Transcript Personal Financial Literacy

Chapter 7
Buying Decisions
Copyright 2007 Thomson South-Western
Buying Decisions
• Impulse Buying: when you do not think
about a purchase ahead of time.
• Often leaves the buyer feeling
dissatisfied and wishing they had
chosen more wisely.
• Some say that any purchase over $50
should be considered carefully.
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Buying Plan
• A buying plan is a method for making
good buying decisions.
• Helps you stretch your limited
resources
• Helps prevent buyer’s remorse which is
regret over a buying decision that was
made.
• A detailed extension of your budget
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Steps in Creating
a Buying Plan
• Evaluate needs and wants. Items
you purchase should be selected to
meet your needs and wants. This
helps make good buying decisions.
– Consider opportunity costs—what you
have to give up in order to buy the items.
– Criteria: standards or rules by which
something can be judged. This would
include the features, functions, and quality
of the item
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Evaluate Needs and Wants
• Set a Timeline: how soon you wish to
make the purchase
• Set a Spending Limit: maximum
amount you are willing to pay for an
item. This prevents being tempted to
spend more than you planned.
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Gather Information
• Find out what products/services are
available, including their features and
prices.
• Comparison shopping: know all options
available.
– Check for a rebate which is a refund of part or all of the
purchase price.
– The Internet is a good place to do product research. The
lowest price is not always the best price.
– Add taxes, handling charges and shipping fees when
looking at total cost.
– Select the purchase method.
• Knowing in advance how you will pay for a product or
service puts you in a better position to bargain.
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Make the Purchase
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Choose the product or service
Be sure the item is in good condition
Verify the package/box is sealed
Know about the warranties and return
policies
• Sometimes delivery or setup is extra
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Evaluate the Purchase
• Ask yourself how satisfied you are with
the purchase.
• Why?
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Check In 1
1. What are the advantages of using a
buying plan?
2. What are the steps of a buying plan?
3. Why does comparison shopping lead to
better buying decisions?
4. Why is the internet a good place to
research products?
5. What can you do after a purchase to help
ensure you make good choices in the
future?
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Sources of Credit
• Credit is the ability to borrow money with the
agreement to pay it back later. The purpose
of credit is to allow buyers to purchase items at
the present time and pay for them in the future.
• The person who borrows money is the debtor.
• The lender is known as the creditor.
• Always give honest and complete answers on
credit application. Be sure you understand
and agree to the terms of the credit agreement
before you sign and submit.
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Service Credit
• The ability to receive services and
pay for them later is known as
service credit.
– Examples include utilities such as
electricity, water, and sewer and doctors
and dentists.
– Some service creditors require a deposit
until they are familiar with your credit
history.
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Bank Credit Cards
• Banks credit cards are issued by banks through
providers such as MasterCard and Visa with
which you can purchase products and get cash
throughout the world.
• It is revolving credit, which allows you (the
account holder) to use it as often as you like up
to a dollar limit.
• Either the entire debt or part of the debt can be
paid each month.
• The account can have an ongoing balance, but
a minimum monthly payment is due.
• Interest is charged on the outstanding balance.
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Bank Credit Cards
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Interest on credit card balances can be quite high!
Interest on credit card balances can be quite high!
Interest on credit card balances can be quite high!
Interest on credit card balances can be quite high!
Interest on credit card balances can be quite high!
Interest on credit card balances can be quite high!
Credit cards can have an annual fee!
Credit cards can have an annual fee!
Interest on credit card balances can be quite high!
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Store Accounts
• Credit accounts issued by specific department
stores, gas companies, or other retail
merchants.
• Allow you to charge item or services only at
their store.
• May discourage comparison shopping because
people tend to buy where they have accounts
• May be revolving credit or installment credit:
• Installment credit - payments are made and
balance is paid off in a set period of time.
(Example: Buying a refrigerator and agreeing
to pay 18% interest on a 3-year plan.
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Charge Cards
• Charge cards are a form of credit card
because you buy now and pay later.
• Charge card balances must be paid in
full each month.
• Because there is no interest or service
fee, these cards often require a large
annual fee ($50-$100 or more).
• Examples include American Express
and Diner’s Club.
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Loans
• Banks and other financial institutions loan
money to consumers.
• An installment loan has regular payments over
a set time
• Single-payment loans have the entire balance
due at the end of the set term.
• The lender may require the borrower to offer
security, or collateral, for the loan *personal
property*
• A cosigner is sometimes required. They must
repay the loan if the borrower does not.
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Lines of Credit
• A line of credit is a preapproved
amount that a debtor can borrow when
needed.
• No interest is charged until the credit is
used.
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Benefits of Credit
• Convenience and Rewards
– Don’t have to carry large amounts of cash
– Accounts can be set up to bill credit cards
monthly
– Cash advances with some credit cards
– Points or other bonuses redeemable for
merchandise or other goods and services.
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Benefits of Credit
• Increased Spending Power
– Without credit, most people would have to
wait to buy things that save them time and
money, such as a washer and dryer, or
car.
– Credit allows people to buy expensive
items they may not be able to purchase if
they had to pay for them at one time.
(Example: Buying a home and taking out
a loan known as a mortgage.)
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Benefits of Credit
• Records and Protection
– Credit card receipts provide records of
purchases useful for price adjustments and
returns and exchanges.
– Credit card purchases can be disputed. For
example, an Internet purchase which does
not ship in the expected time-frame.
– No charges for fraudulent use of the card
– Refunds for stolen or damaged goods within
90 days of purchase
– Emergency replacement of lost cards (often
within 24 hours)
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Check In 2
1. What is the purpose of using credit?
2. List several sources of credit.
3. How are store credit accounts different
from bank credit card accounts?
4. Give 2 examples of collateral that
might be used to secure a loan
5. List several benefits of using credit.
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Costs of Credit
• Credit can also have disadvantages and costs.
It can lead to overspending. Late payments
affect your credit rating negatively.
• If you use credit wisely, you can minimize
costs.
• If you carry an outstanding balance, you will
pay interest.
• Finance charges have the effect of increasing
the costs of items you purchase with credit.
• There are several ways to compute interest.
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Fixed vs. Variable Rates
• Fixed Rate: the interest rate does not
change each month or year.
• Even with a fixed rate, the credit card
company can raise the interest rate
with a 30 day notice.
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Fixed vs. Variable Rates
• With variable rates of interest, the credit
card company can change the rate
often.
• Rates tend to rise fast when interest
rates in general go up.
• However, rates go back down slowly.
• Choose a card with a fixed rate when
two cards have similar interest rate.
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Computing Interest
• Adjusted Balance Method
• Previous Balance Method
• Average Daily Balance Method
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Methods of Computing Interest
• Adjusted balance method
7-3 Costs of Credit
Slide 26
Methods of Computing Interest
• Previous balance method
7-3 Costs of Credit
Slide 27
Methods of Computing Interest
• Average daily balance method
7-3 Costs of Credit
Slide 28
Minimum Payments
• How much you must pay each month
on a credit account
• Paying only the minimum balance could
make the interest charges cost you
more than the purchase itself.
• Usually 3-5% of the balance owed.
• Minimum payments can be raised at
any time by the credit card company.
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Penalties and Fees
• If you make a late payment you will be
charged a penalty, or a fee charged for
violating the credit agreement.
• If you attempt to charge over your credit
limit, if approved, you could be charged
an over-the-limit fee.
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Special Rates
• Credit card interest rates are expressed as an
annual percentage rate (APR)
• Low introductory interest rates often last six
months to a year.
• These temporary rates are then replaced with
variable or fixed rates.
• The purpose of these rates is to get you to
switch to a new credit card. But beware of the
new card changing to a higher rate (eventually)
than your previous one.
• You can transfer balances from an old card to
the new card
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Checking Credit Statements
• Compare charges with your sales receipts
• Verify your payments are shown on the
statement
• Verify that credits for returns are on the
statement
• Take note of any penalties or fees you’ve
been charged
• Verify the interest amount and new
balance are correct
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Checking Credit Statements
• If you find any errors on the statement,
contact the company using the method
given in the credit agreement.
• Usually required to make the complaint
in writing.
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Check In 3
1. Explain the difference between fixed interest rates
and variable interest rates?
2. What does it mean to make a “minimum payment”?
3. Describe fees and penalties charged by credit card
companies?
4. Why do credit card companies offer low
introductory annual rates for purchases and
account balance transfers?
5. What items should you verify when you receive a
credit card statement?
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