Unit 3 Spending and Credit

Unit 3 Spending and Credit 1. Compare the benefits and costs of alternatives in spending decisions. 2. Evaluate information about products and services. 3. Compare the advantages and disadvantages of different payment methods. 4. Analyze the benefits and cost of consumer credit. 5. Compare sources of consumer credit (e.g., credit cards, consumer loans, auto loans, student loans). 6. Evaluate the terms and conditions of credit cards and consumer loans. 7. Evaluate factors that affect creditworthiness. 8. Explain the purpose and components of credit records. 9. Demonstrate awareness of consumer protection and information (e.g., identity theft, phishing, scams). 10. Propose ways to avoid or correct credit problems. 11. Describe the rights and responsibilities of buyers and sellers under consumer protection laws.

Types of Checking Accounts & Using Checking Accounts Section 1

Types of Checking Accounts Regular Checking Accounts • Usually no minimum balance • If there is, monthly service charge if you drop below

Types of Checking Accounts Activity Accounts • No minimum balance • Fee for each check written • Sometimes a fee for each deposit • Usually monthly service fee

Types of Checking Accounts Interest-Earning Checking Accounts • Combination of checking and savings account • Earns interest if you maintain a minimum balance

Evaluating Checking Accounts • Restrictions –minimum balance • Fees and Charges – service charges, check printing, overdrafts and stop-payment orders • Interest – rates and frequency of compounding

Checking Account Special Services • ATMs-quick cash with debit card • Online banking-24 hour access to your account

Checking Account Special Services • Overdraft protection- an automatic loan made to an account if the balance will not cover the checks written • May transfer money from your savings • Stop-Payment Order – a request to not cash a particular check • Fee for this service

Using a Checking Account • Opening a checking account • Individual or joint account • Must sign signature card

Using a Checking Account Writing Checks 1. Enter in checkbook register • Checks, deposits, ATM withdrawals, debit card purchases, interest earned or service fees • Keep an accurate current balance

Using a Checking Account 2. Writing a check-fill in: • Current date • Payee – name of party getting the check • The amount in numerals • The amount in words • Sign the check-as your signature card is signed • Memo-reason for the check

Using a Checking Account • Tips: • Use ink only • If you make a mistake, Void the check in the check register • Tear up the check • Small error – correct and initial next to it

Making Deposits To Your Accounts (Savings & Checking) • Complete a deposit slip • Endorse the check • An endorsement is the signature of the Payee

Making Deposits-Endorsements Types of Endorsements • Blank – signature on back of check • Restrictive – restriction on how check is used; “for deposit only” • Special Endorsement – transfer to another person; you sign and they sign under your signature

Deposits-Endorsement Tips • Do not endorse until ready to cash or deposit it • Write your signature at the top left end on the back • Sign your name exactly as it appears on the front of the check • Use a pen • By mail, use “for deposit only”

Using a Checking Account • Check Clearing – ensures that your money is available for withdrawal • Deposits are held until check clears bank on which it was drawn • Usually 2 business days

Using a Checking Account • Bank Statement – shows all activity of the account for the month • Deposits • Checks written and cleared • ATM charges • Debit card charges • Interest earned • Service Fees

Using a Checking Account • Bank Reconciliation – a report that accounts for the differences between the bank statement and the checkbook register balances • Often referred to as balancing your checkbook

Bank Reconciliation • Step 1: Compare the checks that you have written to the ones listed on the bank statement • List the ones that are outstanding-checks that you wrote but have not cleared • Subtract the total of these checks from the bank statement balance

Bank Reconciliation • Step 2: Look for deposits that you have made but are not on the bank statement • Add those deposits to the bank statement balance

Bank Reconciliation • Step 3: Subtract fees and charges that are listed on the bank statement from your checkbook register balance • Step 4: Add any interest earned to your checkbook register balance

Other Payment Methods • Certified Check – personal check that is guaranteed by the bank • Cashier’s Check or Money Order – purchase for the amount of the check or money order plus a fee • Travelers’ checks – purchased in varying amounts, sign once when purchased and once when cashed

All About Credit Section 2

Consumer Credit • What is credit? • Is using credit good or bad? Why? • What are some risks of using credit? • Should high school students be allowed to have credit cards? Why or why not? • What should you consider before using credit? • What is your credit rating/report? Why is it important?

What is credit? • Buying something now and paying for it later using borrowed money through loans or credit cards • Creditor: an entity (financial institution, merchant, or individual) to whom money is owed Is using credit a good or bad idea?

Is credit free? • NO!! • People pay a price for using credit • Interest: price of using someone else’s money • Must be repaid along with the principal amount • Lenders may also charge fees for using credit

Advantages of Credit • Lets you enjoy goods and services now while paying for them later • Not having to carry large sums of cash when traveling or shopping • Being able to pay for emergencies • Purchasing goods or services you couldn’t otherwise afford • Convenience – allows you to make several purchases but only one monthly payment • Record of purchases • Builds a credit history (rating), allowing you to borrow additional credit in the future

Disadvantages of Credit • Possible identity theft • Can cost more than paying in cash • May lose income/property (collateral) if you don’t pay a secured loan • Poor use can limit future borrowing by damaging credit history • Easy to spend even though you don’t have the money to pay for the item USE CREDIT WITH CAUTION!!

Types of Credit – Closed-End Credit • Closed-End Credit (Installment Loan):one-time loan for specific purpose that you pay back in equal payments for a specific period of time • Examples: Mortgage, Car Loan, Student Loan • Lower interest rate than open-end credit

Types of Credit – Open-End Credit • Open-End Credit (Revolving): loan with a specified limit on the amount of money you can borrow, but no payoff deadline • Billed periodically based on amount borrowed • Can “respend” once paid back • Examples: Credit Card, Home Equity Line of Credit • Higher interest rate than closed-end credit • Credit Limit: maximum amount of money a creditor will allow a credit user to borrow

Sources of Credit – Loans • Loan: borrowed money with an agreement to repay with interest in a specified period of time (closed-ended) • Secured Loan : loan that has a form of collateral as security toward repayment • Collateral: form of security to help guarantee the creditor will be repaid • Usually lower interest rate • Can take collateral if you miss multiple payments • Unsecured Loan: no specific collateral secures the loan

Sources of Credit – Credit Cards • Issued by banks, savings & loans, credit unions, retail stores and other businesses • Represent an agreement between a lender (the institution issuing the credit card) and the cardholder • May be used repeatedly to buy products or services or to borrow money on credit (open-ended)

Cost of Credit • APR (Annual Percentage Rate): total cost of credit on an annual basis, expressed as a percentage APR of 18% = $18/year on each $100 owed • Lenders are required by law to disclose the APR to borrowers • May be different from the stated interest rate • APR is the total cost of credit • Combines the interest paid over the life of the loan as well as any upfront fees • Use to compare different credit options • Does NOT affect the monthly payment on the loan…those are calculated based on the interest rate , length of loan and lender risk

Cost of a Credit Card • Required payment amount varies each month based on total amount owed • Finance Charge: dollar amount you pay to use credit if you do not pay the full amount each month • Grace Period: number of days you have to pay for new purchases without having a finance charge • Minimum Monthly Payment Trap • Avoid making smallest amount you are required to pay each month or you will never pay off balance

Additional Credit Card Fees • Annual Fee: amount charged just for having the card • Cash Advance Fee: charged when you use the card for a cash in hand • Balance Transfer Fee: charged when you transfer a balance from another credit card • Late-payment Fee : charged for paying after due date

Credit Card Incentives/Features • Rebates • Frequent flier miles • Additional warranty coverage • Car rental insurance • Travel accident insurance • Liability limits • If card is lost or stolen, your liability is limited to $50 • Keep your account number in a safe place—report immediately if lost or stolen

What is a Credit Report/History? • Credit History: record of people’s payment behavior over 7-10 year period • There are three organizations that compile credit information on individuals and makes it available to businesses for a fee • Equifax • Experian • TransUnion • www.annualcreditreport.com provides free credit reports to consumers (one per bureau per year)

FICO Score • A calculated score that tells potential lenders the likelihood of you paying your debts back on time • Range between 350 - 850 • Based on: • Type of credit (installment vs revolving) • Length of credit • Amount owed • Repayment history • Inquiries • Public records

Your Credit History • Establishing and Maintaining Good Credit • Start with a secured or co-signed credit card • Pay all bills on time to avoid expensive late fees and collection status reporting on your credit report • Don’t apply for too many credit card accounts • Pay credit card balances in full each month • Don’t use credit to live beyond your means!

Applying for Credit • Creditor: the person, financial institution or business that lends a borrower money • Creditors will research information about potential borrowers before agreeing to loan and to determine interest rate • Three C’s of Credit • Capacity • Character • Collateral • All lenders have their own guidelines for determining creditworthiness

Applying for Credit • Capacity • Does the borrower have the ability to repay the loan? • Income • Length of time at his/her current job • How much debt the borrower already owe

Applying for Credit • Character • Will the borrower repay the loan? • Borrower’s past bill-paying history • Has he/she paid bills on time? • Residence history • Employment history

Applying for Credit • Collateral • Is there a financial asset or piece of property that a creditor can take if the borrower fails to repay the loan? • Provides protection for the creditor if borrower does not repay loan • Creditor may repossess the collateral

Reasons for Denying Credit • Too little time in current job or at current residence • Too much outstanding debt • Too little income to support new debt payment • Unreasonable purpose for requesting credit • Limited credit experience • Foreclosure or repossession • Delinquent past or present credit obligations

Why Does My Credit Score Matter? • Loans/Credit Cards • Utilities • Rent • Employment Credit will follow you for 7-10 years!!!!

Warning Signs • Make only minimum monthly payments • Having trouble meeting payments on time • Total balance on credit cards increases every month • Borrow money to pay off other debts • Exceeded your credit limits • Regularly use savings/emergency fund to pay for necessities • You have been denied credit

Debt Management • Consumer Credit Counseling Service: nonprofit organization that provides credit counselors to help individuals reduce debt and follow debt repayment programs

Bankruptcy • Personal Bankruptcy: legal process in which some or all of your assets are distributed among your creditors in order to pay back debts • Chapter 7 – “straight bankruptcy” where many debts are forgiven and assets may be sold to pay creditors • Chapter 13 – “wage-earner plan” where payment plan is established and assets typically retained • Debts NOT discharged include student loans, child support, alimony, penalties, and fines • LAST RESORT!!!

Protecting Your Credit • Notify lenders to close accounts immediately if you suspect identity theft or card is lost /stolen • Flag credit bureau records with fraud/security alert if you suspect identity theft • Safeguard your credit, debit, and ATM cards; keep record of card numbers • Protect your PIN • Stop payment on lost checks • Open password-only access accounts • Carry only the credit cards you expect to use and keep the others in a safe place • Shred statements before throwing them out

Protecting Your Credit • Cosigning a loan – agreeing to be responsible for loan payments if the other person fails to make them • Parents may be asked to co-sign for their kids’ apartment leases, car loans, student loans, etc. since young adults do not have high credit scores or have any credit history at all

Unit 3 Spending and Credit