Unit 7 – Credit and Personal Finance

Chapter 3, 4, and 5

Chapter 3 – Your Role as Consumer

Objective:

Types of income

• Disposable income – income that is remaining for a person to spend or save

• Discretionary Income – money income a person has left to spend on extras after necessities have been bought.

Many factors influence our choices

• Income• Scarcity• Time• Opportunity Cost – what we are giving up

Take College for example

• It costs a lot of money to go• Not everyone gets in and even if you do you

aren’t quaranteed to finish your degree or get a job in your field.

• It takes a great deal of time and effort• You have to give up lots of things you could

have been doing instead. • AND FOR WHAT?????

College Graduates Make More Money!

Amount of Education Males Females

No high school diploma 19,802 10,613

High School Graduate 27,527 15,972

Some College 35,023 20,602

Bachelor’s Degree 55,188 34,292

Professional Degree 88,216 44, 748

Rational Choices

• Choosing the alternative that has the greatest value from among comparable quality products.

• The best choice for you given the options• Generates the greatest value compared to

other options.

Advertising

• Competitive – attempts to persuade consumers that a product is different from and to superior to any other product

• Informative – benefits consumers by providing useful information.

• Bait and Switch – ad that attracts consumers by advertising a very low priced item but tries to sell you a high priced item at the store, saying the sale item is poor quality.

Comparison Shopping

Positives• Lower prices

– Can find lower prices – Can ask for price matching to

get lower prices at local stores

• Better Quality Products

Negatives• Takes a lot of time

What are some things that should be considered when comparison shopping?

- the value of your time spend comparing should not be greater than the value that you save comparing.

Which type of advertising is beneficial to consumers

• A. Bait and Switch• B. Competitive• C. Informative

Chapter 4 – Going into DebtObjective:

-Students will understand the role of credit in their personal and financial lives.

-Students will be able to understand how to use credit and find their credit scores.

What is Credit?

• Receiving funds to buy goods or services in the present with the promise to pay for them in the future.

Why do people use Credit?

• To make large purchased that they can’t save enough money to pay for.– A home – A car

• To make purchases now, so that they don’t have to wait to buy the good or service. – Television– Clothing

How do you decided if you should use credit or not? Ask yourself.

• Do you really need the item? Can you wait to purchase it until a later time?

• What would I have to give up to pay cash for this item?

• Will the satisfaction that I get from the item be greater or less than the interest I will pay on the item?

• Have I compared enough credit options to make the best credit decision, if I decide to use credit?

• Can I afford to use credit now?

I would use credit to purchase a?

• A. Playstation• B. Clothes• C. Car• D. Groceries

Price of using credit

• Principal – amount originally borrowed in loan.

• Interest – amount the borrower must pay for the use of someone else’s funds.

Installment vs Revolving Credit

Installment• Make monthly payments for

a specified number of months until the purchase is paid in full. – Home– Car– Some large ticket store items

Revolving• Continue adding interest to

the principle based on a remaining balance each month. – Allows to you make additional

purchases on the account before other items are paid off.

– Department store cards– Credit Cards

True or False

• Installment credit would be used to purchase a few household items from sears.

When to use installment credit

• Durable goods – goods that last for longer than 3 years. Usually have a higher value and require the use of credit to make the purchase.

• Mortgage – installment debt for the ownership of a house or land.

Paying a Mortgage

• The average home owner pays more than double for their home if they choose to pay only the installment payment over a period of a 30 year loan. – My house, that I bought for 149,000.00 will end up

costing us over 300,000.00 if we pay just the installment and live in it for 30 years.

– If you can afford to make even 1 extra house payment per year, you will save yourself about 50,000.00 on interest.

When to use revolving credit

• Never… if you don’t need to or can’t afford to pay if off quickly.

• When you need to make a purchase, but the good or service should be paid off in a relatively short amount of time.

• The longer it takes you to pay off your debt the more money you will spend in interest.

True or False

• Revolving credit isn’t bad if you pay it off in full each month.

Where can I get credit?

Commercial Banks

• Banks whose main function is to accept deposits, lends funds, and transfer funds between banks, individuals, and businesses.

Savings and Loan Associations

• Depository institutions that accept deposits and loan funds. – Mortgage loans– Finance commercial auto companies– Usually have a slightly lower interest rate than

commercial banks.

Savings Banks

• Depository institutions set up for small savers who were overlooked by commercial banks.– Mortgages – Auto Loans– Personal Loans– Have some saving and checking accounts

Credit Unions

• Depository institutions owned and operated by its members to provide savings accounts and low interest loans. – Offer auto and personal loans, but only large ones

offer mortgage loans. – Typically have higher interest rates on savings

accounts and lower interest rates on loans.

Finance Companies

• Companies that take the contract for installment debt from stores and adds a collection fee for collecting the debt. – Collection agencies

Consumer Finance Company

• A big financial NO NO!!• Makes loans directly to consumers at

ridiculously high interest rates. – PayDay Loans (Payroll advances) – people can get

small loans to cover expenses until they get paid, the catch is that when they do get paid a large percentage of the paycheck will go to pay the loan fee (as much as 30%). This can cause people to get trapped into taking our many loans to keep up with the debt, and may end up paying whole paychecks in fees.

The best place to get credit is…

• A. Credit Union• B. Consumer Finance Company• C. Local Store• D. Visa, Mastercard, Discover

What is a Payday Loan?

• Pay Day Loans (Payroll advances) – people can get small loans to cover expenses until they get paid, the catch is that when they do get paid a large percentage of the paycheck will go to pay the loan fee (as much as 30%). This can cause people to get trapped into taking our many loans to keep up with the debt, and may end up paying whole paychecks in fees.

Credit Cards and Charge Accounts

Charge Account

• Credit extended to a customer allowing them to purchase goods or services at that particular company and to pay for them later. – Sears, Kay Jewelers, Victoria’s Secret

Types of Charge Accounts

– Regular Charge Account – a purchase is made and a bill is sent, at the end of the month. If the bill is paid in full no interest is charged, if not paid if full by the due date, interest will be charged on the full bill!!

– Revolving Charge Account – allows you to make additional purchases and carry a balance on the bill.

Credit Cards

• Credit device that allows individuals to make purchases at many kinds of stores, restaurants, and other businesses on credit.

• How is a credit card different from a Debit Card?– Debit cards take money directly from a savings or

checking account at a bank, thus you are spending money that you already have. • When you use your debit card as credit you are still

taking money from your account, but you need to sign the receipt rather than enter a pin number.

True or False

• Credit doesn’t cost me anything if I have good credit.

The Cost of Credit

Finance Charges• Cost of credit expressed in

monthly dollars and cents– Based on the balance of the

bill at any given time of the month

– This time difference may affect how much your finance charge will be. • 4 different methods are used

for computing a finance charge

Annual Percentage Rates• Cost of using credit

expressed in a yearly percentage amount. – Easy way to detemine which

credit cards have the highest interest rate.• 13 %(card A) is lower than

17% (card B), so card A is charging a lower interest rate than card B

How can I get Credit?

• Credit Bureau – private business that investigates a person to determine the risk involved in lending to that person.

• Credit Check – Investigation of a person’s income, current debts, personal life, and pat history of borrowing and repaying debt.

• Credit Rating – rating of the risk involved in lending to a specific person or business

FICO Score

• Score given to a person based on their credit history. This score is what the three credit rating companies give you to determine if you are worthy of credit. – Lenders use this score to help them determine if

they want to offer you credit, or how likely you will be to pay back a loan.

What’s a good FICO score?Credit Score Credit Rating

700 - 830 Excellent

680 - 699 Good

620 - 679 Fair

580 - 619 Poor

Under 580 Very Poor

What can hurt my credit rating?

• Making late payments• High debt-to-income ratio• Having many open accounts• Previous Bankruptcy• Unemployment• Legal Trouble

How can I build my credit?

• Use credit to make small purchases and pay them back right away.

• Make all credit payments on time. • May more than the minimum balance. • Don’t take out credit at too many locations.

What agency provides your credit score?

What happens if I don’t pay?

• Lender may have to hire collections agencies to retrieve the funds.

• Lender may have to take a loss on the item– If this happens they make the money back by

increasing the prices of their products to consumers

• You will get a negative mark on your credit making it more difficult to use credit in the future.

True or False

• Nothing happens when I don’t pay my bill, I can just pay double next time.

Taking out a loan

• Secured Loan – loan that is backed up by collateral

• Unsecured Loan – loan guaranteed only by a promise to repay it.

• Cosigner – person who signs a loan contract with the borrower, if the borrower doesn’t have enough credit, and pays the loan back if the borrower doesn’t.

How do I get out of credit debt?

• Pay your highest interest cards off first• Pay more than the minimum payment• Analyze your situation• Try to negotiate new terms with creditors • Use government resources to help you• Spend less money so that you can afford to

make larger payments and don’t add to the debt you already have.

Best way to stay out of debt is to…

• A. Pay off high interest cards first• B. Not carry a balance on your credit• C. Use credit a lot• D. Never use credit for small purchases

How does the government regulate credit?

Laws that protect consumers

• Truth in Lending Act – required creditors to keep consumers informed about the costs and conditions for borrowing.

• Equal Opportunity Act – can’t be denied credit based on race, religion, marital status, gender, sexual preference, ect.

• State Usury Laws – restrict the amount of interest that can be charged

What is bankruptcy?

• Bankruptcy – being legally declared unable to pay off debts that you owe (some debts and taxes must still be paid). – Remains on your credit score for 10 years. • May be difficult to get credit during this time

– Creditors are never paid when customers declare bankruptcy.

Answer this

• What regulation requires lenders to be upfront about their terms?

Chapter 5 – Buying the Necessities

Objective: - Students will learn to make smart

purchases with their money.- Students will learn to shop for the best

deal and purchase only what they can afford.

Places to Shop

• Club Warehouse Stores– Store that carries a

limited number of brands and items in large quantities.

– Less expensive than grocery/department stores

– More money is tied up in food.

– Some food may spoil before you eat it

• Convenience Stores– Open 16-24 hours a day/

7 days a week– Carry a limited selections– Higher prices

What to look for when buying clothing

• Durability – ability of an item to last a long time– Service Flow – amount of use a person gets from

an item and the value they place on its use. • Style• Cost of Care– Dry clean only…for example costs money to have

cleaned

What are some ways to save money on clothing?

You living situation… Rent or Own?

• Americans spend 1/4 to 1/3 of their income on their home.

• Most Americans wait to purchase a home until they become more financially stable.– It is more difficult to get out of a living situation if

you own the home.

Renting Vs. Owning

Renting a Home• Short term agreement• Slightly less monthly

payment– Rent my increase at any time

• Don’t build equity• Never go up in value

Owning a Home• Long term agreement• Higher monthly payment

– Same each month, except for taxes (depending on loan agreement)

• Builds equity- market value minus mortgage still owed

• Houses appreciate – go up in value

Renter need to knows!

• Lease – long-term agreement describing the terms under which property is rented.– Make sure to read carefully!!

• Security Deposit – funds a renter lets an owner hold in case the rent is not paid or the apartment is damaged.– The landlord gets to keep this money if it costs them

money to get the apartment into renting condition again.

• You must give several months notice in many apartments before you move, especially if your lease is not up!

Read before you sign

Avoid Clauses like this…• Confession of judgment –

your landlord can plead guilty for you without your consent.

• Inability to sue – you give up the right to sue the landlord if you suffer from their negligence.

• Arbitrary clause – owner can cancel the least because of dissatisfaction with you.

Add these Clauses…• Ask for appliances(if not

provided)• Access apartment recreation

facilities• Painting or other promises by

the landlord• The right to cancel your lease

if your job changes or relocates you– Might have to pay a fee

• Add new lighting and fixtures, but keep them when you leave

Things to consider when buying a home

• Down Payment• Mortgage Payments• Closing Costs – fees involved in arranging for the

change in ownership of a home. • Property Taxes• Specials• Points• Homeowners Insurance • Mortgage Insurance (it is cheaper to purchase a life insurance

plan that will be enough to pay off your mortgage in the event of a death)

• Utilities and upkeep

Suggestions

• Use a Mortgage calculator to find out what the monthly payments would be on a home in your price range. – If the payment is more than 30-35% of your income…the

home is too expensive for you to afford. – Banks may lend you more than you can afford…if you

can’t pay they can forclose on you and you will loose the home and all of the money you have already paid.

• Research lots of homes in your price range to see if you are getting a good deal.

• Ask the seller to reduce the price by a few thousand, and ask them to pay the closing costs…many will.

Choosing a new/used Car

• New or Used?– Depreciation – decline in value over time. New

cars depreciate very fast!• Registration fees – licensing fee that is

annually paid to the state for the right to use the car.

• Extended Warranty– Do you need it? Can you afford it? Can it be

repaid if you sell the car before the warranty expires?

Continued…

• Normal Maintenance or Repairs– Gas type and amount– Cost of parts and labor for this type of car– Foreign or domestic

• Insurance for the car– Liability or full coverage?• Full Coverage – covers everything• Liability – insurance that pays for bodily injury or

property damage (for the other drivers car)

Insurance rates are based on…

• Type of car you drive (make, model, color)• Where you are driving• What the car is being used for• Marital status• Driving record• Grades in school• Number of drivers• Number of cars on the policy• Defensive Driving

The End