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This 8 page Study Guide was uploaded by Mallyna Sessions on Tuesday February 17, 2015. The Study Guide belongs to csm 204 at University of Alabama - Tuscaloosa taught by fulmer in Winter2015. Since its upload, it has received 201 views. For similar materials see Intro Personl Finan Plan in Business at University of Alabama - Tuscaloosa.
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Date Created: 02/17/15
CSM Study Guide 2 1 Consumer Credit the use of credit for personal needs except a home mortgage Credit an arrangement to receive cash good or services now and pay for them in the future 2 Importance of consumer credit in our society a Any forecast or evaluation of the economy includes consumer spending trends and customer credit as a sustaining force The aging of the baby boom generation has added to the growth of consumer credit While extensive use of debt by this generation is nothing new the fact that it has grown rapidly has added to over debt use 3 Uses and misuses of credit a Valid reasons b c i a medical emergency ii a new car iii college education Shopaholics and young adults are most vulnerable to misusing credit Questions to consider before you decide how and when to make a major purchase For example A car i Do I have the cash I need for the down payment ii Do I want to use my savings for this iii Does the purchase fit my budget iv Could I use the credit I need for this in some better way v Could I postpone the purchase vi What are the opportunity costs of postponing the purchase alternate transportation costs a possible increase in the price of the car What are the dollar costs and the psychological costs of using credit interest other finance charges being in debt and responsible for making a monthly payment vii 4 Advantages of Credit prawn mange current use of goods and services may purchase when funds are low safer than cash and debit cards cushion for emergencies easier to return merchandise convenient when shopping one monthly payment needed for reservations and online purchases oat time and grace period rewards programs i cash back ii merchandise iii accidental death and dismemberment insurance iv auto rental insurance V roadside assistance Disadvantages k Temptation to over spend 1 Potential damage to credit rating m Does not increase total purchasing power n Credit costs money 0 Minimum payment tempting 5 Types of Credit a CloseEnded i ii Installment loans Single pay loans b Open Ended 1 ii iii iv V vi vii viii Credit cards Lines of credit Smart cards Debit cards Stored value cards Travel and entertainment cards Smart phones Home equity loans 6 General Rules of Credit Capacity a Debt paymentstoincome ratio calculated by dividing your monthly debt payments not including your house payment which is a longterm liability by your net monthly income b Debttoequity ratio calculated by dividing your total liabilities by your net worth 7 Cosigning A loan a when you are asked to cosign you are being asked to take a risk that a professional lender will not take The lender would not require a cosigner if the borrower met the lender s criteria for making a loan b If you do cosign 1 ii iii iv VI Be sure you can afford to pay the loan If you are asked to pay and cannot you could be sued or your credit rating could be damaged Consider that even if you are not asked to repay the debt your liability for this loan may keep you from getting other credit that you want Before you pledge property such as your automobile of furniture to secure the loan make sure you understand the consequences If the borrower defaults you could lose the property you pledge Check your state law Some states have laws giving you additional rights as a cosigner Request that a copy of overdue payment notices be sent to you so that you can take action to protect your credit history 8 Building and Maintaining your credit rating a If you apply for a charge account credit card car loan personal loan or mortgage your credit experience or lack of it will be a major consideration for the creditor A good credit rating is a valuable asset that should be nurtured and protected If you want a good rating you must use credit with discretion limit your borrowing to your capacity to repay and live up to the terms of your contracts The quality of your credit rating is entirely up to you 9 5 C s of Credit 999 e Character borrower s attitude toward credit obligations Capacity your financial ability to meet credit obligations Capital refers to your assets or net worth Collateral an asset that you pledge to a financial institution to obtain aloan Conditions refers to general economic conditions that can affect your ability to repay a loan 10 Improving your credit ratings a 999 e Get copies of your credit report and verify that the information is correct Pay bills on time Understand how the score is determined Learn the legal steps Beware of credit repair scams 11 Correcting credit mistakes a b c d e 12 CARD Notify the creditor in writing within 60 days Include account number and explanation of error They must respond within 30 days Two billing cycles but no longer than 90 days to make correction Credit rating unaffected while item is in dispute Act 13 Sources of consumer credit a Before deciding whether to borrow money ask yourself i Do I need a loan ii Can I afford a loan iii Can I qualify for a loan You should avoid credit i When you do not need or really want a product that will require financing ii You can afford to pay cash Inexpensive loans parents or family members are often the source of the least expensive loans Secured with savings Medium priced loans from commercial banks federal savings banks and credit unions Expensive loans finance companies retailers and banks through credit cards Check cashing services Retailers Credit cards Cash advances 14 Student Loans 999 e Usually lower interest rate Legal obligation All come from U S department of Education Must be paid back Now not discharges in bankruptcy 15 Finance charge and APR a b Finance Charge the total dollar amount you pay to use credit APR Annual Percentage Rate the percentage cost of credit on a yearly basis 16The Tradeoffs in Credit a b Term Versus interest costs longer loans lower payments but more total interest Lender risk versus interest rate to reduce the lender s risk and the interest rate i Accept a variable interest rate ii Provide Collateral to secure the loan iii Make a large down payment up front iv Have a shorter loan term 17 Managing your debt a Fair debt collection practices Act FDCPA a federal law enacted in 1978 that regulates debt collection activities 18 Reasons for indebtedness wppnwp g Emotional Problems The use of money to punish or get even The expectation of instant comfort Keeping up with the joneses Overindulgence of children Misunderstanding of lack of communication Amount of finance charges makes it difficult to repay 19 Dang r signals of potential debt problems Frvrpmrvanpp Paying only the minimum Growing balances Missing or late payments Intentionally using overdraft protection Dipping into savings regularly Not discussing money or only discussing money Depending on overtime pay Not knowing how much you owe Exceeding credit limits No savings Being denied credit Having your credit card revoked m Postponing medical or dental visits 20 Consumer credit counseling service a local nonprofit organization that provides debt counseling services for families and individuals with serious financial problems Help them manage more better and teaches them the necessity of family budget planning 21 Types of bankruptcy a Straight Bankruptcy Immediate liquidation plan a debtor is required to draw up a petition listing his or her assets and liabilities many debts are forgiven b Regular income pan wage earner plan a voluntary plan that a debtor with regular income develops and proposes to a bankruptcy court to extinguish his or her debts from future earnings or other property over a period of time usually keeps all assets or property 22 Practical purchasing strategies and impulse buying Timing purchases Store selection Brand comparison Label information Price Comparison Evaluate warranties g Service Contracts Impulse buying unplanned buying 23Warranties and service contracts a Warranty written guarantee from the manufacturers or distributor of a product that specifies that conditions under which the product can be returned replaced or repaired b Service Contracts an agreement between a business and a consumer to cover the repair costs of a product 24 Phrases of making a major consumer purchase a Preshopping Activities i Problem identification 1 Needs vs wants ii Information gathering 1 Personal contracts 2 Media information 3 Independent testing organizations 4 Government agencies 5 Online sources b Evaluating Alternatives i Comparison shopping ii Selecting options 1 Mechanical 2 Convenience 3 Aesthetic iii New or used iv Buy or lease c Determining Purchase Price i Know information about vehicle ii Deal with person of authority to lower price oppy iii Get starting price information in advance iv Get price prior to mentioning tradein v Look for rebates or low interest rates vi Compare financing alternatives d Post purchase activities i Lemon lawsrequire a refund for a vehicle after the owner has made repeated attempts to obtain servicing Out of service 30 days in first year after purchase ii Automobile operation costs iii Motor vehicle maintenance 1 Servicing sources and problems 25Advantages and disadvantages of leasing a vehicle a Advantages i Only a small cash out ow may be required down payment ii Monthly lease payments are usually lower than monthly financing payments iii Lease agreement provides detailed records for business purposes iv You are usually able to obtain a more expensive vehicle b Disadvantages i No ownerships ii A need to meet requirements like credit iii Possible additional costs incurred for extra mileage repairs turning the car in early or even moving to a new state 26 Resolving consumer complaints a Place of purchase b Manufacturer s headquarters c Consumer agency i Mediation ii Arbitration d Legal action 27 Legal options for consumers a Small claims court b Class action suits c Using an attorney d Legal aid society e Prepaid legal service 28 Opportunity costs for of housing choices a Interest income lost b Time and cost of commuting to live in less expensive area c No tax advantages for renters d No equity build up for renters e Time and money to repair improve lower priced homes f Time and effort to custom build 29 Renting versus buying housing be sure to study chart 30Advantages and Disadvantages of renting a Advantages i Mobility moving is easier when you are renting than when you own a home Also makes job transfer easier ii Fewer responsibilitiesfewer financial concerns no maintenance or repair concerns iii Lower financial Costs less expensive than buying a home b Disadvantages i Few financial benefits tenets cannot take tax deductions for mortgage interest and property taxes or benefit from the increased value of real estate ii Restricted Lifestyle tenets are often subject to restrictions regarding pets and decorating the rental unit iii Legal details most tenants sign a lease a legal document that defines the conditions of a rental agreement 31 Costs of renting a Security deposits with your sign and lease 32 Benefits and drawbacks of home ownership a Advantages i Pride of ownerships ii Financial benefits iii Lifestyle exibility b Disadvantages i Financial uncertainty ii Limited mobility iii Higher living costs 33 Finding and evaluating a property to purchase a Determining needs i Evaluate owning your own place ii Asses types of housing available iii Determine how much you can afford iv Prequalify for a mortgage loan b Finding and evaluating property i Selecting a location ii Be aware of zoning laws iii Assess the school system iv Using a real estate agent v Conduct a home inspection or hire an inspector vi Mortgage company will want an appraisal c Pricing and financing i Determine the price ii Negotiate the price iii Determine down payment amount iv Investing rates v Apply and qualify for a mortgage d Fixed rate mortgages i Conventional 1 15 year amortization 2 30 year amortization ii government programs 1 veterans administration 2 federal housing authority iii balloon 34 Reverse mortgages loan based on the equity in a home that provides elderly homeowners with fatfree income and is paid back with interest when the home is sold or the homeowner dies 35 Closing the real estate transaction j P39P qerhstnp z Application or origination Credit report Title insurance and search free Attorney s and appraiser s fees Property survey Pest inspection Homeowner s insurance Escrow for taxes and insurance Prepaid interest Real estate commission 36 Selling your home a b c d e Preparing your home Determining the price Selling yourself Using a realtor Owner financing
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