Unit 2 IDC 4U1

Unit 2: 

Chapter 5: 

5.1 Banking Services and Managing Your Money 


What are your Four Pillars of Banking 

  • Deposits 

  • Investments 

  • Insurance 

  • Credit

    • How do they relate to your Financial Plan 


Background on Money Managment 

  • Money Managemnet: Describes the decision you make over a short term period regarding income and expense

  • Focuses on maintaing short term investments to achieve both liquidity and an adequate return on investment 


Liquidity

  • Refer to your access to ready cash to cover short term and unexpected expenses 

  • Source of Liquidity:

    • Chequing and savings accounts, credit cards and/or lines of credit, emergency funds


Credit vcard and Lines of Credit (LOC)

  • Interest Rate on a line of crexit is usually much lower than  credit card interest rates 

  • Emergency Funds

    • Allows you to avoid interest charges altogether

    • Rule of Thumb: you should have between three and six months worth of expenses in an emergency fund


Types of Institutions 


Types of financial Institutions 

  • Depository Instiutions: Financial institutions that accept deposits from and provide loans to individuals and businesses

    • Chartered banks, trust and loan companies, credit unions and caisses populaire 

  • Non-Despository Institutions: Financial institutions that do not offer federally insured deposit accounts but provide various other financial services 

    • Finance and lease companies, mortgage companies, investment dealers, insurance companies, mututal fund companies, payday loan companies, cheque cashing outlets, and pawnshops


Depository Institutions

  • Chartered Banks: financial institutions that accept deposits and use the funds to provide business and personal loans 

  • Schedule I Banks: domestic banks (e.g. Royal Bank of Canada, Scotiabank, CIBC)

  • Schedule II Banks: foreign banks that have subsidiaries operating in Canada (Ex. Tangerine Bank of Canada 

  • Schedule III Bank: subsidiaries of foreign banks that are restricted in their authority to accept deposits (Ex. Citibank)


Financial Conglomerates

  • Financial Institutions that offer a diverse set of financial services to individual firms 

  • Aims to serve as a one step shop where individuals can conduct all of their financial services 

    • For most part fall under schedule 1 Banks 


Non Depository Institutions 

  • Finance and Lease Companies: Specialize in providing personal loans or leases to individuals 

    • (Ex. For Motor company of Ltd)

  • Mortgage Companies: Specialize in providing mortgage loans to individuals 

    • (Ex. RBC Royal bank)

  • Investment Dealer: Facilitate the purchase or sale of various investments by firms or individuals by providing investment banking and brokerage services 

    • Ex. RBC Capital Markets

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5.2 Banking services offered By Financial Institutions 


Chequing Services

  • Chequing accounts allow you to draw on funds by writing cheques

  • Debit Card: A card that is not only used for identification, but also allows you to make purchases that are charged against an existing chequing account 


Monitoring Your Account Balance 

  • Cheque register: a booklet in your cheque book where you record the details of each transaction you make, including deposits, cheque writing, withdrawals, and bill payments

  • Alternatively, ask your bank to send you a monthly statement 



Overdraft Protection 

  • Overdraft Protection: an arrangement that protects a customer who writes a cheque for an amount that exceeds their chequing account balance 

    • It is a short term loan from the depository institution where the chequing account is maintained 

    • Carriers a fee every time you use the services 

    • High interest rates (Ex. 21 percent per year)

  • Stop Payment: a financial institutions notice that it will not honour a cheque if someone tries to cash it 

    • You must provide accurate information 

    • Normally, a fee is charged for this service 


Credit Card Financing 

  • Allow you to fiance your purchases through various financial institutions using MasterCard and Visa 

  • Safety Deposit Box: a box at a financial institution in which a customer can store documents, jewellery, and other valuables 

    • An annual fee is charge 

  • Automated Banking Machine (ABM): A machine that individuals can use to deposit and withdraw funds at any time of day 

    • A convenience fee is charged when you use an ABM other than one from your own bank 

    • A service package may be purchased to reduce or eliminate regular account fees charged by your own bank 


6.1 

Credit Card

  • Certified Cheque : a cheque that can be cashed immediately by the payee without the payee having to wait for the bank to process and clear it 

  • Money Orders and Drafts : products that direct your bank to pay a specified amount to the person named on them 

  • Traverler’s cheque : a cheque written on behalf of an individual that will be charged against a large, well-known financial institution or credit card sponsor’s 


What is Credit

  • Credit: funds provided by a creditor to a borrower that the borrower will repay with interest or fees in the future 

  • Repayment of credit is segmented into Principal (P) and Interest (I)


Types of Credit

  • Instalment Loan: a loan provided for specific purchases, with interest charged on the amount borrowed (Ex. Car Loan, Mortgage)

  • Repaid on a regular basis, generally with blended payments

  • Timing and amount of each payment depend on the terms of the loan 

  • Revolving Open-End Credit: credit provided up to a specified maximum amount based on income, debt level, and credit history; interest is charged each month on the outstanding balance (Ex. Credit Card, Line of Credit) 

    • Consumer can pay the entire amount borrowed at any time 

    • Typically a minimum payment is due each month 



Advantages of Using Credit 

  • Helps establish a good credit history

  • Helps build a credit score 

  • Helps create the capacity to access credit in the future for large purchases (Ex. home)

  • Eliminated the need for carrying cash 

  • Useful in situations where cash may not be an option (Ex. internet purchases)

  • Many credit cards offer additional benefits (Ex. air miles)


Disadvantages of Using Credit 

  • Difficulty making Payments 

  • Temptation to make impulse purchases 

  • You can damage your credit rating if you do not make the minimum required repayment 

  • Large credit payments hinders ability to save 

  • May need to withdraw from savings to cover net cash flow deficiencies 


6.2 Credit History and Score 


Credit History 

  • Your history with all credit instrument 

  • Such as:

    • Credit cards and retail credit cards 

    • Lines of credit 

    • Personal loans

    • Leases 

  • A favorable credit history is established by paying bills in a timely manner 


Credit Insurance 

  • Represents a committed by some consumer to cover credit cards repayments due to circumstances such as accident and sickness, unemployment 

  • The payment period is limited to a 3-6 month term 


Credit Bureau

  • Provides a report that documents a person’s credit payment history 

  • Generally the score is between 300 and 900

  • 660 - 724 is GOOD

  • 724 and above is Very Good

    • Two credit Bureaus in canada are Equifax and TransUnion

  • Don’t be 110 Customers Understand keep eye an on your credit history (110 customer is No credit)


Review our Credit Report 

  • You should review your credit report from both of the credit bureaus at least once a year 

  • Beneficial for Three Reasons 

    • Ensure that the report is accurate 

    • Identify the types of information that lenders or credit card companies may consider when deciding whether to provide credit 

    • Identify and eliminate any deficiencies


Credit Reports provide the Following Information 

  • Your personal information

  • A consumer statement 

  • A summary of your accounts 

  • Your account history 

  • Bank accounts closed for derogatory reasons 

  • Public information regarding bankruptcies ,judgements and secure loan 

  • The names of creditors who have made account inquiries 

  • A list of creditor contacts 

 

Credit Score 

  • A rating that indicates a person’s  credit worthiness

    • Creditors rely on this score 

    • Can affect the interest rate 

    • Score affected by many factors

      • Payment history, credit utilization, length of relationship with creditor, types of credit established, recent credit inquiries

      • The more times you apply/applications, it takes a hit to your credit score (10% of your credit score)

      • New applications are know as a “hard hit”


What leads to Poor Credit Score 

  • A low credit score is  normally due to either missed payments or excessive amount of debt 

  • Poor credit history on your report for three to ten years 

  • Bankruptcy on your report for sic to seven years 

  • You can Improve your credit score immediately by

    • Catching up on late payments 

    • Making at least the minimum payments on time and reducing your debt 


Credit Card 

  • Easiest way to establish credit 

    • Credit Cards help you to:

      • Establish a good credit history 

      • Create credit capacity 

      • Eliminate the need for carrying cash 

      • Provide a method for payments when cash is not an option +





Benefits to Credit Cards 

  • Earn 

    • Earn additional benefits 

  • Receive 

    • Receive free financing until the due date on your credit card statement 

  • Keep 

    • Keep track of your spending by providing you with a consolidated list of the purchases you made 


Applying for a Credit Card 

  • Potential creditors obtain information from you and from credit bureaus so that they can assess your ability to repay credit 

  • Information they obtain includes:

    • Personal Information

    • Revenue 

    • Expenses 

    • Credit History 

    • Capital 

    • Collateral 

  • Creditors generally prefer that you have a high level of revenues, a low level of expenses, a large amount of capital and collateral, and a good credit history 

  • Credit Check 

  • Other Information That Creditors Evaluate 

    • Income 

    • Existing debt level

    • Current economic conditions 



Types of Credit Cards

  • Mastercard, Visa and American Express are the most popular 

  • Credit card company receives a percentage commonly (between 2 and 4 percent) of the payments made to merchants 

  • Many financial institutions issue credit cards 


Prestige Credit Card 

  • Prestige Cards: credit cards, such as gold cards or platinum cards, issued by a financial institution to individuals who have an exceptional credit standing  

  • Provide extra Benefits 

    • Travel insurance, Insurance on rental cars, special warranties on purchase

  • Usually charge and Annual Fee





Specialized Credit Cards

  • Retail (or proprietary) Credit Card: a credit card that is honored only by a specific retail establishment (Ex. Sears, Esso)

  • Interest Rate Charged is normally higher than that charged on standard or prestige cards 


Credit Limit 

  • Specifies the maximum amount of credit allowed 


Overdraft Protection 

  • Allows purchases beyond stated credit limit 

  • Fees are charged 


Other Credit Card Info

  • Annual Fee

  • Incentives to Use the Card (Ex. points)

  • Grace Period

  • Period between time of purchase and when payments is due (Usually about 20 - 21 days)


Cash Advances / Convenience Cheques 

  • Usually charge high interest plus a transaction fee at the time of the transaction (No grace Period 21% daily)

  • Extremely costly source of financing and should be used only as a last resort 


Financing 

  • Paying only a portion of the credit card bill monthly 

  • Expensive and should be avoided if possible  

  • Interest rate  between 20 and 30 percent 

  • Rate may be variable, fixed, teared or maybe a teaser rate 

  • Finance Charge: the interest rate and fees you must pay as a result of using credit 



Previous Balance Method 

  • Interest is charged on the balance at the beginning of the new billing period 

  • Least favourable method 


Average Daily Balance Method 

  • Interest is charged on average daily balance at the end of every day in the billing period 

  • Your finance charges will be lower under this method if you pay part of the outstanding balance during the billing period 


Minimum Monthly Payments

  • You should always strive to pay off your entire credit card balance in full each month 



Credit Card Statement 

  • Details why your new balance differs from the balance shown on your statement for the previous month 

    • Results form any new purchases cash advances or finance charges or payments 


Consumer Proposal 

  • Consumer proposal: An offer made by a debtor to his or her creditors to modify his or her payments 

    • Creditors have up to 45 days to object 

    • Proposal can be made in cases where individual debt us less than $250 000, not including your home mortgage 

  • Removed from your credit bureau report once the consumer proposal terms have been met 


Bankruptcy

  • Individuals can file for bankruptcy when they become insolvent 

    • Insolvent : a person who owes at least $1000 and is unable to pay his or her debts as they come due

  • Property is given to a trustee in bankruptcy 

    • Trustee in bankruptcy : a person licensed to administer consumer proposals and bankruptcies and manage assets held in trust 


Identity Theft : A Threat to Your Credit 

  • Identity theft : occurs when an individual uses personal, identifying information unique to you (E.g. your Social Insurance Number) without your permission for their personal gain 

  • Goal may be to acquire money or goods or to establish a new identity for criminal purposes 


Shoulder surfing :

  •  occurs in public places where you can be readily seen or heard by someone standing close by 


Dumpster diving : 

  • occurs when an identity thief goes through your trash for discarded items that reveal personal information that can be used for fraudulent purposes 


Skimming : 

  • occurs when identity thieves steal your credit or debit card number by copying the information contained in the magnetic strip of the card 


Pretexting : 

  • occurs when individuals access personal information under false pretenses 


Phishing : 

  • Occurs wwe pretexting happens onlines 


Pharming : 

  • Similar to phishing, but targeted at larger audiences, it directs users to bogus websites to collect their personal information 


Chapter 7 Personal Loans 


The Personal Loan Process 

  • Involves filling out the application, negotiating the interest rate, and negotiating the loan contract 

  • What you must provide for the Application Process

    • Personal Balance Sheet 

    • Personal cash Flow Statement 

    • Proof of income 


What is a Loan 

  • Loan: a contract that specifies the terms of a loan as agreed to by the borrower and the lender 

    • Amount of the Loan 

    • Interest Rate 

    • Loan Repayment Schedule 

  • Amortize: to repay the principal of loan through a series of equal payments

    • Each Payment can be broken down to principal and interest

  • Maturity or Term: the life or duration of the Loan 

    • Longer maturity equal lower payments, but more interest is paid over the life of the loan 


Loan Security 

  • Collateral: assets of a borrower that back a loan in the event that the borrower defaults 

  • Secured Loan: A loan that is backed or secured by collateral 

  • Unsecured Loan: A loan that is not backed by collateral 

  • You will receive more favorable terms on a secured loan 


Co-Signers

  • A Co-signer is sometime required if credit history is weak 

  • Can have significant financial implications for the co-signer 

  • Never feel pressured or obligated to co-sign a loan 


The Real Cost of Borrowing (COB) on Personal Loans 

  • Real cost of borrowing must also take into account the payments of additional fees

    • Service Charge 

    • Appraisal fees for any collateral 


Focus on Ethics: Predatory Lending (Loan Sharking)]

  • Beware of illegal lending practices 

  • Lender charging high loan fees

  • Lender provides home equity loan with the expectation of default so he can take ownership 

  • Lender ties other products to loan approval 

  • Lender includes balloon payments at end of loan 

  • Loan agreement includes confusing information

  • Shop around for best loan terms 


Home Equity and Car Loans 7.2


Home Equity Loan 

  • Home equity loan is a loan in which the equity in a home serves as collateral 

  • A home equity loan essentially providers you access to funds form the equity line of cred, or HELOC

    • You pay interest only on the funds that you borrow 


Credit Limit on a Home Equity Loan 

  • Financial institution provide home equity loans of up to 75 percent of the market value of your home 

  • A home equity loan can also be considered a second mortgage 


Interest Rate on a Home Equity Line of Credit 

  • HELOC is typically a variable rate 

  • Prime Rate +1 or 2 

  • Prime rate: is the interest rate a bank charges its best customers 


Car Loans 

  • Selecting the Car:

    • Personal Preferences 

      • What type of car do you need

    • Price 

      • Stay within your budget 

    • Condition 

      • Have a mechanic evaluate a used car 

  • Insurance 

    • Some Cars have higher repair costs and/or are common targets of thefts 

  • Resale Value 

  • Repair Expenses 

  • Financing Rate 

    • Compare both financing rates and the purchase price offered by dealer 


Choosing a Car 

  • Trade in Tactics 

    • Attempt to Negotiate price on new car before mentioning that you  have a trade in 

  • The Value of Information 

    • Information is valuable shop around 

    • Use Consumer magazines or Web Sites 

  • Purchasing a Car Online 

    • Not as efficient as buying an airline ticket or a book

Purchases Versus Lease Decisions 

  • Leasing is a popular alternative to buying a car 

  • Advantages of leasing 

    • Do not need a substantial down payment

    • Return the card at the end of the lease period 

    • Lower Monthly car Payment 

  • Disadvantages of Leasing 

    • You have no equity investment i.e.., you do not own the car you are responsible for maintenance cost and damage to the leased vehicle 

    • There is usually a kilometre limit for leased vehicle