AAEC 2104 Week 8: Credit
AAEC 2104 Week 8: Credit AAEC 2104
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This 4 page Class Notes was uploaded by Mara DePena on Sunday March 20, 2016. The Class Notes belongs to AAEC 2104 at Virginia Polytechnic Institute and State University taught by Dr. White in Spring 2016. Since its upload, it has received 22 views. For similar materials see Personal Financial Planning in Agricultural & Resource Econ at Virginia Polytechnic Institute and State University.
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Date Created: 03/20/16
TYPES OF CREDIT Credit When you buy something today with the commitment of AAEC 2104 CREDIT paying off your debt in the future Consumer credit all types except housing 0 Any nonmortgage credit purchases 0 Auto loan student loans vacation loans etc OpenRevolving credit 0 Nonrevolving Borrow up to your limit and you re done 0 Borrow up to your credit limit pay it off borrow again 0 Variable pavback Minimum payment to full amount o Interest charges build on the outstanding balance o Credit cards Issued by a nancial company Gives the holder the ability to borrow funds to purchase goods with Credit cards charge interest when funds are borrowed Normally used for short term nancing Have advantages and disadvantages o Open accounts at stores o Operating lines of credit For purchasing operating inputs 0 Home equity line of credit Simple rules to keep in mind 0 Alex s rule of 3 No more than 3 credit cards Even better get on parent s o Don t spend money if you can t pay it back o Pay your balance in full every month o Don t make minimum payments Interest will sneak up on you SCHUMER BOX Read it Allows you to compare loans side by side Lays out everything associated with credit card The average interest rate for college students is 1822 Interest rates may be xed or variable 0 Variable rates are usually tied to an index May change each month Teaser rate Short term low rates as low as 0 APR After stated term it increases Balance transfer Moving balance from one card to another Cash advance Get credit card go to store get cash on spot 0 Bad thing to do 0 Borrow cash against your credit limit 0 Pay a cash advance fee 24 0 High APR on cash advances Default APR Your APR if you miss a few payments Goes up 0 Grace period When you are not charged interest Typically 2025 days after loan if you do not have outstanding balance From time of initial purchase to rst interest charges 0 You don t need a card that has an annual fee MAIN FACTORS Average daily balance method Most common method to calculate the balance owed add up each day s balance divide by number of days TYPES OF OPEN CREDIT Bank credit cards 0 Visa Mastercard 0 May have nice perks Variations of bank credit cards 0 Premium or platinum cards 0 Affinity cards VT Alumni Association etc gets a percentage as a donann o Secured credit cards For those with bad credit Pledge something as collateral Credit limit value of collateral Travel and entertainment cards 0 Not revolving must pay entire balance each month Basically interest free 0 Probably has an annual fee Singlepurpose cards 0 Used for only one store 0 Good way to limit spending 0 Charge accounts 0 Use productservice today pay at end of month Phone bill electric medical hardware feedsupply ADVANTAGES OF CREDIT CARDS Convenience Safer than carrying cash 0 Great for emergencies o Helps with record keeping 0 One monthly statement shows your purchases 0 Internet shopping Helps build credit history if used wisely Extra warranties and consumer protection 0 50 max for loststolen card if reported 0 Use someone else s money free for 30 days DISADVANTAGES OF CREDIT CARDS Typically spend more with credit card v cash 0 Easy to lose track of your purchases 0 Fees and interest charges 0 High interest rates 0 Live above your means now pay for it later 0 Commit future earnings to debt payments Destroy credit history if used unwisely Michael Jordan rule of nance his number was 23 o It takes 23 years to pay back a 23 APR if you make minimum payments on a 2000 purchase 0 Richard Petty Rule 0 5000 balance 17000 interest total 0 Takes 43 years to pay off 0 If invested instead 550000 GETTING A CREDIT CARD 0 Shop around 0 CreditCardscom BankRatecom Look at APR fees as well as the issuer 5 39s of Credit lenders look at these 0 Character measured by credit scorehistory 0 Capacity current income 0 Capital value of your investment assets 0 Collateral only for secured credit cards 0 Conditions overall economy COLLEGE STUDENTS AND CREDIT CARDS New laws for those under 21 0 Must have income 0 Cosignerjoint account TROUBLESHOOTING YOUR CREDIT CARD SITUATION 0 Determine how long it will take to pay the balance in full 0 Switch to lowest APR card possible 0 Use savings to reduce credit card balances 0 Not a good sign 0 Pay credit card balances with home equity line 0 Stop using your credit cards 0 Work with your creditor HOW TO USE CREDIT CARDS Only use when you have the cash in your checking account 0 Use it as a convenience not a long term loan 0 Pay your balance in full every month 0 Pay 0 in interest 0 Maybe carry a small balance 12 times per year to build your credit score 0 Make your minimum payment though Never make justthe minimum payments No cash advances Have no more than 3 credit cards 0 Al has 3 One for travel one for online purchases one he keeps in his wallet Average American household has between 850010000 in credit card debt Let your credit card company know you are leaving the country so they don t freeze you Try not to use your debit card in other countries use a credit card Their security is not as good CREDIT HISTORY Creditors report to Credit Bureaus 0 Credit limit 0 Outstanding balance 0 Payment history Late is de ned as 30 60 or 90 days late 0 Date opened 0 Judgments collections etc 75 have a mistake on them and 25 have a critical mistake It s all used to calculate your credit score Entitled to 1 free copy of your credit report per year Check 36 months before you apply to home loan auto loan credit card 0 If there is a mistake you can x it online If you have a card for a long time hold onto it or it will lower your credit score Credit inquiry When you gave someone else the right to check your credit score and they check it This hurts your credit score CREDIT BUREAUS AND REPORTS Expedan TransUnion Equ ax Free annual copy of your credit report annualcreditreportcom CreditKarmacom 100 free
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