Personal Finance Midterm: Ch 1-7

What to do if your credit application is denied.

- You have the right to know why. - Contact credit bureau and ask for a copy of credit report (no fee if within 60 days of denied notification) - Ask bureau to investigate any inaccurate/incomplete info

A personal check with guaranteed payment is a:

Certified check

Tax-exempt income

Income that is not taxed

Tax-deferred income

Income will be taxed at a later date.

Simple interest

Interest computed only on the principal and without compounding

An example of tax-exempt income is:

Interest from municipal bonds

The fewest financial services would probably be offered by a(n):

Investment company

APR is important because:

It helps you compare interest rates between credit options

What are publicly supported community law offices that provide legal assistance to consumers who cannot afford their own attorney?

Legal aid societies

A Consumer Credit Counseling Service is a :

Local, nonprofit organization affiliated with the National Foundation for Consumer Credit

What are the credit implications to the consumer of only making the minimum payment every month?

Decreased ability to obtain additional credit, inability to obtain lower interest rates on additional credit purchases, Financial problems due to unexpected expenses.

Traditional IRA

Deduction is available only to people who do not participate in employer-sponsored retirement plans or who have an adjusted gross income under a certain amount.

Rule of 72

Divide 72 by the interest rate to find the # of years it will take for your money to double.

Advantages of credit

Enables people to enjoy goods and services now or it can provide for emergencies, and it can pay for them all through payment plans based on future income.

Itemized deductions

Expenses that can be deducted from adjusted gross income, such as medical expenses, real estate property taxes, home mortgage interest, charitable contributions, casualty losses, and certain work-related expense

A deduction directly reduces the amount of taxes owed. True or False?

False

A general sales tax is also referred to as an excise tax. True or False?

False

Consumer information from business organizations is usually the most objective type of data available to help in a buying decision. True or False?

False

Cooperative housing involves the purchase of an individual living unit in a multiunit complex or building. True or False?

False

Demand deposits refer to money deposited in savings accounts. True or False?

False

Most financial records should be kept in a safe-deposit box. True or False?

False

Several financial benefits are associated with renting your place of residence. True or False?

False

When a simple interest is paid back in more than one payment, the method of computing interest is known as the add-on interest method. True or False

False

A common advantage associated with home ownership is:

Financial benefits

A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities.

Financial plan

Definite financial obligations are referred to as:

Fixed expenses

Variable expenses

Flexible payments that change from month to month

Roughly 85% of instances of identity theft involve:

Fraudulent use of an individual's existing account

What warranty covers most repairs of a product?

Full

Adjusted Gross Income (AGI)

Gross income reduced by certain adjustments, such as contributions to an individual retirement account (IRA) and alimony payments.

Most real estate professionals believe that the most important factor in selecting a home is:

Location

Investment income

Money received in the form of dividends, interest, or rent from investments; also called portfolio income.

Escrow account

Money, usually deposited with the lending financial institution, for the payment of property taxes and homeowner's insurance.

Debt payments to income ratio

Monthly debt payments (no including house payment)/net monthly income

What is deductible as an itemized deduction?

Mortgage interest

What component of financial planning is career planning apart of?

Obtaining

Financial planning activities

Obtaining, planning, saving, borrowing, spending, managing risk, investing, retirement and estate planning

Commercial banks

Offer a full range of financial services, including checking, savings, lending, and most other services.

Payment services

Offer an ability to transfer money to others for daily business activities.

The process of managing your money to achieve personal economic satisfaction

Personal financial planning

Stored-value cards

Prepaid cards for telephone service, transit fares, highway tolls, laundry service, library fees, and school lunches.

Points

Prepaid interest charged by the lender (1 point = 1% of loan amount)

Capital gains

Profits from the sale of a capital asset such as stocks, bonds, or real estate.

Savings

Provides safe storage of funds for future use.

Financing options for underbanked individuals do not include:

Relatives

The Federal Trade Commission can help you:

Restore you identity

An example of open-end credit is:

Revolving check credit

Goal Setting Guidelines

S- specific M- measurable A- action oriented R- realistic T- time based

The most common method of calculating the cost of credit is the:

Simple interest formula

To ensure wise purchasing decisions, you should use information and:

Take the time required to make an informed decision

Interest rates

The cost of borrowing money

Line of credit

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

An important thing to pay attention to when using rebates is:

The expiration date

Insolvency

The inability to pay debts when they are due because liabilities far exceed the value of assets.

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.

Annual percentage yield (APY)

The percentage rate expressing the total amount of interest that would be received on a $100 deposit based on the annual rate and frequency of compounding for a 365-day period.

Marginal tax rate

The rate used to calculate tax on the last (and next) dollar of taxable income.

Amortization

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

Abritration

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

Economics

The study of how wealth is created and distributed

Tax avoidance

The use of legitimate methods to reduce one's taxes.

Often, closed-end credit is easier to obtain than open-end credit because:

There is collateral on the loan

Why is making only the minimum payment amount is favorable to creditors?

They can charge higher rates of interest based on an extended payback period

An underbanked individual is one who uses high-cost financial services when:

They have a bank account

Debt to Equity Ratio

Total liabilities/net worth

Average tax rate

Total tax due divided by taxable income.

Opportunity cost refers to:

Trade-offs when a decision is made

A personal balance sheet reports the financial position of a person or family on a given date. True or False?

True

A savings account with daily compounding will have higher earnings than an account with quarterly compounding. True or False?

True

Credit encourages overspending and ties up future income. True or False?

True

Inflation reduces the buying power of a dollar True or False?

True

National name products usually cost more than store brands or private label items. True or False?

True

Savings and investment programs are the main method for achieving financial goals True or False?

True

When making an online purchase, you should:

Use a secure buying website

Opportunity cost

What you give up by making a choice

If you make more than one interest payment during the year, the APR:

Will be higher than the stated interest rate

Assets

cash and other property with a monetary value

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

I bonds

has an interest rate based on two components: (1) a fixed rate for the life of the bond and (2) an inflation rate that changes twice a year.

Based on the CARD Act, credit card companies are now required to show you on your credit card statement:

how long it will take to pay the balance making only the minimum monthly payment

Disadvantages of Credit

overspending, higher cost, impulse buying

Net worth

the difference between total assets and total liabilities

What's in your credit files?

• Your employer, position, and income • Your previous address • Your previous employer • Your spouse's name, Social Security number, employer, and income • Whether you rent or own your home • Checks returned for insufficient funds

5 C's of Credit

Character, Capacity, Capital, Collateral, Conditions

CPI

Consumer price index

Fixed expenses

Costs that do not change from month to month

Financial strategies refer to:

Courses of action to achieve financial goals

What is an example of a liquid asset?

A checking account

Types of financial goals

-Short-term goals (1-1.5 yrs) -Intermediate goals (2-5 yrs) -Long-term goals (5+ yrs)

What to do if you are a victim of identity theft.

1. Contact credit bureaus 2. Contact creditors 3. File a polece report

Phone or utilities fraud accounts for approximately What percent of all identity theft issues?

14%

How many people in America are "unbanked"

17 million

Liquid assets

Cash and items of value that can easily be converted to cash.

The savings plan that is likely to have a set rate of return is a:

Certificate of deposit

Contingency Clause

A clause in a real estate sales contract that makes the agreement conditional on such factors as the availability of financing, property inspections, or obtaining expert advice

Tax audit

A detailed examination of your tax return by the Internal Revenue Service.

Installment cash credit

A direct loan of money for personal purposes, home improvements, or vacation expenses

Mutual savings bank

A financial institution that is owned by depositors and specializes in savings accounts and mortgage loans.

Balance Sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date.

What allows a person to borrow on the paid-up value of a home?

A home equity loan

Ajustable-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.

Open-end credit

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

Installment sales credit

A loan that allows you to receive merchandise, usually high-priced items

Single lump-sum credit

A loan that must be repaid in total on a specified day, usually within 30 to 90 days.

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

Compounding

A process that calculates interest based on previously earned interest.

An exemption refers to:

A reduction from adjusted gross income.

Inflation

A rise in the general level of prices

Certificate of Deposit (CD)

A savings plan requiring that a certain amount be left on deposit for a stated time period to earn a specified interest rate.

Money market fund

A savings-investment plan offered by investment companies, with earnings based on investments in various short-term financial instruments.

Excise tax

A tax imposed on specific goods and services

Warranty

A written guarantee from the manufacturer or distributor of a product that specifies the conditions under which the product can be returned, replaced, or repaired.

Roth IRA

Allows a $5,500 (2014) annual contribution, which is not tax-deductible; however, the earnings on the account are tax-free after five years.

Liquidity

Allows you to withdraw your money on short notice without a loss of value or fees.

Interest Calculation

Amount in savings x Annual interest rate x Time period = Interest

Liabilities

Amounts owed to others

Service contract

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

Tax credit

An amount subtracted directly from the tax owed

529 plan

An education savings plan that helps parents save for the college education of their children.

Appraisal

An estimate of the current value of the property.

Tax shelter

An investment that provides immediate tax benefits and a reasonable expectation of a future financial return

A legally binding decision by a third party is:

Arbitration

According to the Federal Reserve Board, interest rates on open-end credit:

Are usually much higher than closed-end credit

Calculating net worth

Assets - Liabilities = Net Worth

Renting a home vs buying a home can what?

Can be more or less expensive