Personal Financial Management Chapter Five

If a retailer goes bankrupt...

holder get pennies on the dollar at most - and in many cases, nothing

The APR is the relative cost of credit on a yearly basis.

APR is a key to comparing credit costs.

Borrowers

Cardholders who do not pay off their balances every month

What would be the interest cost (simple interest) for a $3,000 loan with a 8% rate for nine months of a year?

$180 Simple interest=Principal X Rate X Time. In this case, time is 9/12 (for 0.75 of a year).

Close-ended Credit

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

Inexpensive Loans

Parents or other family members often are the source of inexpensive loans - loans with little to no interest. Can cause strain between relationships.

Capacity

The borrower's ability to pay additional debts. Can you repay the loan?

Capital

The borrower's assets or net worth. What are your assets and net worth?

Character

The borrower's attitude toward his or her credit obligations. Will you repay the loan?

Why do banks prefer customers with high credit scores?

The customer who has a high score will often pay bills on time.

Why should you keep personal information private?

To avoid identity theft

Single Lump-Sum Credit

a loan that must be repaid in total on a specified day, usually within 30 to 90 days. Lump-sum credit is generally, but not always, used to purchase a single item.

Credit Score

a number that reflects the information in your credit report

A bank line of credit is also known as:

a revolving check credit

What occupation began using credit first?

farmers

The five Cs are used to...

help identify good customers for credit approval

A revolving check credit and a bank line of credit are:

prearranged loan for a specified amount of money that is accessed with special checks

When making online purchases, you should:

use a secure browser, keep a record of the purchase, and review your statement.

A method to confirm that you can pay for the loan is to confirm if:

you have enough take-home pay to cover monthly expenses, the loan payment, and other expenses.

Interest

A periodic charge for the use of credit.

Convenience User

Cardholders who pay their balance in full on or before each payment due date

What are the best reasons to maintain good credit history?

You will have a good FICO score. You are less likely to be denied credit.

Installment Sales Credit

a loan that allows you to receive merchandise, usually high-priced items such as large appliances or furniture

Medium-Priced Loans

Loans with moderate interest that can usually be obtained from commercial banks, savings and loan associations, and credit unions.

A reason why people tend to choose long-term financing is:

they want to make smaller monthly payments

Credit Matters because...

it affects your ability to get a loan, a job, housing, insurance, and more.

Spending all of your money on credit card bills will:

leave you with no spending money

The Fair Credit Billing Act's underlining purpose is:

to protect consumer credit ratings

Revolving Check Credit

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

Line of Credit

A short-term loan that is approved before you actually need the money.

Grace Period

A time period during which no finance charges will be added to your account

Credit

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

How does the Fair Credit Billing Act protect consumer credit ratings?

By allowing consumers to challenge charges that are false and avoid having delinquent charges added to their credit history

Open-ended Credit Examples

Cash issued by department stores, bank cards (Visa, MasterCard) Travel and entertainment (T&E) (American Express, Diners Club) Overdraft Protection

Types of Loans

Inexpensive Loan Medium-Priced Loan Expensive Loan Home Equity Loan

Simple Interest

Interest computed on principal only and without compounding.

Why is it not good to spend your entire monthly income on credit card bills?

It is not good if you have no money left for emergencies.

Three most common types of close-ended credit

installment sales credit installment cash credit single lump-sum credit

Smart Card

A plastic card equipped with a computer chip that can store 500 times as much data as a normal credit card.

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.

Questions to consider before deciding how and when to make a major purchase:

Do I have the cash I need for the down payment? Do I want to use my savings for this purchase? Does the purchase fit my budget? Could I use the credit I need for this purchase in some better way? Could I postpone the purchase? What are the opportunity costs of postponing the purchase? What are the dollar costs and the psychological costs of using credit?

Expensive Loans

the easiest but most expensive loan. Commonly involves high interest rates ranging from 12 to 25 percent from finance companies and retail stores. Banks also lend money to their credit card holders through cash advances - loans that are billed to the customer's credit card account.

Fair Debt Collection Practices Act

prohibits certain practices by agencies that collect debts for creditors

Advantages of a Medium-Priced Loan

they provide personalized service and are usually willing to be patient with borrowers who can provide good reasons for late or missed payments. HOWEVER, you have to be a member of a credit union in order to get a loan.

Open-ended Credit

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

The following is a prearranged loan for a specified amount of money that is accessed with special checks:

A bank line of credit A revolving check credit

A credit bureau is a reporting agency that collects credit and other information about consumers.

A credit bureau is a reporting agency that collects information on how promptly people and businesses pay their bills

Advantages of Credit:

Consumer credit enables people to enjoy goods and services now Credit cards permit the purchase of goods even when funds are low Credit is more than a substitute for cash Using credit is safe and more

A billing error is:

when the business mails your statement to an incorrect home address being forced to pay for defective goods goods or services purchased without your authorization a mathematical error

Where does the Consumer Credit Reporting Act place the burden of proof for accurate credit information?

It places the burden on credit reporting agencies.

Finance Charge

The total dollar amount paid to use credit.

Two Basic Types of Consumer Credit:

Closed-End Credit Open-End Credit

Under the Consumer Credit Reporting Reform Act, what would happen if a Credit Bureau verifies inaccurate information?

If the Credit Bureau is wrong about information, the consumer can sue for actual, possibly punitive damages.

You are entitled to ask a credit bureau to correct its records if a mistake took place that led to you being denied credit.

If you are denied credit, you are entitled to know why.

What type of applications does the ECOA cover?

The ECOA covers applications for mortgages and home improvement loans.

Mobile Commerce

The ability to purchase using a mobile device.

Conditions

The general economic conditions that can affect a borrower's ability to repay a loan. What if your job is insecure?

Annual Percentage Rate (APR)

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

Debit Card

electronically subtracts money from your savings or checking account to pay for goods and services.

The Five Cs of Credit

Character Capacity Capital Collateral Conditions

Loans

borrowing with a money agreement to repay it, as well as interest, within a certain amount of time

Debt Payments-to-Income Ratio

calculated by dividing your monthly debt payments (not including house payment, which is a long-term liability) by your net monthly income. Experts suggest you spend no more than 20% of your net (after-tax) income on consumer credit payments.

Debt-to-Equity Ratio

calculated by dividing your total liabilities by your net worth. Do not include the value of your home and the amount of its mortgage. If the ratio is about 1 you have probably reached the upper limit of debt obligations.

A loan for a motorcycle is an example of:

closed-end credit

Disadvantages of Credit

Greatest disadvantage - the temptation to overspend, especially during periods of inflation. failure to repay a loan can result in loss of income, valuable property, and good reputation, even court action or bankruptcy

What should you do when you receive a phone call claiming to be from your bank?

Hang up, call your local bank, ask if there is something wrong with your account(s), and go to the bank the next day to verify your account(s)

Close-ended Credit Examples:

Mortgage Loans Automobile Loans Installment Loans (installment sales contract, installment cash credit, single lump-sum credit)

Two ways to calculate whether or not you can afford a loan:

1. add up all of your basic monthly expenses and subtract the total from your take-home pay. If the difference will not cover the monthly payment and still leave funds for other expenses, you cannot afford the loan. 2. ask yourself what you plan to give up to make the monthly loan payment. If you currently save a portion of your income that is greater than the monthly payment, you can use these savings to pay off the loan. However, if you do not, you will have to forgo spending on entertainment, new appliances, or perhaps even necessities.

Advantages of Credit

Immediate access to goods and services flexibility in money management safety and convenience a cushion in emergencies a means of increasing resources a good credit rating if you pay back your debts in a timely manner

Consumer Credit

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

Installment Cash Credit

a direct loan of money for personal purposes, home improvements, or vacation expenses. No down payment is made and you make payments in specified amounts over a set period.

Which of the following are good deterrents of identity theft?

Keeping checks in a safe place Shredding documents before throwing them away

Family members may only charge interest they would have earned on the money if they had deposited it in a...

savings account

Which of the following results from improper use of credit?

Bankruptcy Default and loss of credit rating

What is an irresponsible use of credit?

Purchasing goods until your credit limit is reached.

Collateral

A valuable asset that is pledged to ensure loan payments. What if you don't repay the loan?

Home Equity Loan

a loan based on your home equity - the difference between the current market value of your home and the amount you still owe on the mortgage