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What is your gut reaction to these words?. Credit cards Debt Bankruptcy. Suze Orman says…. The First Law of Money = People first. Then money. Then things. Investment in Consumer Durables. Most household durable goods have both investment and consumption attributes - PowerPoint PPT Presentation
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What is your gut reaction to these words?
Credit cardsDebtBankruptcy
Suze Orman says…
The First Law of Money =People first. Then money. Then things.
Investment in Consumer Durables Most household durable goods have both
investment and consumption attributes consumption benefits are services provided and
typically these largely outweigh any investment attributes
Examples of large household durables automobile washer
Large expense of durables necessitates that many households must either save for such purchases or finance them by going into debt.
Saving for the Purchase of Durables
Benefits acquisition costs are lower
Costs delayed gratification / loss of use relative price may rise in interim
Financing the Purchase of Durables
Benefits immediate use / gratification establishment of credit rating (?) purchase price known with certainty
Costs acquisition costs are higher
Acquisition Costs
Financing costs Search costs Delivery charges Installation charges Education costs Accessories
Then, there are operation costs…
Maintenance repairs / service contracts disposables energy costs insurance storage foregone interest (opportunity costs)
How much will that durable good really cost you?
List 3 durable goods you want to purchase some time in your life
Estimate the cost of each item Think of your hourly wage How many hours do you need to work to
purchase each item?
Given substantial acquisition and operation costs, why do households continue to purchase durables?
time savings direct utility / satisfaction status
Overspending
is hazardous
to your wealth
Definition... Consumer debt - two components
consumer installment credit which covers most non-mortgage loans to consumers repayable
in two or more payments (e.g., car loans) revolving credit (e.g., credit cards)
Borrower may obtain funds up to a certain pre-approved limit There is no set amortization schedule The credit may be used repeatedly Borrower may repay over time or all of the balance at once Most of the time interest rates are not fixed
Mortgage debt is a separate category in credit files, even though it is either installment (traditional mortgage) or revolving (home equity line of credit)
Dave Ramsey says,
To avoid debt, ACT YOUR
WAGE
Where can you get credit? Banks, S&L’s, Credit Unions
low risk, low interest rate Sales Finance Companies (e.g. Sears, GM) Credit Cards Consumer Finance Companies (e.g. Advance Check
shops) Interest rates from 400-980% APR Doesn’t always seem so high because you are charged fees
Ex. Borrow $100 for 31 days at USA Cash = $44.29 loan fee
Pawnshops high risk, high interest rate
This shows the stratification of the credit market
An ad I saw once:
Use our “Easy Credit Plan”100% Down$0 Monthly Payment
Credit Report Score
Determined by FICO (Fair Isaac Corporation) based on: Payment history – 35% Amount owed – 30% Length of credit history – 15% New credit – 10% Types of credit in use – 10%
Check out the official website at www.myfico.com
Credit Reports Each of the 3 credit reports from Experian, TransUnion, and
EquiFax lists your: Credit accounts, including all credit cards, auto loans, student loans,
and mortgages in your name, with information about the: Creditor and account number Balance Date opened Payment history Current status, such as “OK”, “Closed by customer”, “30 days late
payment”, etc. Inquiries: recent applications for new credit Collections: when a collection agency is seeking you to repay a debt Public Records: court judgments such as a bankruptcy, foreclosure,
or tax lien You are entitled to one free credit report from each agency every
year. Access it at www.annualcreditreport.com or by calling (877)322-8228
Credit Report Myths
Check out the reading on this – very important to understand
Does one late payment really hurt me?
Survey by Experian (2005): More than half of US consumers have a
delinquent payment on their cc More than a third have a late payment in the past
year Average score with 1 late payment = 598 credit
score Average score with no late payments = 759
Credit Card (a definition)
A means for buying something you don’t need, at a price you can’t afford, with money you don’t have.
Credit Cards
Which credit card is best for you? Evaluate:
annual fee periodic interest rate how they calculate outstanding balance (grace
period and loan repayment) Do you pay off your balance every month? -
OR- Do you carry a balance?
How long will it take to pay cc off with 2% minimum payments?
$2,500 balance, 18% interest 244 months (>20 years) with $3365.51 in interest
$2,500 balance, 22% interest 347 months (almost 29 years) with $6102.13 in
interest
Credit cards, cont.
When are credit cards a good thing?
When are they a bad thing?
How can you resurrect yourself and your credit if credit cards are a bad thing for you?
More on Credit Cards
Need a credit card to establish credit history and for emergencies If you can eat it, drink it, or wear it, then it's not an
emergency!
Even if the lender thinks you can handle $2,000 or $5,000 or $10,000 in debt (credit limit) doesn’t mean that you should or can
Changes in Credit Card Rules-2009-2010
1. Limited interest rate hikes
2. No more universal default
3. More time to pay bills
4. Clearer due dates and times
5. Highest interest paid first
6. Limits on over-the-limit fees
7. No double-cycle billing
8. Making minimum payments
9. Subprime card fee limits
Some statistics…
Among college students, >80% have 1 cc 15% have 4+ cc’s 50% pay bal every month 16% have bal >$1,000 5% have bal >$5,000
In the 1990s, the bankruptcy rate for 18-25 has DOUBLED Most filings were for revolving credit with
balances <$10,000