Pesonal finance 6th madura chapter 08 managing your credit

Characteristics of Credit Cards 1 of 3– Most popular are MasterCard, Visa and American Express  MasterCard and Visa allow financing  Most American Express cards require payment in ful

Chapter Objectives

Credit Cards (1 of 4)

Advantages

• No need to carry large amounts of cash

• Free financing as long as you pay in full each month

• Monthly statement for recordkeeping

Disadvantages

• Can make purchases that you can’t afford

• Allows spending beyond your means

Credit Cards (2 of 4)

Credit Cards (4 of 4)

– Other information that creditors evaluate

 Income

 Existing debt level

 Current economic conditions

Characteristics of Credit Cards (1 of 3)

– Most popular are MasterCard, Visa and American

Express

 MasterCard and Visa allow financing

 Most American Express cards require payment in full

– Retail (or proprietary) credit card: a credit card that is

honored by a specific retail establishment

 Retail stores and gas stations

 Limits purchases to a single merchant

Characteristics of Credit Cards (2 of 3)

credit limit

– Prestige cards: credit cards, such as gold or platinum

cards, issued by a financial institution to individuals who have an exceptional credit standing

Characteristics of Credit Cards (3 of 3)

and when payment is due

– Types of interest rates charged on credit cards

 May be fixed, variable or tiered

– Regulations on interest rates – new regulations more

favorable to users

– Cash advances

Financial Planning Online (1 of 4)

the Personal Finance section containing

calculators

– Estimates of when you might be debt free

– Estimates of your future credit card payments based on

interest rates, card balance, and the desired payoff time

Finance Charges (1 of 2)

a result of using credit

– Most frequently used

– Interest charged on average daily balance at the end of

every day in the billing period

– Interest charged on the balance at the beginning of the

new billing period

Finance Charges (2 of 2)

– Interest is charged based on the balance at the end of the new billing period

Financial Planning Online (2 of 4)

www.consumerfinance.gov

card.

Estimating Credit Repayment (1 of 4)

must be paid as interest on an annual basis

rate including any fees charged by the creditor

– Allows comparison among potential lenders

Estimating Credit Repayment (2 of 4)

– The larger the interest rate, the higher the interest

payments

– Total interest paid depends on the length of the

financing period

Estimating Credit Repayment (3 of 4)

EXHIBIT 8.2 How Interest Payments Are Influenced by Interest Rates

(assume loan amount of $10,000)

Simple Interest Rate Payment per Year Simple Interest Payments over Four Years Total Simple Interest

Estimating Credit Repayment (4 of 4)

Credit Card Statement (1 of 2)

Credit Card Statement (2 of 2)

timely manner

instructions included on statement

Regulation of Credit Cards (1 of 2)

– Passed in 2009; contains provisions to protect

consumers

 Conditions for fees

 Advance notice to change interest rate

 Promotional interest rate guidelines

 Payment period

 Credit limit

 Disclosure about paying balance due

Regulation of Credit Cards (2 of 2)

 Restrictions for cardholders less than age 21

 Summary of provisions

– Created in 2010 as part of Financial Reform Act – Goal is to enforce consumer finance laws

– Makes sure consumers receive full disclosure of

information to help them make financial decisions

Financial Planning Online (3 of 4)

rights”

laws that protect your rights when using credit

Tips on Using Credit Cards (1 of 5)

Tips on Using Credit Cards (2 of 5)

Tips on Using Credit Cards (3 of 5)

Financial Planning Online (4 of 4)

http://www.ftc.gov

establishing, using and protecting credit.

Tips on Using Credit Cards (4 of 5)

– Spend as little as possible

– Consider ways to increase income

– Borrow from a family member

– Get a debt consolidation loan

– Sell assets for cash

– Reduce everyday expenses

Tips on Using Credit Cards (5 of 5)

– Personal bankruptcy: a plan proposed to the court in

which you repay at least a portion of your debt and pay attorney and filing fees

 Chapter 7 allows the discharge of almost all debts, but also have to surrender assets to pay debt

 Chapter 13 allows you to keep your assets, but the court takes control of your finances and devises a 3–5 year repayment plan

How Credit Management Fits Within Your Financial Plan (1 of 4)

financial plan are:

– What limit should you impose on your credit card? – When should you use credit?

How Credit Management Fits Within

Your Financial Plan (2 of 4)

EXHIBIT 8.5 How Credit Management Fits Within Stephanie Spratt’s

Financial Plan

GOALS FOR MANAGING CREDIT

1 Set my own limit on credit card purchases to ensure that I will always be able

to pay o the credit balance in the same month.

2 Set a policy to avoid incurring high interest expenses on credit cards.

ANALYSIS

Monthly Cash Inflows $2,500

- Typical Monthly Expenses (paid by checks) - 1,400

= Amount of Funds Available 1,100

How Credit Management Fits Within

Your Financial Plan (3 of 4)

EXHIBIT 8.5 How Credit Management Fits Within Stephanie Spratt’s

Financial Plan

Cash $100 0

Checking account balance 800 0

Money market fund 400 3.0

One-month CD 1,200 4.3

Credit card balance 600 20.0

How Credit Management Fits Within

Your Financial Plan (4 of 4)

EXHIBIT 8.5 How Credit Management Fits Within Stephanie Spratt’s

Financial Plan

DECISIONS

Decision on Credit Limit

Given that I have $1,100 each month left from my salary after paying typical

expenses (by check), I have $1,100 remaining that can be used for credit card

purchases if necessary I will impose a maximum limit of $1,100 on my credit card spending As my income rises over time, I may consider increasing my credit limit, but only up to some level that I can afford to pay o immediately when I receive the bill.

Decision on Paying Off Credit Balances