Money Matters: Understanding Credit and Debt
Money is a fascinating subject for individuals and businesses. Everyone seems to need it.
Money is anything generally accepted as a means of paying for goods and services.
“Money bewitches people. They fret for it, and they sweat for it. They devise most ingenious ways to get it, and most ingenious ways to get rid of it. Money is the only commodity that is good for nothing but to be gotten rid of. It will not feed you, clothe you, shelter you, or amuse you unless you spend it or invest it. It imparts value only in parting. People will do almost anything for money, and money will do almost anything for people. Money is a captivating, circulating, masquerading puzzle” (Quoted in Campbell R. McConnell, Economics, New York: McGraw-Hill, p. 335).
Money can act as a temporary store of value—a way of keeping accumulated wealth until it is needed to make new purchases. Money has a substantial advantage as a store of value; it is highly liquid—it can be obtained and disposed of quickly and easily.
There are disadvantages to holding money, particularly in inflationary times. If prices double, money that has been saved (but not in an interest-bearing checking or savings account) will buy only half as much as it would have before inflation.
Money’s chief advantage is that it is immediately available for purchasing products or paying bills and debts.
#MoneyMatters: Electronic Banking
The long-awaited “cashless/checkless society” may have begun in the form of the electronic funds transfer system (EFTS)—a computerized system for making purchases and paying bills through electronic depositing and withdrawal of funds.
In other instances, a coded plastic debit card is used. Although debit cards resemble credit cards, they do not allow the holder to buy now and pay later.
In fact, they require immediate payment for any cash withdrawal or purchase by deducting the amount from the individual’s account immediately.
Automated Teller Machines (ATMs)
ATMs are electronic banking machines that permit customers to make cash withdrawals, deposits, and transfers on a 24-hour basis by using an access card.
Networks of interlinked banking systems give users access to their hometown bank accounts from ATMs across the country.
Customers who need to make withdrawals or deposits when the bank is closed can usually do this using their plastic debit card at the bank’s ATM.
Many of the ATMs are available at bank buildings, in freestanding kiosks, supermarkets, shopping malls, convenience stores, and airline terminals.
However, just as a full-service retailer such as a department store charges higher prices to cover its services, the services of financial institutions are far from free, particularly for small depositors.
While most banks charge no fees for customers who use their own bank’s ATM, a charge is levied on customers who use other ATMs in the bank’s network.
#MoneyMatters: Debit Cards
Debit cards are access cards; they allow the cardholder to make electronic transactions and cash withdrawals from his or her account.
They can be inserted into ATMs to make deposits, withdraw cash, transfer funds from one account to another, and pay utility bills.
Retailers use point-of-sale terminals to process customer’s debit card purchases.
Testing by fast-food giants McDonald’s, Wendy’s, and Burger King showed that debit-card purchases were 45% larger than those made with cash.
The creation of regional and national networks that accept debit cards from numerous banks has led to rapid acceptance by consumers and merchants.
Gasoline marketers Exxon, Mobil, Arco, and Amoco, accept debit cards.
Electronic banking using debit cards and point-of-sale terminals offers advantages for both businesses and consumers.
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Merchants can reduce their bad-check losses, banks can save on paperwork costs, and consumers can get money instantly.
The downside to easy access to cash is an inability to save money.
#MoneyMatters: Credit Cards
The era of “plastic money” has reached every aspect of modern society.
Credit cards function as temporary cash substitutes, but they are special credit arrangements between the issuer and the cardholder.
Although debit cards resemble credit cards, they are access cards for making electronic transactions and cash withdrawals.
With growing frequency, people use credit cards as a substitute for currency and checks.
The popularity is due to the convenience of making credit-card transactions and the growing willingness of merchants throughout the world to accept credit cards in place of cash or checks.
Merchants typically pay fees of 1% to 5% for credit card sales.
A typical cardholder’s wallet or purse contains three credit cards, such as MasterCard, Visa, Discover, American Express.
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Credit Card Debt
Debt represents funds obtained or used through borrowing.
Have you ever looked at your credit card bill and wondered where all those charges came from?
Have you found yourself swiping your credit card for a purchase before you’ve had a chance to think about whether you really wanted to borrow money to pay for it?
Don’t feel discouraged—there are ways to get a better hold on your credit card use.
While the plastic card may function much like money in permitting you to make purchases, the monthly statement of card purchases is a tangible reminder that they are credit cards—not money.
The issuer—usually a bank—permits you to repay the outstanding balance at the end of the billing period or, in the case of bank cards and retail credit cards, to pay at least a stated minimum amount each month and pay interest on the outstanding balance until it is repaid.
Reducing credit card debt can be an essential part of achieving financial well-being.
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5 Credit Card Rules of Thumb
- Don’t swipe the small stuff: Use cash when it’s under $20.00.
- Credit keeps charging: It adds approximately 20% to the total balance.
- Maintain a low credit card balance
- If possible, do not charge more than you can pay each month.
- Pay off the entire balance each month to avoid interest charges.
Many people disregard interest rates because they intend to repay the balance every month, thereby avoiding interest charges.
Cardholders frequently pay an annual fee and interest charges between 17.5% and 20% on unpaid balances. Thus, credit cards can generate profits three times as high as other bank services.
Over-the-limit fees and other charges are designed to generate additional revenue for banks.
The thousands of banks, credit unions, and other financial institutions currently issuing Visa and MasterCard love credit cards because of their profit potential.
RELATED ARTICLE: Easy-to-Remember Guidelines Help People Reduce Credit Card Debt
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#MoneyMatters: Sources and Uses of Funds
Credit Unions serve as sources of consumer loans at competitive rates for their members. While credit unions have traditionally concentrated on short-term consumer loans and savings deposits, their operating flexibility has been increased. They offer an interest-bearing checking account called a share draft account and can make long-term mortgage loans.
Consumer finance companies offer short-term loans to borrowers who pledge tangible items such as property as security against non-payment.
Commercial finance companies supply short-term funds to businesses unable to borrow enough needed funds from traditional banks.
In some cases, these individuals/businesses cannot secure bank loans because they are relatively new and lack good credit history or otherwise fail to meet the bank’s lending standards.
In other instances, individuals/businesses may have borrowed to the limit from banks or have credit issues, and therefore, must turn to other sources for additional funds.
Since these loans typically involve greater risks, finance companies typically charge higher interest rates than banks.
3 Types of Unsecured Bank Loans
A significant source of short-term funds—an unsecured loan—accounts for much of the nation’s business financing.
These loans are called unsecured because the borrower is not required to pledge any assets as collateral.
The three types of short-term unsecured loans made by commercial banks are promissory notes, lines of credit, and revolving credit agreements.
- A Promissory Note is a traditional loan whereby the borrower signs a note stating the terms of the loan, its length, and the interest rate charged. It is to be used for a specific purpose, such as a temporary increase in inventory for the back-to-school season. Most promissory notes have a maturity of 30 to 90 days.
- A Line of Credit is an agreement that states the amount of short-term unsecured credit the bank will make available to the borrower. A line of credit is not a guaranteed loan. It typically represents a one-year agreement that if the bank has enough available funds, it will allow you to borrow the maximum stated amount of money. Lines of credit are available to individuals and businesses.
- A Revolving Credit Agreement is simply a guaranteed line of credit. The bank guarantees that the amount shown in the credit agreement will be available to the borrower. For guaranteed availability, the bank usually charges a commitment fee that applies to the unused balance of the revolving credit agreement.
Unsecured bank loans are made based on previous experience dealing with the individual/business and your credit reputation.
Loan assessments typically use factors like income, sales, earnings, current loans outstanding, and other variables.
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Secured Short-Term Loans
As an individual/business continues to borrow money, it soon reaches a limit beyond which no additional unsecured loans will be made.
Many companies, especially small businesses, are unable to obtain any short-term unsecured money. For them, secured loans are the only source of short-term borrowed funds.
Secured loans require the borrower to pledge collateral such as accounts receivable, inventory, equipment, or property.
Long-Term Sources of Funds
Various financial institutions make long-term loans. They generally have maturities of 5 to 12 years. Long-term loans are made by commercial banks, insurance companies, and pension funds.
In some cases, equipment manufacturers may allow their customers to make credit purchases over several years.
The cost of long-term loans is generally higher than that of short-term loans due to greater uncertainty about the future.
Certificates of Deposit
Putting away some money regularly—even if it’s a small amount—can help you manage unexpected expenses and emergencies without accumulating unnecessary debt.
A certificate of deposit (CD) is a note issued by a commercial bank. The size and maturity date of a CD vary considerably and can be tailored to meet your needs. The more common CDs—3 months, 6 months, 18 months, and 42 months—can be redeemed before maturity, but substantial penalties are levied.
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Money is a fascinating subject for individuals and businesses. Everyone seems to need it. Money is anything generally accepted as a means of paying for goods and services. “Money bewitches people. They fret for it, and they sweat for it. They devise most ingenious ways to get it, and most ingenious ways to get rid…