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FIN 200: Personal Finance

FIN 200: Personal Finance. Topic 9-Credit II Lawrence Schrenk, Instructor. Learning Objectives. Explain the features of credit cards. ▪ Choose the best credit card for your needs. Calculate the payments, interest rates and time of annuities. ▪. Credit Cards. What are ‘Credit Cards’?.

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FIN 200: Personal Finance

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  1. FIN 200: Personal Finance Topic 9-Credit II Lawrence Schrenk, Instructor

  2. Learning Objectives • Explain the features of credit cards.▪ • Choose the best credit card for your needs. • Calculate the payments, interest rates and time of annuities.▪

  3. Credit Cards

  4. What are ‘Credit Cards’? • Credit Cards • Revolving credit instrument, i.e., line of credit • Balance forward as a loan charging interest • No late fee with minimum payment • Distinguish from • Bank/Debit/ATM Cards • Charge Cards, some American Express Cards • Prepaid ‘Credit’ Cards (versus Secured Cards) • Edward Bellamy, Looking Backward (1887)

  5. The Card

  6. Applying for the Card • Universal versus Retail (Proprietary) Card • Personal Information • Credit Rating • Annual Fee • Credit Limit • Secured Credit Card • Comparison Shopping • BankRate.com

  7. ‘Incentives’ • Teaser Rates • Rebates • Frequent Flyer Points • Gift Certificates • Cash Back (Different Levels) • Balance Transfer Offers • ‘Premium’ Cards • NOTE: Be realistic about whether you are likely to have a balance.

  8. Using the Card • Purchases • Cash Advance • Range of Acceptance • Which Stores? • Domestic vs. International • Use versus Posting Date • Overdraft Protection

  9. Security • Phone/Internet • In Person • Card Stolen • List of Telephone Numbers • Loss/Fraud/Warranty Coverage • Resource • Avoiding Credit and Charge Card Fraud

  10. Grace Period/Minimum Payment • Grace Period: The time allowed to pay the balance without incurring interest charges • Usually 20-30 days • May be no grace period if carrying a balance • Exclusions, e.g., cash advances • Minimum Payment: The minimum payment required to avoid late charges • But not necessarily financing charges • NOTE: How long to pay off with minimum payments?

  11. Interest Rates • Annual Percentage Rate (APR) • Simple Interest • Includes Fees • Fixed versus Variable Rates • Annual Interest Paid • Amount Borrowed x Simple Interest • Any Compounding? • More on Interest Calculations Later!

  12. Fees and Charges • Annual Membership Fee • Finance Charge • Late Fee • Overlimit Fee • Returned Check Fee • Payment Processing Fee • Cash Advance Fee • Foreign Exchange Fee

  13. Finance Charge Calculation • Average Daily Balance • Average balance over Billing Period • Previous Balance • Balance at Beginning of New Period • Adjusted Balance • Balance at End of Period

  14. Choosing a Card • Checklist • Card Acceptance • Fees • Interest Rate (APR) • Grace Period • Loss/Fraud/Warranty Coverage • Balance Computation Method • Resources • Choosing a Credit Card (FTC)

  15. Project Notes

  16. Annuities: Payments, Interest Rates and Time

  17. Annuities: Payments, Interest Rates and Time • Present or Future Value of an Annuity (Borrowing or Savings) • How much are my payments (PMT)? • What interest rate am I getting (I/Y)? • How long will it take (N)? ▪ I/Y I/Y I/Y 1 0 2 N PMT PMT PMT

  18. Payments with a Calculator • How much do we have to save per year to have $2,000 in 3 years if the interest rate is 12%? • Input 3, press N • Input 12, press I/Y • Input 2000, press +/-, press FV • Press CPT, PMT to get 592.70, i.e., $592.70 NOTE: This is a savings problem. There is a parallel calculation for the payments in a borrowing problem.

  19. Payments with a Calculator 12% 12% 12% 1 0 2 3 $592.70 $592.70 $592.70 $2,000.00

  20. Interest Rate with a Calculator • What interest rate do you need to have $2,000 in 3 years if you save $600 per year? • Input 3, press N • Input 600, press PMT • Input 2000, press +/-, press FV • Press CPT, I/Y to get 10.73, i.e., 10.73% NOTE: This is a savings problem. There is a parallel calculation for the payments in a borrowing problem.

  21. Interest Rate with a Calculator 10.73% 10.73% 10.73% 1 0 2 3 $600.00 $600.00 $600.00 $2,000.00

  22. Time with a Calculator • How long do we have to save $600 per year to have $2,000 if the interest rate is 5%? • Input 5, press I/Y • Input 600, press PMT • Input 2000, press +/-, press FV • Press CPT, N to get 3.16, i.e., 3.16 • Since 12 × .16 = 1.92 ≈ 2, 3 years 2 months. NOTE: This is a savings problem. There is a parallel calculation for the payments in a borrowing problem.

  23. Time with a Calculator 5% 5% 5% 1 0 2 3.16 $600.00 $600.00 $600.00 $2,000.00

  24. Payment, Interest Rate and Time Practice Problems • On a loan of $10,000 for 5 years at 8%, what is my annual payment? • $2,504.56 • On a loan of $10,000 for 5 years and an annual payment of $2,300, what is the interest rate? • 4.85% • On a loan of $10,000 at 6% and an annual payment of $2,300, how long will it take to repay the loan? ▪ • 5 years 2 months (5.19 years) ▪

  25. Ethical Dilemma • Chen applied for and received a credit card with a $5,000 credit limit. Six months later Chen finds that other expenses have restricted him to making only minimum payments. Not only that, he has borrowed on his card to the full extent of its credit limit. Upon returning from work today, Chen finds a letter from the credit card company offering to increase his limit to $10,000 because he has been a good customer and has not missed a payment. a. Discuss the ethics of credit card companies that offer to increase credit limits to individuals who make only minimum payments and who have maxed out their card. b. Should Chen accept the credit card company's offer?

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