chapter 4 debt
character
A person's reputation as a reliable and trustworthy person. The creditor may look at your educational background, whether or not you have had any problems with the law, and any other factors that might indicate your strength of character.
People believe they require the items they are purchasing immediately, they do not want to wait. Many people do not want to postpone purchasing an important durable good, they would rather buy on credit and enjoy the use of the item now than later. Another reason is people buying items to be spread over life. If you buy a pickup truck now for 15,000 and keep it for 5 years, it will only be worth $5,000 at the end of that time span.
Explain 2 reasons why people use credit to purchase an item.
takes over contracts for installment debts from stores and adds a fee for collecting the debt; a consumer finance company makes loans directly to consumers at high rates of interest
Explain how a finance company works.
A secured loan is a loan that is backed up by a collateral, and an unsecured loan is guaranteed only by a promise to repay it.
Explain the difference between a secured loan and an unsecured loan and provide examples.
A longer payment period results in a smaller monthly payment, for example, if the repayment of a loan is spread over 3 years, the monthly payments will be smaller than if the loan were repaid in 2 years. There is a trade-off, but the longer it takes to repay an installment loan, the greater the total interest the lender charges.
Explain the following statement: "The longer the repayment period, the lower the monthly payment will be but more interest will be paid over the length of the loan"
A debit card does not provide a loan, it makes cashless purchases easier by enabling customers to transfer funds electronically from their bank accounts directly to the store or restaurant where they purchased goods.
How does a debit card work?
amounts owed
How much you owe on credit accounts, such as installment loans and credit cards, and the portion of your available credit that you're using (known as your credit utilization rate) together are worth about a third of your scores.
Lenders will assess your credit score and history to determine your credit risk or creditworthiness.
How will your credit rating affect your ability to get a loan?
divorce, unemployment, accidents
List 3 reasons why people file for bankruptcy
payment history 35%, amounts owed 30%, length of credit history 15%, credit mix 10%, new credit 10%
List the 5 things that affect your credit score, the percentage, and describe them
720+ excellent 690-719 good below 719 poor
List the range of scores
new credit
New credit inquiries and recently opened accounts can also influence about a tenth of your scores.
capacity to pay, character, collateral
factors of creditworthiness
capacity to pay
Related to income and debt, if your employment has been spotty, your capacity pay will be considered questionable. The amount of debt you are carrying is also a factor, if debts are large, creditors will be reluctant to loan you more.
collateral
Something of value that a borrower lets the lender claim if a loan is not repaid.
length of credit history
The age of your accounts — including how long you've had your oldest account and your newest account — and the average age of all your accounts are worth about 15% of your scores, along with how long it's been since you last used specific accounts.
credit mix
This includes the types of accounts you have, such as credit card accounts, mortgage loans and retail loans. It's not a key factor but it's still considered in formulating your scores.
higher interest rate, lowers credit score, prevent from renting an apartment
What are the consequences of filing for bankruptcy? List 4.
It's when you go before a judge and tell them you can't pay your debts. Then, depending on the situation, they either erase your debts or make a plan for you to pay them back. There are several reasons why people file for bankruptcy—things like a job loss, a divorce, a medical emergency or a death in the family.
What does filing for bankruptcy do?
a three-digit number ranging from 300 to 850 (and up to 900 for some industry-specific scores).These scores are largely based on your credit reports and can help creditors assess how likely you are to repay debt.
What is a FICO score
makes loans directly to consumers at relatively high interest rates-often more than 20 percent a year. The people who use consumer finance companies are usually unable to borrow from other sources with lower rates because they have not repaid loans in the past or have an uneven employment record.
What is a consumer finance company?
A credit card is like a charge account, allowing a person to make purchases without paying cash. They can be used at many kinds of stores, restaurants, hotels, and other businesses throughout the US and even foreign countries. Pros of credit cards are that it can build your credit score and if used correctly you can earn rewards like cash back. Cons are that if you don't pay it back in full on the due date then you must pay interest to the bank, and a bad credit score can limit what you can buy.
What is a credit card? List and explain 2 pros and 2 cons of using credit cards.
Manufactured items that have a life span longer than 3 years on an installment plan. Automobiles, refrigerators, washers and other appliances.
What is a durable good? (provide examples)
student loans, child support, unpaid taxes
What types of debt doesn't bankruptcy erase? List 3.
You're sitting at the kitchen table, staring down collection notices and wondering how you're going to make things work. Maybe you've recently lost your job and the debt is piling up to an overwhelming amount.
When would you file for bankruptcy?
FICO® scores are widely used by many types of creditors, including lenders, credit card issuers and insurance providers to gauge your credit risk — that is, how likely you are to repay the money loaned to you.
Why are your FICO scores important?
The court approves a monthly payment plan so you can pay back a portion of your unsecured debt and all of your secured debt over a period of three to five years. The monthly payment amounts depend on your income and the amount of debt you have. But the court also gets to put you on a strict budget and check all your spending.
describe chapter 13 bankruptcy: Repayment Plan
Forced to sell all of your things and all the money goes to pay your bills and the bank has to sell almost everything you have. Certain things you don't have to sell. Everything that you don't need for survival, is liquidated.
describe chapter 7 bankruptcy: Liquidation
repaid with equal payments or installments
how does an individual repay installment debt?
payment history
our history of paying bills is one of the most important factors in determining your scores. Your payment history includes your on-time and late payments on credit accounts, and public records related to non-payments, such as a bankruptcy.
borrowed principal and owed interest
what are the principal and interest of debt?
people often buy automobiles, refrigerators, washers, and other appliances
what types of durable goods do people often pay off using installments?
