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Chpt 11.2b Shopping 4 CreditWHEN TO USE CREDITCan you describe a situation when it is a good time to use credit and when it is NOT a good time to use credit?When to Use CreditGreat to have in times of emergencies, family crisis, unexpected illness, etc.Could be a convenient way to manage income by keeping track of spending—provided bills are paid in full each month. Allows the benefit of having large items such as a home, car, and appliances while still paying for them.When Not to Use CreditCan lead to spending beyond one’s means because it is so convenient and easy to use. If one is tempted to live on credit.When credit takes away the opportunity to use the income that pays off the credit, which is needed for other things. When there is concern that the credit cards and credit account numbers may be stolen and used by others.QUESTIONS TO ASK BEFORE USING CREDIT1. Is this a necessity or luxury item?2. Do I really need this good or service?3. Can I meet my obligation to pay for it without hurting my existing cash flow?4. Do I really understand all of the terms and obligations that I must agree to when purchasing this?5. Do I realize that this would cost less if I paid cash?6. Have I really thought about the consequences of making this purchase?7. Can I repay the debt in a timely fashion to avoid finance charges?CHARGE IT!Using credit cards to pay for goods and services is a fact of life for most consumers. Yet, many consumers do not take the time to comparison shop for credit cards. We are more interested in rebates, bonuses, or perks which allow us to earn credit toward other services or purchases. The more we charge with our credit cards, the bigger our rebate or bonus, but we fail to realize that usually these cards carry higher annual fees and finance charges. Charge It! It is not a problem if you pay off your balance each month, but statistics on credit card use show that Americans are carrying increasingly high levels of credit card debt. You can use credit cards to pay for telephone calls, speeding tickets, every kind of service, support for charitable organizations, funerals and credit cards can even reimburse you when purchases are lost, stolen, or go on sale. So it is important to compare credit terms and costs of similar cards so that you can select the credit card that will give you the features and terms that meet your needs.Applying for a Credit CardTo get a credit card, you must apply for it. These days, many people receive credit card offers in the mail, or through other sources. Your potential creditor will obtain personal information from you.They will consider personal information, such as cash inflows or income, and current cash outflows such as house payments or car payments.In addition, some creditors will also evaluate your assets, such as savings or other financial assets and real property.Potential creditors will also perform a credit check—that is they access your credit reporting order to examine your credit history and determine your ability to repay. Your credit report summarizes your existing lines of credit and past credit.Did you pay your bills on time or default on any loans? This information will show up on a credit check. Creditors will be more likely to extend credit to people with high levels of cash inflows, low levels of cash outflows, and a good credit history.Applying for CreditWhy Does a lender need to know about your credit history to extend credit? Before taking out a loan, ask yourself whether you can meet all of your essential expenses and still afford the monthly loan payments.When you are ready to apply for a loan or a credit card, you should understand the factors that determine whether a lender will extend credit to you.THE FIVE Cs OF CREDITC = CapacityC = CapitalC = CollateralC = ConditionsC = CharacterThe 5 Cs of CreditWhen a lender extends credit to consumers, it takes for granted that some people will be unable or unwilling to pay their debts. Therefore, lenders establish policies for determining who will receive credit.Most lenders build such policies around the “five Cs of credit”CharacterCapacityCapitalCollateralConditionsQUESTIONS TO ASK BEFORE USING CREDIT1. Is this a necessity or luxury item?2. Do I really need this good or service?3. Can I meet my obligation to pay for it without hurting my existing cash flow?4. Do I really understand all of the terms and obligations that I must agree to when purchasing this?5. Do I realize that this would cost less if I paid cash?6. Have I really thought about the consequences of making this purchase?7. Can I repay the debt in a timely fashion to avoid finance charges?The Best Credit CardsThe best credit cards have no annual fee, and the rate of interests figured as a certain amount over the prime rate. (The prime rate being a special rate that banks pay for loans from other banks),For example, if a credit card is advertised as being prime plus 6.5%, then the annual percentage rate on the card would be 10% if is at 3.5%. Sounds a little bit complicated, but very simply you want a credit card rate as close to prime as possible. So prime plus 9% would be the absolute best, and is probably not possible to get, but prime plus about 3% to 7% is considered a good rate.If you don’t carry a balance it doesn’t matter so much, but hen something might come up during a particular month and if you have to leave a balance on a credit card it really matters having the lowest rate possible. Credit Card StatementEvaluating Credit CardsWhen you evaluate various credit card options, consider the following factors as well:Compare the credit card interest rates. Look for a low interest rate card but remember the interest rate is not fixed so it can be adjusted either quarterly or by written notice by the bank or company. You may be able to negotiate with your bank for a lower interest rate. Compare how finance charges are calculated to help determine the total cost of credit. Make sure the annual fees are reasonable. Not all credit cards require an annual fee. It is worth shopping around to get the lowest fee or no-fee, especially if you pay off your balance each month. Read each contract carefully before you sign so that you understand all the costs and conditions. Shop for a credit card the same way you would shop for any goods or service. Try to negotiate for the options and conditions you want at the lowest cost available. Questions To Ask When Selecting A Credit Card?What credit limit do you set for each card each month? (should be realistic to income and spending and a set amount for each card) Where will you use your card? (Which stores and for what services?) Which type of credit card(s) is appropriate? (Which type of card best meets your needs?) ?Will you pay off the balance each month? (Look for a low annual fee, other fees and a grace period.) Credit Card FeaturesCredit LimitCredit card companies evaluate your creditworthiness not only to determine whether to extend credit but also to establish an individual credit limit. Overdraft Protectionis a feature that allows you to “overdraw” or exceed your credit limit Annual FeeA fee of $20 to $70 for the privilege of using their card.Credit Card FeaturesIncentives to Use the CardSome credit cards offer bonus incentives to encourage people to use their credit cards like cash back, airline miles, donations to various charities, or the ability to cash-in accumulated points for gifts. Prestige CardsFinancial institutions often issue prestige cards that are often called platinum or gold cards and provide additional benefits to cardholders, such as special warranties on purchased products or insurance on travel.Grace PeriodsCredit cards typically allow a grace period in which you are not charged interest on your purchases. Typical grace periods are 20 days from the time of the statement is “closed”, or your bill is calculated and mailed.Cash AdvancesMany credit cards allow cash advances at banks or automated teller machines (ATMs) that can be used to get cash rather than a good or a service. Financing or Interest ChargesMany individuals make purchases with their credit card and then pay just a portion of the balance for several months or years. Most credit cards charge interest rates on carried balances that range between 15 and 22 percent. Prepaid Cash Cards – Companies such as Walmart allow you to purchase a card that you can “load” with cash then you can use the card to purchase a good or service.types and sources of creditsingle-payment creditItems and services are paid for in a single payment, within a given time period, after the purchase. Interest is usually not charged. Utility companies, medical services Some retail businessesHow Many Cards?Having too many credit cards can lead to overspending. If you limit the number of cards and set a limit on each card, you can control spending and avoid excessive debt.Generally, you decide how many credit cards you need based on your spending habits and income. The accepted rule is that your monthly payments on all debts, excluding your mortgage payment, should not exceed 20% of your take home pay.Credit User ResponsibilitiesAs a credit card user, you have the following responsibilities: ?Assess your financial situation and determine how much you can repay monthly.Understand the contract's costs and conditions so that you know the total cost of credit purchases. Keep copies of credit transactions and compare with your monthly statement.Remove carbons from credit card receipts and destroy them. Do not give your credit card numbers to anyone you do not know and trust. ................
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