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ch: 8 personal finance notes

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ch: 8 personal finance notes 52307

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Pers Finan Mgt - FIN 108 - 007
Harry E. Gallatin
Class Notes
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This 5 page Class Notes was uploaded by Onome Notetaker on Tuesday September 27, 2016. The Class Notes belongs to 52307 at Indiana State University taught by Harry E. Gallatin in Fall 2016. Since its upload, it has received 14 views.


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Date Created: 09/27/16
Chapter 8 ­ Managing Your Credit Personal finance notes  Credit Cards 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  Excessive spending can continue with minimum payments Credit cards (cont’d)  Applying for a credit card ­ Personal information  Cash inflows  Cash outflows  Credit history  Capital  Collateral ­ Credit check   Credit card issuer obtains a credit report ­ Other information that creditors evaluate  Income  Existing debt level  Current economic conditions Characteristics of Credit Cards  Providers of credit cards  ­ Most popular are MasterCard, Visa and American Express ­ 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 (cont’d)  Credit limit—maximum amount of  credit allowed  Overdraft protection—allows purchases beyond credit limit  Annual fee  Incentives to use the card ­ 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 (cont’d)  Grace period—period between time  of purchase and when payment is due  Interest Rate ­ 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 Finance Charges  Finance charge:  the interest that you must pay as a result of using credit Average daily balance method ­ Most frequently used ­ Interest charged on average daily balance at the end of every day in the billing  period Previous Balance Method ­ Interest charged on the balance at the beginning of the new billing period Adjusted Balance Method ­ Interest is charged based on the balance at the end of the new billing period Estimating Credit Repayment  Simple interest rate: the percentage of credit that must be paid as  interest on an annual basis  Annual percentage rate (APR): the simple interest rate including  any fees charged by the creditor ­ Allows comparison among potential lender  Impact of interest rate on the amount you owe ­ The larger the interest rate, the higher the interest payments  Impact of financing period on credit payments ­ Total interest paid depends on the length of the financing period Credit Card Statement  Statements typically sent at the end of the billing cycle  Lists: ­ Previous balance ­ Purchases ­ Cash advances ­ Payments ­ Finance charge ­ New balance ­ Minimum payment  Always scrutinize statement for errors  Dispute any errors, but pay correct charges in a timely manner  Customer service number and/or dispute instructions included on statement Regulation of Credit Cards  Credit CARD Act ­ 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 (cont’d)  Restrictions for cardholders less than age 21  Summary of provisions  Bureau of Consumer Financial Protection ­ 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 Tips on Using Credit Cards  Use a credit card only if you can cover the bill  Impose a tight credit limit  Reduce credit limit when the economy weakens  Pay credit card bills before investing money  Pay off credit card debt before other debt  Avoid credit repair services Tips on Using Credit Cards (cont’d)  Resolving an excessive credit balance ­ 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 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  Key credit management decisions for your financial plan are: ­ What limit should you impose on your credit card?    ­ When should you use credit? 


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