Finance chapter 5
the borrowers financial ability to meet credit obligations
Capacity
the borrowers assets or net worth
Capital
Wage earner plan
Chapter 13
• Debtor with regular income proposes a plan to eliminate debts over time • Information provided to the court the same as under Chapter Plan may last up to five years • Debtor makes payments to a court-appointed trustee
Chapter 13 Bankruptcy
straight bankruptcy
Chapter 7
• Submit a petition to the court that lists assets and liabilities, and pay a filing fee • Many, but not all, debts are forgiven • Assets sold to pay creditors • Can keep some assets (home, vehicle,..) • Most personal filings
Chapter 7 bankruptcy
The borrowers attitude toward his or her credit obligations
Character
The Five C's of Credit : Your capacity to pay back a loan is determined by examining your income and your debts 1. 2. 3. 4. 5.
Character Capacity Capital Collateral Conditions
Closed or open end credit? Mortgage, automobile, and installment loans for furniture, appliances and electronics
Closed-end credit
one time loans that the borrower pays back in a specified period of time and in payments of equal amounts
Closed-end credit
a valuable asset that is pledged to ensure loan payments
Collateral
general economic conditions that can affect a borrowers ability to repay a loan
Conditions
The use of credit for personal needs (except a home mortgage). It's based on trust in people's ability and willingness to pay bills when due.
Consumer credit
an arrangement to receive cash, goods, or services now and pay for them in the future
Credit
Agencies that collect information on how promptly people and businesses pay their bills
Credit bureaus
____________ obtain information from banks, finance companies, stores, credit card companies, and other lenders
Credit bureaus
Average cardholder has > 9 credit cards Convenience users vs. Borrowers Finance charge = total amount paid to use credit ‣ "Teaser rates" Reward programs
Credit card
Electronically subtract money from your savings or checking accounts. Most commonly used at ATMs
Debit card
3 major credit bureaus
Experian, TransUnion, and Equifaxt
Sets procedures for promptly correcting billing mistakes, refusing to make credit card payments on defective goods and promptly crediting payment
Fair Credit Billing Act (FCBA)
the total dollar amount paid to use credit
Finance charge
• Loan based on your home equity ◦ Current market value of your home minus the amount you still owe on the mortgage • Interest is tax deductible • Should only be used for major purchases
Home equity loans
Maximum home equity loan =
Home value * ___% - mortgage balance
Interest formula:
I = Principal x interest rate x time
Finance charge formula:
Interest + service charge
the ability to purchase using a mobile device
Mobile commerce
A line of credit in which loans are made on a continuous basis and the borrower is billed periodically for at least partial payment
Open-end credit
Closed or open end credit? Use as needed until line of credit max reached ◦ Credit cards ◦ Department store cards ◦ Home equity loans • You pay interest and finance charges if you do not pay the bill in full when due • Revolving check credit • Bank line of credit
Open-end credit
A prearranged loan from a bank for a specified amount, also called a bank line of credit
Revolving check credit
How to protect your credit from theft or loss • ________ any papers that contain personal information • _______ your accounts immediately if you suspect an identity thief has accessed the account • Be sure your credit card is ________ after a purchase • Keep a record of credit card _______ • Notify your ____________ immediately if your card is lost or stolen
Shred Close returned numbers credit card company
interest computed on principal only and without compounding
Simple interest
Your credit files can include: _____________
employer(s), position(s), income, address, checks returned, etc.
Home equity loans should be used for major expenses such as __________ or _________. These loans have interest that is tax-deductible.
home improvements or education
The periodic charge for the use of credit is called ________.
interest
A ________ is the maximum dollar amount of credit the lender has made available to a borrower
line of credit
Disadvantages to consumer credit • Temptation to ___________ • Can create long-term ___________ and slow progress toward financial goals • Potential loss of __________ due to late or non-payment • Ties up future ________ • Credit costs ________ - more costly than paying with cash
overspend financial problems merchandise income money
What to do if your identity is stolen?
~ FIRST File a police report ~Contact the three major credit bureaus ~Contact creditors
3 most common types of closed-end credit:
1. Installment sales credit 2. Installment cash credit 3. Single lump-sum credit
FICO scores generally rant from ______ to _______. • Higher score = ______ risk (the higher the better)
350 to 850 less
The percentage cost (relative cost) of credit on a yearly basis. Yields a true rate of interest for comparisons with other sources of credit
Annual percentage rate (APR)