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FIN 2081 Chapter Notes - Chapter 5: Debit Card, Stored-Value Card, Overdraft

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erinshark14
29 May 2018
School
UC
Department
Finance
Course
FIN 2081
Professor
Dr. Prince Ellis

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5/29/18, 9)42 AMChapter 5 - Consumer Credit - Taskade
Page 1 of 3https://www.taskade.com/v/H17oWqbw17
Chapter 5 - Consumer Credit
What is consumer credit?
Credit is an arrangement to receive cash, goods, or services now and pay for them in the future.
Consumer credit referes to the use of credit for personal needs (except a home mortgage) by individuals
and families , in contrast to credit used for business purposes.
Uses and Misuses of Credit
Using credit to purchase goods and services may allow consumers to be more efficient or more productive,
or it may lead to more satisfying lives.
Using credit increases the amount of money a person spand to purchase goods and services now.
The trade-off is that it decreases the amount of money that will be available to spend in the future.
Advantages of Credit
Consumer credit enables people to enjoy goods and services now or it can provide for emergencies, and it
can pay for them all through payment palns based on future income.
Credit cards permit the purchase of goods even when funds are low.
Customers with previously approved credit may receive other extras
Such as: advance notice of sales and the right to order by phone or to buy on approval.
Credit cards also provide shopping convenience and the efficiency of paying for several purchases with one
monthly payment.
The use of credit cards can provide up to a 50-day "float"; the time lag between when you make the
purchase and when the lender deducts the balance from your checking account when it is due.
Disadvantages of Credit
Whether or not credit involves security (or collateral) - something of value to back the loan - failure to repay a
loan may result in loss of income, valuable property, and your good reputation.
It cane ven lead to court action and bankruptcy.
Misuse of credit can create serious long-term financial problems, cause damage to family relationships, and
delay progress toward financial goals.
Credit does not increase total purchasing power.
Credit is a service for which you must pay.
Paying for purchases over a period of time is more costly than paying for them with cash.
Purchasing with one credit rather than cash involves one obvious trade-off: the items purchase may cost
more due to monthly finance charges and the compounding effect of interest on interest.
Closed-End Credit
Closed-End Credit is used for a specific purpose and involves a specific amount.
The three most common types are:
Installment Sales Credit
Installment Cash Credit
Single lump-sum credit
Installment Cash Credit is a direct loan of money for personal purpose, home improvement, or vacation
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Document Summary

Credit is an arrangement to receive cash, goods, or services now and pay for them in the future. Consumer credit referes to the use of credit for personal needs (except a home mortgage) by individuals and families , in contrast to credit used for business purposes. Using credit to purchase goods and services may allow consumers to be more e cient or more productive, or it may lead to more satisfying lives. Using credit increases the amount of money a person spand to purchase goods and services now. The trade-o is that it decreases the amount of money that will be available to spend in the future. Consumer credit enables people to enjoy goods and services now or it can provide for emergencies, and it can pay for them all through payment palns based on future income. Credit cards permit the purchase of goods even when funds are low. Customers with previously approved credit may receive other extras.

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Related Questions

Find an article dealing with budgeting and prepare a 1 page summary of how you can apply the information to your personal finances.

ARTICLE:

Budgeting is the foundation of personal finance. Whether or not you write a personal budget, use a budget spreadsheet, use a budgeting app, or simply keep track in your head — you’re probably already budgeting.

And budgeting is never more important than in your early adult life as you figure out how to stretch a paycheck, pay off debt, and — hopefully — save a little bit, too.

This page will give you the basic tools you’ll need to start budgeting.

What is a Budget, Exactly?

A monthly budget is a plan for how you will allocate income to meet your expenses for a designated month. Some think of budgets as spending constraints, but budgets are better described as “spending plans”. If you budget correctly you will be able to spend money on things you enjoy without worrying about meeting other financial obligations, overdrawing your accounts, or going into credit card debt.

A monthly budget typically consists of a list describing your income sources and expenses. Each description is followed by the amount you project for the amount of the income or expense for the designated month. A monthly budget can be an Excel spreadsheet, managed within a software program like Quicken, or simply jotted on a piece of notebook paper.

Writing Your Budget

A monthly budget is an estimate, but your goal should be to make as educated an estimate as possible. To do this, you will want to collect a month’s worth of pay stubs, bills, and bank statements, if possible.

INCOME

Assuming you are budgeting for an upcoming calendar month, start by looking at your previous month’s take-home pay.

If you are paid monthly or semi-monthly, this will be easy.

If you are paid every other week, multiply your paycheck by 2.166 to determine your monthly pay.

Paid weekly? Multiply your check amounts by 4.333.

Budgeting is a bit trickier if your main source of monthly income varies (if you work variable hours or earn tips), you can average several months of income or estimate based upon experience. But be conservative. In a month’s time you want to have spent less than you planned for in your budget—a difficult goal when you don’t bank as much cash as you thought.

You also want to take other income sources into account.

Do you work more than one job?

Will you get a bonus next month?

Do you pick up odd gigs or sell old stuff from time to time?

Do you have any investments paying dividends?

Create entries in your monthly budget for these additional income sources and create a line for your total monthly income. This is the amount you have to spend for the month and the basis for your “spending plan”. You cannot spend more than this in any one month. If you anticipate unusually large expenses next month for which you have money saved (a vacation, for example), consider including the savings you will use to pay for the expense as income. This will allow you to see a more typical monthly spending plan despite the inclusion of a non-monthly expense.

EXPENSES

For your monthly budget to work, your expense projections need to be as accurate as possible. Some expenses, like your rent, car payment, and insurance bill, are simple. From there, it gets trickier.

Chances are your utility bills fluctuate from month to month and how much you spend on groceries, dining out, and clothing may vary drastically. Here’s where having a few bills and bank statements will be useful so you can average several month’s worth of data.

Place each expense on a line and write down the amount next to it. You may find it useful to create categories of expenses like:

“Transportation”

“Household”

“Food”

“Entertainment”

“Debt”

Consider expenses that may not be monthly, such as clothing or car maintenance. You should still budget for these items. If you allocate money every month for these things, that money will be available when you do need it.

Tracking and estimating your monthly expenses will be harder, but not impossible, if you frequently pay in cash. While cash is a good way to moderate your spending, you need to be diligent about collecting receipts if you want to know where your money went. A new benefit of credit and debit cards now that you can use them virtually everywhere, even for micro payments of just a few dollars, is at the end of the month you get a statement with all of your monthly expenses on one page. If you’re struggling with credit card debt, definitely stick with debit cards or cash. But if you can learn to use a credit card responsibly and pay it off in full each month, I actually think a good credit card can make budgeting easier.

Your Bottom Line

When you have a complete list of your monthly expenses, add them up and subtract the sum from your monthly income. You should have a positive number. No? Uh-oh. If you have been spending according to this budget, you are going into debt. You will need to find out why your expenses exceed your income and find ways to cut your expenses – fast! Look at your list of expenses and separate discretionary spending. This includes entertainment, travel, gifts, and all dining (including lunches!) Most people can cut their monthly expenses significantly by learning to give up small daily expenditures like coffee or snacks.

If your budgeted expenses fall below your income, congratulations! You are successfully living below your means. The question, now, is how to use your extra money. Follow our six steps to financial stability to help you prioritize your money goals.

Finally, Keep It Simple

If you ever want to build wealth and stay out of debt, you have to spend less than you earn. And a budget can ensure that you do that. Still, rigidly tracking every dime you spend is like counting calories — it sounds good in theory, but most of us fail to keep up with it.

But you can stick with a budget if:

You keep your budget as simple as possible.

You harness the power of automating your money.

After you get a handle on your budget, you’ll be able to focus on other priorities like getting out of debt, building emergency savings, and begin to save for retirement. They aren’t the most exciting financial goals of your lifetime, but once they are out of the way they provide solid footing for financial security for the rest of your life.

Read more at: https://www.moneyunder30.com/budgeting-in-your-twenties

Skip Stephens recently graduated from college with a degree Ibusiness administration. While attending college, Skip built up alarge amount of debt, which currently includes student loans,outstanding credit card balances, bank loans, and so forth. Nowthat he has a good-paying job, Skip wants to clean up his debtposition to improve his credit reputation so that he can qualifyfor a mortgage when he is ready to purchase a house in a fewyears.

As a result of a conversation with a financial planner, Skipdecided that he should consolidate his debt into a single loan.Consolidation will help him monitor his debt better as he pays itoff, and such an action probably will also decrease the interestrate that he is now paying. It took some effort, but Skip was ableto find a financial institution that seems willing to offer him thetype of loan he needs. The firm, which is named Syndicated Lending,is a new firm that specializes in loans to riskier borrowers, so itappears to be the right fit for Skip. Much of Syndicated’s businessis conducted electronically via the Internet. Although the companyhas a Website that gives some information about loans thatSyndicated offers, there is not much information about interestrates, application fees, and other charges associated with gettinga loan. When Skip clicked on the “Interest Rate” icon onSyndicated’s Website, a message appeared that said to contact thecompany directly. After many attempts, Skip was able to speak to a“real” person at Syndicated. When he asked why more information wasnot available on the Website, the employee stated that the companydecided not to post interest rates because managers believed it wasunfair to publicize low rates to lure customers, knowing that mostborrowers are unable to qualify for such loans. In other words,managers felt that it was unethical to use the “bait andswitch”1 tactics used by competitors. The employee gaveSkip some general information about the loans that Syndicatedoffers, but she would not tell him interest rates because thecompany had a policy of not quoting a rate until a thorough creditcheck was completed. As a result, to get an interest quote, Skipwould have to fill out and submit a loan application and he wouldhave to pay a $100 application/credit check fee.

Skip decided that he wanted more information about Syndicatedbefore deciding whether to apply for a loan, so he talked withpeople in the local area, searched chat boards and consumer opinionWebsites on the Internet, and so forth. Although much of theinformation he collected was positive, many people complained thatSyndicated was a “shady” organization that has a reputation ofchanging interest rates without notice and that it is not acustomer-friendly firm. Some of the people whom Skip talked withwent so far as to call Syndicated an unethical “loan shark” thatcould get away with unannounced interest rate hikes and otherchanges in loan agreements because the company knows that itscustomers cannot borrow from any other financial institution in thelocal area.

Now Skip is wondering whether it is wise to apply for aconsolidated loan from Syndicated, even though it appears that hecan improve his credit rating and lower his interest payments. Whatshould Skip do? Does it seem as though Syndicated follows unethicallending practices? Is it unethical to use “bait and switch” tacticslike those that Syndicated accuses other institutions of using?Should interest rates be posted on the company’s Website?

Garnett Jackson, the founder and CEO of Tech Tune-Ups, stared t the window as he finished his customary peanut butter and jelly dwich, contemplating the dilemma currently facing his firm. ech Tune-Ups is a start-up firm, offering a wide range of com- ter services to its clients, including online technical assistance, ote maintenance and backup of client computers through the temet, and virus prevention and recovery. The firm has been 'ghly successful in the 2 years since it was founded; its reputation fair pricing and good service is spreading, and Mr. Jackson lieves the firm is in a good position to expand its customer base idly. But he is not sure that the firm has the financing in place to rt that rapid growth. Tech Tune-Ups' main capital investments are its own powerful mputers, and its major operating expense is salary for its consul- ts. To a reasonably good approximation, both of these factors w in proportion to the number of clients the firm serves. Currently, the firm is a privately held corporation. Mr. Jackson his partners, two classmates from his undergraduate days, have tributed $250,000 in equity capital, largely raised from their nts and other family members. The firm has a line of credit a bank that allows it to borrow up to $400,000 at an interest of 8%. So far, the firm has used $200,000 of its credit line. If when the firm reaches its borrowing limit, it will need to raise ity capital and will probably seek funding from a venture capi- firm. The firm is growing rapidly, requiring continual invest- t in additional computers, and Mr. Jackson is concerned that it approaching its borrowing limit faster than anticipated. 525 Mr. Jackson thumbs through past financial statements and esti- mates that each of the firm's computers, costing $10,000, can sup- port revenues of $80,000 per year but that the salary and benefits paid to each consultant using one of the computers is $70,000. Sales revenue in 2011 was $1.2 million, and sales are expected to grow at a 20% annual rate in the next few years. The firm pays taxes at a rate of 35%. Its customers pay their bills with an average delay of 3 months, so accounts receivable at any time are usually around 25% of that year's sales. Mr. Jackson and his co-owners receive minimal formal salary from the firm, instead taking 70% of profits as a "dividend," which accounts for a substantial portion of their personal incomes. The remainder of the profits are reinvested in the firm. If reinvested profits are not suffi- cient to support new purchases of computers, the firm borrows the required additional funds using its line of credit with the bank. Mr. Jackson doesn't think Tech Tune-Ups can raise venture funding until after 2013. He decides to develop a financial plan to determine whether the firm can sustain its growth plans using its line of credit and reinvested earnings until then. If not, he and his partners will have to consider scaling back their hoped-for rate of growth, negotiate with their bankers to increase the line of credit, or consider taking a smaller share of profits out of the firm until further financing can be arranged. Mr. Jackson wiped the last piece of jelly from the keyboard and settled down to work. Can you help Mr. Jackson develop a financial plan? Do you think his growth plan is feasible? Prepare a 700-1,050 word response, plus Excel spreadsheet, for the Mini-case at the end of Chapter 18 in Fundamentals of Corporate Finance (Brealey). Specifically, the Learning Team will need to follow all assumptions in the Mini-case precisely and carefully to complete the following: a. Identify the steps necessary to financially plan and forecast for 2005, 2006, and 2007, b. Project future years using the growth rate assumptions in the Mini-case, c. Determine what type and amount of financing may be required, taking into account the impact on leverage ratios, d. Determine the impact of rising interest rates on future performance, e. Assess alternative capital structures and impact on debt ratio and return on equity. f. Separately, after completing (a) through (e) above, explain how outsourcing certain cost of goods sold items would impact this planning and budgeting process.