Finance chapter 5

the borrowers financial ability to meet credit obligations

Capacity

the borrowers assets or net worth

Capital

Wage earner plan

Chapter 13

• Debtor with regular income proposes a plan to eliminate debts over time • Information provided to the court the same as under Chapter Plan may last up to five years • Debtor makes payments to a court-appointed trustee

Chapter 13 Bankruptcy

straight bankruptcy

Chapter 7

• Submit a petition to the court that lists assets and liabilities, and pay a filing fee • Many, but not all, debts are forgiven • Assets sold to pay creditors • Can keep some assets (home, vehicle,..) • Most personal filings

Chapter 7 bankruptcy

The borrowers attitude toward his or her credit obligations

Character

The Five C's of Credit : Your capacity to pay back a loan is determined by examining your income and your debts 1. 2. 3. 4. 5.

Character Capacity Capital Collateral Conditions

Closed or open end credit? Mortgage, automobile, and installment loans for furniture, appliances and electronics

Closed-end credit

one time loans that the borrower pays back in a specified period of time and in payments of equal amounts

Closed-end credit

a valuable asset that is pledged to ensure loan payments

Collateral

general economic conditions that can affect a borrowers ability to repay a loan

Conditions

The use of credit for personal needs (except a home mortgage). It's based on trust in people's ability and willingness to pay bills when due.

Consumer credit

an arrangement to receive cash, goods, or services now and pay for them in the future

Credit

Agencies that collect information on how promptly people and businesses pay their bills

Credit bureaus

____________ obtain information from banks, finance companies, stores, credit card companies, and other lenders

Credit bureaus

Average cardholder has > 9 credit cards Convenience users vs. Borrowers Finance charge = total amount paid to use credit ‣ "Teaser rates" Reward programs

Credit card

Electronically subtract money from your savings or checking accounts. Most commonly used at ATMs

Debit card

3 major credit bureaus

Experian, TransUnion, and Equifaxt

Sets procedures for promptly correcting billing mistakes, refusing to make credit card payments on defective goods and promptly crediting payment

Fair Credit Billing Act (FCBA)

the total dollar amount paid to use credit

Finance charge

• Loan based on your home equity ◦ Current market value of your home minus the amount you still owe on the mortgage • Interest is tax deductible • Should only be used for major purchases

Home equity loans

Maximum home equity loan =

Home value * ___% - mortgage balance

Interest formula:

I = Principal x interest rate x time

Finance charge formula:

Interest + service charge

the ability to purchase using a mobile device

Mobile commerce

A line of credit in which loans are made on a continuous basis and the borrower is billed periodically for at least partial payment

Open-end credit

Closed or open end credit? Use as needed until line of credit max reached ◦ Credit cards ◦ Department store cards ◦ Home equity loans • You pay interest and finance charges if you do not pay the bill in full when due • Revolving check credit • Bank line of credit

Open-end credit

A prearranged loan from a bank for a specified amount, also called a bank line of credit

Revolving check credit

How to protect your credit from theft or loss • ________ any papers that contain personal information • _______ your accounts immediately if you suspect an identity thief has accessed the account • Be sure your credit card is ________ after a purchase • Keep a record of credit card _______ • Notify your ____________ immediately if your card is lost or stolen

Shred Close returned numbers credit card company

interest computed on principal only and without compounding

Simple interest

Your credit files can include: _____________

employer(s), position(s), income, address, checks returned, etc.

Home equity loans should be used for major expenses such as __________ or _________. These loans have interest that is tax-deductible.

home improvements or education

The periodic charge for the use of credit is called ________.

interest

A ________ is the maximum dollar amount of credit the lender has made available to a borrower

line of credit

Disadvantages to consumer credit • Temptation to ___________ • Can create long-term ___________ and slow progress toward financial goals • Potential loss of __________ due to late or non-payment • Ties up future ________ • Credit costs ________ - more costly than paying with cash

overspend financial problems merchandise income money

What to do if your identity is stolen?

~ FIRST File a police report ~Contact the three major credit bureaus ~Contact creditors

3 most common types of closed-end credit:

1. Installment sales credit 2. Installment cash credit 3. Single lump-sum credit

FICO scores generally rant from ______ to _______. • Higher score = ______ risk (the higher the better)

350 to 850 less

The percentage cost (relative cost) of credit on a yearly basis. Yields a true rate of interest for comparisons with other sources of credit

Annual percentage rate (APR)