Dave Ramsey Personal Finance Chapter 4: Debt

Three Huge Ways You Lose When Buying a New Car:

#1: Payments. Spreading the purchase of an automobile over four or five years hinders your ability to pay off debt or save money for that time. #2: Interest. Included in the payment, of course, are the interest charges. That means you pay more than the sticker price. It's like buying a 20,000 dollar vehicle for $23,000. #3: Depreciation. This is the biggest one. If you purchase a 20,000 dollar car, it will be worth about $8,000 in four years. That's in addition to all gasoline, maintenance and other stuff. You could buy a 2,000 dollar beater and get the same use out of it for those same four years without taking a 12,000 dollar hit.

5 Steps Out of Debt

#1: Quit borrowing more money! #2: You must save money. #3: Sell something. #4: Get a part-time job or work overtime temporarily. #5: Use the debt snowball method.

Credit Score

A measure of an individual's credit risk; calculated from a credit report using a standardized formula

Annual Fee

A yearly fee that's charged by the credit card company for the convenience of the credit card

FICO is known as...

I love debt.

How do I take out a mortgage?

If you don't have a credit score, you should focus on one thing - making sure you have a large down payment. If you've never gone into debt, that shouldn't be too difficult, right? Without a credit score, the down payment, as well as your job and how long you've been employed in that line of work, are big factors. You'll also want an outstanding history of rental and utility payments. Look for a mortgage company that uses a process called manual underwriting, sometimes called "non-traditional credit" or "no credit score" lending.

Debt Snowball

Preferred method of debt repayment; includes a list of all debts organized from smallest to largest balance; minimum payments are made to all debts except for the smallest, which is attacked with the largest possible payments

Explain how debt snowball works.

Put all your debts in order from smallest to largest, pay minimum payments on all your debts except for the smallest one, attack the smallest debt with intensity until it is paid off, and apply the paid off debt's payment to the next debt on the list continuing to "snowball" payments toward each larger debt.

Myth #2

Spend money on whatever you want while in college and pay for it later when you're making more money.

Explain why financing a car is a bad idea.

Spreading the purchase of a car over four or five years hinders your ability to pay off debt or save money during that time. You will be paying interest in addition to the purchase price. The car depreciates quickly which means you may end up owning more on the car than it's worth.

Which of the following best summarizes how the use of a credit card for purchases instead of cash can change one's spending behavior?

Studies show that consumers typically spend more when using credit as opposed to cash purchases.

Individual account information is removed from your credit report seven years after the last activity on the account, except for Chapter 7 bankruptcy, which stays on your credit report for:

10 years.

What is the best mortgage for buying a house?

A 15-year fixed mortgage rate; Long term money!!

Which of the following is a sign that your identity may have been stolen?

A call from a collection agency about a debt you didn't occur, bank and billing statements don't arrive on time, and your credit report shows accounts you didn't open.

Depreciation

A decrease or loss in value

Credit Report

A detailed report of an individual's credit history

If you do not have a FICO score, what factors will determine whether or not you qualify for a mortgage?

History of rental and utility payments, amount of your down payment, and employment history.

Why is an adjustable rate mortgage, also known as ARM, a bad idea?

An ARM is a mortgage with an interest rate that changes based on market conditions. They are not recommended since there is increased risk of losing your home if your rate adjusts higher, and if you lose your job, your payment can become too much for you to afford.

Credit Bureau

An agency that researches and collects individual credit information and sells it for a fee to creditors so they can make a decision on granting loans. Typical clients include banks, mortgage lenders, credit card companies and other financing companies.

Which of the following is not a good idea for getting out of debt?

Borrow money from your parents to pay for the debt.

Which of the following is not a credit myth?

Borrowing money can have serious consequences and prevent you from building wealth.

Myth #1

Build credit. The credit industry wants you to believe this. Credit is not necessary to survive. The truth is there is no good reason to go into debt.

Describe the negative consequences of taking on debt. What effects can debt have on your future?

Constantly owing money to others prevents you from paying yourself through saving and investing. Making it difficult or even impossible to build wealth over time.

Annual Percentage Rate

Cost of borrowing money on an annual basis; takes into account the interest rate and other related fees on a loan

Which of the following is not a recommended step in the Drive Free method of purchasing a car?

Explore new car dealerships for the best interest rate.

Co-signing a loan is a good way to help a friend or relative.

False

If you are a victim of identity theft, you are only responsible for paying back half of the debt.

False

It is okay to use a credit card if you pay it off every month.

False

You must establish credit in order to buy a house.

False

You need to have a credit card to rent a car or check in to a hotel.

False

Which of the following things cannot be done with a debit card but can be done with a credit card?

Go into debt.

A long-term rental agreement on a car; a form of secured long-term debt

Lease

How do I rent an apartment?

Most apartments will work with you if you can provide first and last month's rent as well as a security deposit. Get a rental history referral from your previous landlord. If it's your first time renting, you might have to look around for a little while. But you'll be able to find someone to work with you.

Myth #3

Need a new car. You should buy the car you can afford-with cash.

Which of the following is NOT a factor in determining a FICO score?

Paying cash for all purchases.

What factors affect a credit score?

Payment History, Amounts Owed, Length of Credit History, New Credit, and Types of Credit In Use.

Which of the following is the most cost-effective option for purchasing a home?

The most ideal way to buy a house is with 100% down. If that is not an option, you should get no more than a 15-year, fixed rate mortgage with a down payment of at least 10%.

A credit score is intended to measure:

The risk of your not repaying debt.

What if an employer wants to see my credit score during the interview process?

This is a growing trend, but it mainly affects people in the financial industry - banks, mortgage brokers, investment companies and so on. Again, the key here is to learn their process up front and explain why you don't have a credit score if they ask you about it.

Loan Term

Time frame that a loan agreement is in force, and before or at the end of which the loan should either be repaid or renegotiated for another term

Teens are a huge target of credit card companies today.

True

There are three credit bureaus: Experian, TransUnion and Equifax.

True

You can and should obtain a free copy of your credit report annually in order to check for any suspicious activity.

True

Myth - You need a credit card to rent a car or make a purchase online or by phone.

Truth - A debit card does all of that. The only thing you can't do with a debit card that you can do with a credit card is go into debt!

Myth - You can get a good deal on a new car.

Truth - A new car loses 70% of its value in the first four years. This is the largest purchase most consumers make that goes down in value.

Myth - Leasing your car is what sophisticated financial people do. You should always lease things that go down in value. There are tax advantages.

Truth - Consumer Reports, Smart Money magazine and a good calculator will tell you that the car lease is the most expensive way to finance and operate a vehicle.

Myth - I'll take out a 30-year mortgage and pay extra on it. I promise!

Truth - Life happens and something else will always seem more important. Never take out more than a 15-year fixed rate mortgage.

Myth - Car payments are a way of life, you'll always have one.

Truth - Staying away from car payments by driving reliable used cars is what typical millionaire does. That is how they became millionaires.

Myth - I'll make sure my teenager gets a credit card so he or she can learn to be responsible with money.

Truth - Teens are a huge target of credit card companies today. The reason is that the adult market is saturated. Also, researchers have discovered that there is a strong brand loyalty to your first credit card. Therefore, credit card companies are competing to have their card be your first card.

Myth - You need to take out a credit card or car loan to "build up your credit score."

Truth - The FICO score is an "I love debt" score and is not a measure of winning financially. In fact, it can often mean the opposite. If you were to inherit $10,000,000 tomorrow, it would have no effect on your credit score!

Myth - By co-signing a loan, I am helping out a friend or relative.

Truth - The bank requires a co-signer because the person isn't likely to repay. Be ready to pay the loan and have your credit damaged.

Myth - Debt is a tool. It should be used to create prosperity.

Truth - The borrower is the slave to the lender.

Myth - The lottery and other forms of gambling will make me rich.

Truth - The lottery is a tax on the poor and on people who can't do math.

Myth - If I loan to a friend or relative, I will be helping them.

Truth - The relationship will be strained or destroyed.

Myth - Cash advance, payday, lending, rent-to-own, title pawning, and tote-the-note lots are needed services for lower income people to help them get ahead.

Truth - These are horrible, greedy rip-offs that aren't needed and benefit no one but the owners of these companies. They are what's known as predatory lenders.

Myth - I pay my credit card off every month with no annual payment or fee. I get brownie points, air miles and a free hat.

Truth - When you use cash instead of plastic, you spend 12 to 18% less because spending hurts.

Credit Card

Type of card issued by a bank that allows users to finance a purchase

When a person owes more on an item, like a car or house, than it is worth, the person is said to be __________ on the loan.

Upside Down

What are some things you can do to protect your personal information?

Use a paper shredder and destroy credit card offer and other documents with personal information, check your credit report annually, create strong passwords and keep them confidential, purchase identity theft protection, and never give out your social security number unless absolutely necessary.

Can you live without a credit score?

Yes