investing in himself or
herself to raise the quality of life and/or income in the future.
The amount borrowed should be compared to the projected extra
income provided by the education to be obtained.
Debt Has Enormous Opportunity Costs
When people take on debt they often neglect to save or invest.
Taking on too much debt early in life, instead of saving and
investing, can compromise your goal of being financially
successful.

9 Obtaining Affordable HousingYOU MUST BE KIDDING, RIGHTKel.docx

9 Obtaining Affordable HousingYOU MUST BE KIDDING, RIGHTKel.docx

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