MODULE 3 Flashcards
Debt
is usually money, owed by one party to another. Debt is used by many individuals
and companies to make large purchases that they could not afford under other
circumstances (Chen, 2024).
Debt (2)
is part of financial transaction of a person to acquire items to meet current and
future needs. The acquisition of debts usually include paying of the interest.
Interest
Cost incurred of using money which is percentage based on the principal for a given period of
time
Interest rates have ____
simple and compound interest
Simple Interest.
It refers to the ratio of the interest paid or earned to the amount borrowed.
Interest = Principal x Interest Rate
Compound Interest.
Refers to the result of periodic addition of simple interest to the principal. The
resulting amount (principal + interest) will earn interest
Compound Interest Rate= Principal (1+i)
Where:
i= interest rate
n=number of years
Types of Debt
Good Debt
Bad Debt
Borrowing to pay off debt.
Borrowing to invest.
Good Debt
We consider debt as “good debt” if it generate income or help an individual increase their net
worth. Some loans that is acquired to acquire for assets can be considered as good debt e.g. business loan, real estate loan.
Examples:
mortgages
student loans
small- business loans
Bad Debt
We consider debt as “bad debt” if the amount borrowed is used to acquire a depreciating asset. Some of the items that if acquired using borrowed amount are clothes, vacations etc.
Examples:
credit cards
payday loans
personal loans
Borrowing to pay off debt.
If a person already have loans they can acquire for additional loans to
cover their debts.
Borrowing to invest.
An individual can acquire for loans to invest in assets. Some of the assets they
can acquire are stocks and bonds. However, one can incur loss when the value of their assets will
decrease
Credit Cards
An item issued by a bank or financial services company that allows the owner to borrow funds to pay for the acquisition of goods and services. The owner of the card shall pay the amount incurred along with the interest that is impose for non full payment of the credit transaction made.
The credit cards have___
annual percentages rate charges that is higher than the usual rate. When
using a credit card, one should always pay in full. One should be cautious in determining whether
the interest is incurred daily, or monthly.
Parts of Credit Card
FRONT
Chip
Card Number
Expiration Date
Cardholder Name
BACK
Magnetic Strip
Signature
CVC Code
Hologram
Types of Credit Cards
Rewards Credit Cards.
Branded version credit cards.
Secured Credit Cards.
Rewards Credit Cards.
These types of credit card are
generally referred to as cards that there
are incentives being given when the card is being used.
Branded version credit cards.
A company may issue credit
card that bears their company names. This is to encourage
customer loyalty. The cardholders may avail of perks such as
discounts, promos etc.
Secured Credit Cards.
This credit card should provide a fund deposit. The
cardholder should not spend more than the deposits made. This is similar
to prepaid debit card.
Secured Versus Unsecured Cards
SECURED
- Refundable deposit required to open an account
- Low risk to the issuer
- Low-fee cards available for bad credit
- Credit limit is based on the amount of the deposit
UNSECURED
- No deposit or collateral required to open an account
- High risk to the issuer
- Low-fee cards usually require good credit
- Credit limit is based on credit profile and income
Annual Fee.
This is a fee being charged for the issuance of card. This usually changes over
time but some issuer do not have annual fees. Some credit cards do not have annual fees.
Transaction Date.
This date is the actual date when the card was used to purchase or have
been used by the cardholder.
Posting Date.
This date is the date when the card transaction was recorded as deduction
from the balance of the card.
Decisions and Attitudes Towards Debt
- The decision when to acquire for debt will be based on the need of the person for
additional sources of funds. - One should know when to acquire for debt since it is important that they should pay it on time.
- In analyzing for the type of debt to acquire, the person should also assess if it is a good
debt or a bad debt. If the person would be focusing on having bad debts, there is the
tendency that the person will not be able to meet financial obligations. - the decision and attitude
towards debt is associated to the cultural differences and also norms. It is important that a person should be aware of the consequences of debts to improve their attitude towards debt.
