Focus on Personal Finance: Chapter 5

Revolving Check Credit

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

Closed vs. Open Credit

Closed is used for a specific purpose and is borrowed at a specific amount. Three most common types are: installment sales credit, installment cash credit and single lump-sum credit. Open-ended credit is kept open and paid off and added to regularly.

Things that affect your Credit Score

People checking it often, delinquencies on accounts, being too close to max on accounts for too long, late payments, closing without paying, returned checks, other such bad stuff

Capacity

The borrower's financial ability to meet credit obligations

Line of Credit

The dollar amount, which may or may not be borrowed, that a lender makes available to a borrower

Conditions

The general economic conditions that can affect a borrower's ability to repay a loan

What to do if identity is stolen

1. Contact credit bureaus. Have them flag your file. 2. Contact Creditors. Contact creditors in writing. 3. File police report. Keep police report to prove that a crime was committed.

Five C's of Credit

Character, Capacity, Capital, Collateral, Conditions

Other Factors determining credit worthiness

Age, public assistance, housing loans

Credit

An arrangement to receive cash, goods, or services now and pap for them in the future.

How to protect yourself

Be sure you don't leave your cards unwatched. Use secure internet browsers. Notify company immediately if cards are lost or stolen. Don't download unknown files. etc

Equity Loan

Borrowing against the current equity in large value items such as homes

Financial Counseling Services and Effects

Consumer Credit Counseling Services (CCCS) is nonprofit that provides debt counseling and helps with debt repayment plans. Other Services charge little or nothing for services. Help with debt counseling and debt repayment as well. Can seriously damage credit score.

Credit Score vs. Report

Credit score is a set number that represents your credit worthiness and credit report is a summary of all items of credit within a certain time period as well as your standing on the items. It also contains other information such as name, address, social security #, job, and age. Your credit score is based off of what is contained in this report

Uses for Credit scores

Determining credit worthiness, car insurance, some jobs, loan interest rates, loans in general and lines of credit

Uses of Credit

Emergencies, buying expensive items that are needed now, items that may go up in price later, borrowing for college education, or other things that may increase your living situation

Simple Interest

Interest computed on principal only and without compounding

Levels of Loans

Inexpensive(parents or other family members are often the source of money) Medium-priced loans (obtained from commercial banks and credit unions. Harder to get than other loans.) Expensive loans (easiest to obtain and often have the highest interest rates. Obtained from finance companies and retail stores.)

Credit Costs

Interest is the main cost of credit but lenders will charge more interest to cover the inflation rate than say your gma and gpa. Sometimes it can make the loan more than you can afford.

Fair Credit Billing Act

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

Character

The borrower's attitude towards his or her credit obligations

Capital

The borrower's assets or net worth

Finance Charge

The total dollar amount paid to use credit

Consumer Credit

The use of credit for personal needs (except home mortgage)

Consumer Credit Protection Laws

Truth in lending and consumer leasing acts (you can sue for losses because a creditor failed to report information accurately), Equal Credit Opportunity Act (sue for damages if you feel a creditor has discriminated against you), Fair Credit Billing Act (creditor fails to correct billing errors so therefor must give up any charges to you because of it and you can sue), Fair credit reporting act (sue creditor or bureau for violating the rules regarding access to your credit cards), Consumer Credit Reporting Reform Act (places burden for accurate credit information on credit bureau not consumer)

Disadvantages of cosigning loans

You are fully responsible for the loan and sometimes they creditor will go after you instead because you are the one more likely to pay if the loan is defaulted on

Credit Capacity Rules

debt payments-to-income ratio should be no more that 20%. Debt-to-equity ratio- if it is reaching 1 then you are reaching your max capacity to borrow.

Credit Tradeoffs

term versus interest costs- if you pay off a loan over a long period of time you will have lower monthly payments but you will pay more in interest. Lender Risk versus Interest Rate- The more risk to the lender, the higher the interest rate