FAMR 361 - 9.29.16 On HW worksheets review; Cost of Credit; Simple interest; Credit Cards WKST PDF

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On HW worksheets review; Cost of Credit; Simple interest; Credit Cards WKST Review...

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Monday ,May3,y

FAMR361 Reminders for next class: Credit Report assignment due

- Forms you need: Laulima, under resources, “credit report”

New assignment, in class assignment due 10/11/16

- Everywhere you see a highlighted/greyed out area in the second column, there is an error, but questions don’t cover every single greyed out area

- Multiple choice answers except for one. - Under variable expenses, there is is food eating out, have to explain for food why you have 0, but for food eating out has something

• As this question is a fill in the blank, you have to explain why you would put 0 for food

- If you never spend anything, you have to explain to the right of the second column your reason (ex: living under parents)

- For water, trash, etc. reason can be “covered in rent” - Biggest food expenditure comes from “food away from home” - Under the surplus deficit • “Where is the person getting these numbers?” - What they’re doing is mixing up the cash flow assignment between the balance assignment

- 250 in savings should not be there if there is a deficit - Don’t forget to do your allocation, unless there is a minus - If you need help with cash flow, you can contact Jancy or Adrian

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Monday ,May3,y Worksheet Review (Not sure which WKST, one of the assignments)

- Q3: The Truth in Lending Act • Answer is A • For small loans, there is a usury law - Q4: Items that must be disclosed in credit advertisement include: • APR • Dollar Finance Charge • Length of Loan • Total amount repaid at the end of “loan”

Different Worksheet Review: 9. What information should you look for when shopping for a cash loan?

- APR

10. Charge account A and B have the same APR. If you only make a minimum payment and have a remaining balance, why is it possible for the dollar finance charge to be different between the 2 accounts?

- It’s because credit cards work differently from cash loans. - The dollar finance charge varies, depending upon how the remaining balance is computed.

• For example, previous balance method often leads to a higher finance charge than the average daily balance method.

- Look for how they manage the finance charge

Cost of Credit Document (on Laulima in Exam 1 notes) Review 2

Monday ,May3,y Cash and Sales Loans

- Add on, discount, simple interest (3 methods that financial institutions use)

Add on: If you pay all at once, the APR will be 5%, but if you pay in installments, it will be more than 5%. You still will be charged 30 finance charge in either loan.

- “Rule of 78” Graph: Represents a loan, where the blocks represent 1/12 of a payment, so each block = $18.75

• Until you make the first payment, you have full 12 blocks to use • If you make the first payment, you lose 1 block ($18.75), and continues for 12 months

• If this section of the square (upper half) represents the amount you have to use, what portion of this whole square does this represent? (lower half)

- Represents a half - What it’s saying is that if you paid back in 12 installments, you only have half of the loan to use

• Average amount: Take 1,462.50 divided by 12 and you get 121.88 • Average amount of money you have to use is about half of your loan - Always want the non-installment payment if given the option • Who is likely to loan you money this way? • Family, friends because their willing to do that, won’t lose money • Overall, 1 installment payment is better because you have use of all the blocks until you make the one and only payment you need to make

- Until then, you might able to make more money than the interest charged to you

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Monday ,May3,y

- More on Add on method - If you go to a small loan company, it will be offered • a) is example of non-installment loan (on WKST) • b) is example of installment loan - No reason to pay it back fast because you’ll still be charged the $30 finance charge. If given the option, don’t take this kind of loan for small loans

- Annual percentage rate represents cost if you paid back - Ex: that proves multiple installment plan will cost more than 5% APR (on WKST)

• 52.50 x 12 = $630.00 - 200 x 30 (finance charge) x 12 (number of payments in a year) divided by 600 (amount loaned) x 13 (number of payments in contract +1) = 7200 divided by 7800 = 9.23%

- So, the APR becomes about double - Not required to do this on exam, but shown in class - Credit Card Accounts - Computing the Finance Charge

Simple interest

- If credit scores are good, loan can be taken out from a bank or credit union - Rewards you for paying back faster - ex: Computation for a $600 loan with annual finance charge of 10 percent. Obtained on June 15 and paid back in 6 months (shown on WKST)

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Monday ,May3,y

• Paying it back faster reduces finance charge • Payment 1: Finance charge = $600 x 10% x 25 days/365 days (25 out of 365 you had outstanding balance) = $4.11

• Payment 2: Finance charge = $501.11 x 10% x 31/365 = $4.26 - Why did the finance charge go up? • Because you took longer to pay it back. 25 days vs. 31 days. • Payment 3: Finance charge = $402.37 x 10% x 40/365 = $4.41 - Why did it go up again? • Went up higher because took even longer to pay it back (40 days) • Payment 4: Finance charge = $303.28 x 10% x 25/365 = $2.08 - Went down because paid it back fast • If you want to keep your finance charge lower, just have to pay it back faster

Discount

- Offered for business/business loan • Takes away the finance charge before giving the balance • ex: So, if you need $600, how much would you have to borrow? - More than $600 because they don’t include the finance charge yet

Credit Cards WKST Review

- 3 different methods of figuring the balance • Rate is 1/2% per month 5

Monday ,May3,y

• Pay attention to finance charge - If credit card was based on this method, you’ll owe 1.50 if based on previous balance, 1.13 if based on average daily balance, and .75 if based on daily adjusted balance

• On the previous balance (worst of 3) method, they're gonna base finance charge on what it was at the start without including any payments made before the due date

• On Adjust balance (best of the 3) they take your opening balance, minus the payments before the due date, and charge based on what remains

• On Average balance is the halfway point between the worst and the best. If you look at the equation on the WKST, it explains how they get the $73.74 balance on the graph

- What do you have to do? Make the payments faster. Can’t wait for the printed statement to make payment, pay it as soon as you can.

- You can control the average balance by paying faster.

Questions needed to prepare for On exam: question has to do with debit cards and liability vs. consumer credit card

- 1978 Electronic Funds Transfer Act (debit or ETF card) • If business takes more than 10 days, they have to credit your account the disputed amount until investigation is over

- ex: if you notified the company within 2 days, you’re out the first $50 of unauthorized use

- ex: if you notify the business after 2 days, there is a $500 liability • Then, if you receive statement, but do nothing: - 60th day after you receive statement: unlimited liability 6

Monday ,May3,y

On exam, similar case, but not as simple

- Timeline: Jon lost 1 consumer credit card and 1 debit card - Thief withdraws $600 using the debit card and uses credit card to make a $60 purchase

- 4 business days later, Jon reports the loss to the consumer credit company and the debit card’s bank

• On the $60 credit card charge, how much is Jon liable for? • $50 for credit card, $500 for debit card • If Jon had paid attention and reported immediately, he wouldn’t be liable for anything

- Total liability = $550

Will continue next time

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