Chapter 7 Buying Decisions

Slide 2 How Can You Be a Responsible Shopper? 7-1 Designing a Buying Plan Use systematic decision making: consider all the pros and cons of a choice along with the costs. Be financially responsible: plan your earning, spending, and saving to meet your financial goals.

Slide 3 What Is a Buying Plan? 7-1 Designing a Buying Plan A buying plan is an organized method for making good buying decisions. Step 1: Define your spending goal. Step 2: Choose the item to buy. Step 3: Define criteria (features, functions, and quality of item you want to purchase). Step 4: Set a timeline. Step 5: Set a spending limit.

Slide 4 Buying Plan 7-1 Designing a Buying Plan Spending GoalItemCriteriaTimeline Spending Limit 1. Define your need, want, or spending goal. 2. List the item(s) that will satisfy your goal. 3. Describe the features or items that represent an ideal choice. 4. Identify when your goal should be met. 5. Set an upper limit on how much you can or are willing to spend.

Slide 5 Buying Plan for a Washer and Dryer 7-1 Designing a Buying Plan Spending GoalItemCriteriaTimeline Spending Limit To wash clothes at home rather than at a laundromat (saving time and money) Washer and dryer (new or used) Washer should be heavy-duty, have cycles for different kinds of clothes, and have a bleach dispenser. Dryer should be electric (not gas) and have several heat settings. 1 year or sooner $750

Slide 6 Where Can Consumers Get Credit? Credit is the ability to borrow money and pay it back later. 7-2 Getting Started with Credit o Service credit o Credit cards o Store accounts o Charge cards o Consumer loans o Lines of credit

Slide 7 Installment Payment Plan 7-2 Getting Started with Credit Installment credit is used to finance a high- priced item with a series of equal payments made over a set period of time. Installment Plan for a Refrigerator Amount borrowed $1, Annual rate of interest 16% Number of monthly payments 36 Amount of monthly payment (including both principal and interest) $42.19 Total amount to be repaid (36 payments of $42.19) $1, Total interest paid for the loan $318.84

Slide 8 What Are the Benefits of Credit? 7-2 Getting Started with Credit Convenience and rewards o Pay one bill each month o Get points or bonuses Increased spending power Records and protection

Slide 9 Focus On Getting Started with Credit What’s in a Credit Report? A credit report is a statement of your credit history: your borrowing and repayment performance. It helps creditors determine your ability to pay new debt. It is issued by a credit bureau. It can affect your financial future. You have a right to see your report.

Slide 10 Success Skills 7-2 Getting Started with Credit Managing Your Credit Score Your credit score (FICO) is compiled on a point system. It is calculated based on five categories: payment history, amounts owed, length of credit history, new credit, and types of credit. An excellent score is in the range. You can improve your score. o Examples: pay debts promptly, pay more than the minimum, reduce amount owed

Slide 11 How Is Interest Computed on Credit? Finance charges are interest and fees you pay on the credit card balance. A fixed interest rate is set. A variable interest rate can change. Interest can be computed using the o adjusted balance method, o previous balance method, o or average daily balance method. 7-3 Computing the Costs of Credit

Slide 12 Credit Card Statement (partial) 7-3 Computing the Costs of Credit

Slide 13 What Are Common Credit Policies? 7-3 Computing the Costs of Credit Minimum payment Penalties and fees o Over-the-limit fee o Cancellation fee Interest rate increases Lowered credit limit

Slide 14 How Can You Make Wise Credit Choices? Be cautious about special offers, such as low introductory rates and balance transfers. Be wary of easy access credit. o It is quick and easy but has high or hidden fees. Be careful when applying for credit online. o Avoid credit offers that come in s or pop-up ads; use a secure site. Examine your credit card statement. o Make sure charges, credits, and fees are correct. 7-3 Computing the Costs of Credit

Slide 15 Payday Loan 7-3 Computing the Costs of Credit A payday loan is a short-term loan to cover expenses until your next payday. Interest and fees can be substantial. The formula for computing the annual percentage rate of a payday loan is: Loan fee ÷ Loan amount × Number of days in the year ÷ Loan term in days If you borrow $350 for two weeks (14 days) and pay a loan fee of $50, the annual percentage rate would be calculated as follows: $50 ÷ $350 × 360 ÷ 14 = 3.67, or 367% APR