Module 2

Benefits of using credit

Increases the amount of money a person can spend to purchase goods and services now. The trade-off is that it decreases the amount of money that will be available to spend in the future.

Simple interest

Interest computed on principal only and without compounding

costs of renting

Monthly rent Security deposit Utilities - electricity, water, garbage, etc. Renter's insurance

Fair Credit Reporting Act (FCRA)

Regulates the use of credit reports, requires the deletion of obsolete information, and gives consumers access to their files and the right to have erroneous data corrected.

Consumer Credit Counseling Services (CCCS)

A local, nonprofit organization that provides debt counseling services for families and individuals with serious financial problems.

rule of 78s

A mathematical formula to determine how much interest has been paid at any point in a loan term. Also called the sum of the digits.

previous balance method

A method of computing finance charges that gives no credit for payments made during the billing period.

Average Daily Balance Method

A method of computing finance charges that uses a weighted average of the account balance throughout the current billing period.

two-cycle average daily balance method

A method of computing finance charges that uses the average of the account balance throughout two consecutive billing cycles. Banned under the Credit CARD Act

add-on interest method

A method of computing interest in which interest is calculated on the full amount of the original principal

collateral

A valuable asset that is pledged to ensure loan payments.

Chapter 13 bank

A voluntary plan that a debtor with regular income develops and proposes to a bankruptcy court

Credit

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

condominium

An individually owned housing unit in a building with several such units

buy-down

An interest rate subsidy from a home builder or a real estate developer purchased by the buyer that reduces a home buyer's mortgage payments during the first few years of the loan.

small claims court

a court that settles legal differences involving amounts below a set limit and employs a process in which the litigants usually do not use a lawyer

cooperative housing

a form of housing in which a building containing a number of housing units is owned by a nonprofit organization whose members rent the units

manufactured home

a housing unit that is fully or partially assembled in a factory before being moved to the living site

class action suit

a legal action taken by a few individuals on behalf of all the people who have suffered the same alleged injustice

lease

a legal document that defines the conditions of the rental agreement between the tenant and the landlord

payment cap

a limit on the payment increases for an adjustable-rate mortgage

home equity loans

a loan based on the current market value of a home less the amount still owed on the mortgage

mortgage

a long-term loan on a specific piece of property such as a home or other real estate

Declining balance met

a method of computing interest when more than one payment is made on a simple interest loan

cooperative

a nonprofit organization whose member-owners may save money on certain products or services

rebate

a partial refund of the price of a product

interest

a periodic charge for the use of credit

earnest money

a portion of the price of a home that the buyer deposits as evidence of good faith to indicate a serious purchase offer

revolving check credit

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

warranty

a written guarantee from the manufacturer or distributor that states the conditions under which the product can be returned, replaced, or repaired

service contracts

an agreement between a business and a consumer to cover the repair costs of a product

Credit insurance

any type of insurance that ensures repayment of a loan in the event the borrower is unable to repay it

Steps to build and maintain credit rating

1. Limit borrowing 2. Pay on time 3. Control the number of inquiries

impulse buying

unplanned buying

Opportunity costs of housing choices

-Interest Income Lost. -Time and cost of commuting to live in less expensive area. -No tax advantages for renters. -No equity build up for renters. -Time and money to repair/improve lower-priced home. -Time and effort to custom build.

disadvantages of home ownership

-financial uncertainty -limited mobility -higher living costs

advantages of home ownership

-pride of ownership -financial benefits -lifestyle flexibility

Practical Purchasing Strategies

-timing purchases (seasonal) -store selection -brand comparison -label information -price comparison -evaluate warranties -service contracts

steps to close the real estate transaction

1. Application fee 2. Credit report 3. Title insurance 4. Attorney's fees 5. Property survey 6. Pest inspection 7. Homeowner's insurance 8. Escrow for taxes and insurance 9. Prepaid interest 10. Real estate commission

Two types of bankruptcy

1. Chapter 7 - straight bankruptcy, immediate liquidation plan 2. Chapter 13 - regular income plan, wage earner plan

Rules of credit capacity

1. Check your budget 2. Compute debt payments to income ratio (monthly non-mortgage debt payments divided by net monthly income) 3. Compute debt to equity ratio (total liabilities divided by net worth)

Sources of consumer credit

1. Commercial banks 2. Consumer finance companies 3. Credit unions 4. Life insurance companies 5. Federal savings banks

Steps when your identity is stolen

1. Contact the fraud departments of each of the three major credit bureaus 2. Contact the creditors for any accounts that have been tampered with or opened fraudulently 3. File a police report

Advantages of Credit

1. Current use of goods and services 2. May purchase when funds are low 3. Safer than cash or debit cards 4. Cushion for emergencies 5. Easier to return merchandise 6. Convenient when shopping 7. One monthly payment 8. Needed for reservations and online purchases 9. Float time and grace period 10. Rewards programs

Reasons for debt

1. Emotional problems 2. Using money to punish or get even 3. Expectation of instant comfort 4. Keeping up with the Joneses 5. Overindulgence of children 6. Misunderstanding or lack of communication 7. Amount of finance charges makes it difficult to repay

Steps to improve credit score

1. Get copies of your credit report, verify that the info is correct 2. Pay bills on time 3. Understand how score is determined 4. Learn the legal steps 5. Beware of credit repair scams

Risks of cosigning a loan

1. Guaranteeing someone else's debt 2. You may have to pay 3. Can damage your credit rating

Steps to resolving consumer complaints

1. Initial communication with place of purchase 2. Communication with company HQ 3. Consumer agency assistance, mediation or arbitration 4. Legal action

Credit Card Accountability, Responsibility, and Disclosure Act (CARD)

1. Limits rate increases in first year 2. Restricts rate increases to new purchases only 3. Must inform of rate increases 45 days in advance 4. Teaser rate for at least 6 months 5. Statement issued 21 days prior to due date 6. Makes statements more clear and concise 7. Set consistent due date each month

Factors of leasing a vehicle

1. Lower payments and cash outlay 2. No ownership in vehicle 3. Maximum number of miles set 4. Capitalized cost 5. Money factor 6. Payment amount 7. Residual value

Steps to correct credit errors

1. Notify creditor in writing within 60 days 2. Include account number and explanation of error 3. Creditor must respond within 30 days 4. Two billing cycles but no longer than 90 days to make correction 5. Credit rating unaffected while item is dispute

Warning signs of debt problems

1. Paying only minimum balances 2. Growing balances 3. Missing or late payments 4. Intentionally using overdraft protection 5. Dipping into savings regularly 6. Not discussing or only discussing money 7. Depending on overtime pay 8. Not knowing how much you owe 9. Exceeding credit limits 10. No savings 11. Being denied credit 12. Having your credit card revoked 13. Postponing medical or dental visits

Phases of making a major purchase

1. Pre-shopping activities - problem identification and information gathering 2. Evaluate alternatives - selecting and comparing options 3. Determine purchase price - negotiate and bargain, compare financing alternatives 4. Post-purchase activities - operation and maintenance costs

steps to selling your home

1. Prepare your home 2. Determine the price 3. Sell yourself 4. Use realtor 5. Owner financing

steps to find and evaluate a property to purchase

1. Select a location (zoning laws and schools) 2. Use a real estate agent 3. Conduct a home inspection 4. Mortgage company will want an appraisal

Steps to protecting against credit card fraud

1. Sign new cards as soon as they arrive 2. Treat your cards like money, store them in a secure place 3. Shred anything with your account number before throwing it away 4. Don't give your card number over the phone or online unless you initiate the call 5. Don't write your card number on a postcard or the outside of an envelope 6. Remember to get your card and receipt after a transaction 7. If your billing statement is incorrect or your cards are lost or stolen, notify issuers immediately 8. If you don't receive your billing statement, notify company immediately

Legal options for consumer complaints

1. Small claims court 2. Class action suit 3. Lawyer or legal aid

Disadvantages of Credit

1. Temptation to overspend 2. Potential damage to credit rating 3. Does note increase total purchasing power 4. Credit costs money 5. Minimum payment tempting

Trade-offs of credit

1. Term vs interest costs - long loans = lower monthly payment but more total interest 2. Lender risk vs interest rate - reduce the lender's risk by accepting variable interest rates, provide collateral to secure the loan, make a large down payment or have a shorter term

Steps to avoid internet fraud

1. Use a secure browser 2. Keep records of your online transactions 3. Review your monthly bank and credit card statements 4. Read the policies of websites you visit 5. Keep your personal information private 6. Give payment information only to businesses you know and trust 7. Never give your password to anyone online 8. Do not download files sent to you by strangers or click on links from people you don't know

information in your credit bureau file

1. your employer, position, and income 2. your former address 3. your former employer 4. your spouse's name, SSN, employer, and income 5. whether you own your home, rent, or board 6. checks returned for insufficient funds

second mortgage

A cash advance based on the paid-up value of a home; also called a home equity loan.

Truth in Lending Law

A federal law that requires creditors to disclose the annual percentage rate (APR) and the finance charge as a dollar amount.

Fair Debt Collection Practices Act (FDCPA)

A federal law, enacted in 1978, that regulates debt collection activities.

conventional mortgage

A fixed-rate, fixed-payment home loan with equal payments over 10, 15, 20, 25, or 30 years.

Adjustable Rate Mortgage (ARM)

A home loan with an interest rate that can change during the mortgage term due to changes in market interest rates; also called a flexible-rate mortgage or a variable-rate mortgage.

bankruptcy

A legal process for dealing with debt problems of individuals

rate cap

A limit on the increases and decreases in the interest rate charged on an adjustable-rate mortgage.

reverse mortgage

A loan based on the equity in a home, that provides elderly homeowners with tax-free income and is paid back with interest when the home is sold or the homeowner dies.

Role of consumer credit on economy

Baby boomers represent 30% of the population but holds 60% of the outstanding debt adding to the overall debt use. Credit cards are considered a financial survival tool

Equal Credit Opportunity Act (ECOA)

Bans discrimination in the extension of credit on the basis of race, color, age, sex, marital status, and other factors.

5 C's of Credit

Character, Capacity, Capital, Collateral, Conditions

debit card

Electronically subtracts the amount of a purchase from the buyer's account at the moment the purchase is made.

refinancing

The process of obtaining a new mortgage on a home to get a lower rate.

Debt to Equity Ratio

Total liabilities/net worth

credit bureau

collect credit and other information about consumers

open-end credit

credit as a loan with a certain limit on the amount of money you can borrow for a variety of goods and services. Cards issued by department stores, bank cards, travel & entertainment cards

closed-end credit

credit as a one-time loan that you will pay back over a specified period of time in payments of equal amounts. Mortgage loans, automobile loans, installment loans.

disadvantages of renting

few financial benefits, restricted lifestyle, legal details

open dating

information about freshness or shelf life found on the package of a perishable product

Advantages of renting

mobility, fewer responsibilities, lower initial costs

Debt payments to income ratio

monthly non-mortgage debt payments/net monthly income

legal aid society

one of a network of publicly supported community law offices that provide legal assistance to consumers who cannot afford their own attorney

Consumer Credit Reporting Reform Act

places the burden of proof for accurate credit information on the credit reporting agency

points

prepaid interest charged by a lending institution for the mortgage; each discount point is equal to 1 percent of the loan amount

zoning laws

restrictions on how the property in an area can be used

Fair Credit Billing Act (FCBA)

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

adjusted balance method

the assessment of finance charges after payments made during the billing period have been subtracted

mediation

the attempt by an impartial third party to resolve a difference between two parties through discussion and negotiation

capital

the borrower's assets or net worth

Character

the borrower's attitude toward his or her credit obligations

capacity

the borrower's financial ability to meet credit obligations

conditions

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

line of credit

the maximum amount of money a creditor will allow a credit user to borrow

annual percentage rate (APR)

the percentage cost of credit on a yearly basis. the APR yields a true rate of interest for comparison with other sources of credit

amortization

the reduction of a loan balance through payments made over a period of time

arbitration

the settlement of a difference by a third party whose decision is legally binding

unit pricing

the use of a standard unit of measurement to compare the prices of packages that are different sizes

Consumer Credit

the use of credit for personal needs (except a home mortgage)

finance charge

total dollar amount paid to use