Chapter 7 Buying Decisions Copyright 2007 Thomson SouthWestern

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. Personal Finance 2

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 Personal Finance 3

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 Personal Finance 4

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. Personal Finance 5

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. Personal Finance 6

Make the Purchase • • 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 Personal Finance 7

Evaluate the Purchase • Ask yourself how satisfied you are with the purchase. • Why? Personal Finance 8

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? Personal Finance 9

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 agree to the terms of the credit agreement before you sign and submit. Personal Finance 10

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. Personal Finance 11

Bank Credit Cards • Banks credit cards are issued by banks through providers such as Master. Card 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. Personal Finance 12

Bank Credit Cards • • • 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! Interest on credit card balances can be quite high! Personal Finance 13

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. Personal Finance 14

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. Personal Finance 15

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. Personal Finance 16

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. Personal Finance 17

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. Personal Finance 18

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. ) Personal Finance 19

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) Personal Finance 20

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. Personal Finance 21

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. Personal Finance 22

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. Personal Finance 23

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. Personal Finance 24

Computing Interest • Adjusted Balance Method • Previous Balance Method • Average Daily Balance Method Personal Finance 25

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. Personal Finance 29

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. Personal Finance 30

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 Personal Finance 31

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 Personal Finance 32

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. Personal Finance 33

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? Personal Finance 34