Mizzou K12 Personal Finance, One Half Unit- Final

Different Ways Credit Card Companies Figure Out Interest

1. Average daily balance 2. Adjusted Balance 3. Previous Balance 4. Past-Due Balance

How to avoid billing errors and discrepancies

1. Document 2. Communicate

Ways to prevent financial problems

1. Educate yourself 2. Develop a budget, maintain it, and adjust as needed 3. Be on the lookout for warning signs 4. Ask for help before money problems become serious

What are the 5 types of medical insurance

1.Hospitalization 2. Surgical 3. Regular medical 4. Major medical 5. Comprehensive medical

What do "prepaid" credit cards require

Deposits in advance

Liability Insurance

Designed to cover an individual held responsible for the loss or damage of someone else's property or for the bodily injury of another person. Liability insurance will cover the judgment against you up to the limits of the insurance policy you have purchased

Borrowers

Do not pay the balance in full each month

Examples of Credit Bureaus

Equifax, Experian, and TransUnion

Smart Card

Has a special computer chip that can hold a large amount of data. Offered by some creditors, the smart card can have an assortment of features and store a variety of data, from your driver's license to your credit history, or even your entire medical history

Grace Period

The period of time between the billing date and the due date during which no interest accumulates

Policyholder/Insured

The person for whom the risk is assumed

Economic Risk

The possibility of financial loss that may result

Risk

The possibility of suffering a loss or injury

Trust

The relationship between the debtor and the creditor, what the credit system is based on

Exceed-Line-of-Credit cost/fee

There is often a cost (or at the very least, a warning) if the credit card holder exceeds the line of credit

How is a FICO/credit score determined

This score is assigned using a mathematical model that analyzes a person's credit history. Lenders use this score to gauge the risk a borrower represents

Trade Credit

Used by a business that receives goods from a wholesaler or another business on credit, which will be paid off in a specified period of time and under agreed-upon terms

Consumer Credit

When individuals borrow for personal needs

Cash Advance

When the credit card company pays another credit card bill for you, or sends you a check to spend as you wish

What is the 20-10 Rule

You should never borrow more than 20 percent of your annual net income, and monthly payments should not be more than 10 percent of your monthly net income

Capital

Your assets and your net worth

Personal Property

all the things of value you own other than real property (clothes, furniture, appliances, toys, jewelry, etc)

APR

The interest rate percentage you must pay for one year

Secured Loan

The lender has the right to the property used as collateral if the debtor defaults (fails to repay the loan)

Credit Limit

The maximum balance that can accrue to the card at any given time

How to establish good credit

-Build a consistent work history. It is no accident that on any credit card application you are asked how long you have been at your current job. Job stability equals higher probability of making payments. -Open a checking account and keep accurate records so you never bounce a check. -Open a savings account and make regular deposits, even if the amounts are small. It's your ability to keep a disciplined savings history that interests creditors. -If you are of age, apply for a credit card. (Gasoline or department store cards are the easiest to obtain.) -Pay all your debts (credit cards and loans) on time. Avoid making just minimum payments on credit cards. -Attempt to correct any errors involving your finances as quickly as possible. Take precautions to prevent theft or misuse of your credit information. -Do not let anyone else use your credit card. -Protect all passwords related to your finances. -Be very cautious when making transactions over the telephone or online. Make sure that companies are reputable and that transactions are secure.

Advantages of Credit

-Credit allows us to buy now and pay later. We can acquire needs and wants immediately rather than waiting until we have the cash on hand. In the case of expensive items like cars or homes, it would take many years to save enough cash to purchase these items if credit were not available. -Credit can enable us to purchase goods on sale for less than they would cost in the future. -Credit cards make it possible for us to carry less cash, and they are safer than carrying large amounts of cash. -Credit cards may be accepted where checks are not. -Using credit builds a credit history. -Credit cards allow us to shop online or over the telephone. -Advance reservations for shows, hotels, restaurants, and airlines can be made with credit cards. -Credit and credit cards allow us to consolidate bills and make a single monthly payment on them. -A credit card statement is a good record of expenses.

Disadvantages of Credit

-Credit can lead to impulse buying and overspending. -Credit can encourage us to buy what we cannot afford. -Higher interest charges can exceed our ability to pay. -There are fees and penalties associated with buying on credit. -Credit can lead to purchasing items at inflated prices. -Credit can mean we have less money in the future to purchase goods and services because we must pay back loans plus interest and fees. -Misusing credit can cause long-term harm to our credit rating.

Warning Signs of Potential Financial Problems

-Exceeding the 20-10 Rule -Uncertainty about how much is owed on any outstanding balance -Habitually paying minimum amounts on credit cards -Having trouble paying even the minimum payment -Debts on credit cards increase regularly and rarely decrease -Exceeding credit card limits -Routinely late with payments or missing payments -No money for emergencies -Using savings to buy essentials like food or to pay utilities -Borrowing money to pay old debts; using credit card cash advances to pay bills -Skipping payments of some bills in order to pay others -Overdrawing checking accounts—"bouncing" checks -Receiving two or more notices from creditors or having your account turned over to a collection agency -Being denied credit because of a poor credit report

Open-End Credit/Revolving Credit

A creditor issues a line of credit, which is the maximum amount allowed that can be borrowed. In other words, consumers can borrow as credit is needed, but the unpaid balance cannot exceed the credit limit at any time

Bankruptcy

A legal process whereby all or some of a debtor's assets are distributed among creditors to pay all or part of the debtor's obligations when the individual has failed to pay his or her debts

Consumer Credit Counseling Service

A non-profit organization concerned with helping individuals and families prevent as well as solve debt problems

Claims Adjuster

A person who represents the insurance company and assesses the damage and determines whether it is covered by the policy

Amortization Schedule

A table that breaks down principal and interest for each payment and lists the unpaid balance after each payment is made

Bank Cards

The most popular and widely accepted type of credit card that differ depending on the bank that issued the card

Promissory Note

A written agreement to repay a loan

Personal Property Floater

Added coverage for personal items of value

Credit

An arrangement to receive cash, goods, or services now and pay for them later

Adjustable Rate Mortgage (ARM)

An interest rate that can be adjusted up or down depending on the prime lending rate that banks around the country are charging

Fixed-Rate Mortgage

An interest rate that does not change over the entire loan period

Mortgage

Any long-term loan for real estate

Credit Bureaus

Are in the business of collecting, storing, and distributing people's credit histories

How to calculate net worth

Assets minus Liability = Net worth

Property Risks

Associated with the things you own—a home, vehicles, jewelry, RVs, boats, furniture, appliances, and other possessions

Oil and Gasoline Credit Cards

Available through oil companies like Amoco, Chevron, Sinclair, Texaco, and BP and can only be used at the business issuing the card

Loan Credit

Borrowing money for a specific purpose usually involves a written contract with terms

Insurance Companies

Businesses that provide planned protection against economic losses

Travel and Entertainment Cards

Can charge goods and services on a travel and entertainment card, but the balance is due in full each month. There is no partial or minimum payment allowed. If you fail to pay the full balance, it is likely that the card will be rejected when you try to charge the next purchase

Single-Purpose Credit Cards

Can only be used at issuing business (like retail store cards and gasoline cards)

Retail Store Credit Cards

Cards issued by stores such as JC Penney, Dillard's, Nordstrom, and Macy's that may offer special discounts or privileges

What are the 5 Cs of credit

Character, capacity, capital, collateral, credit history

Closed-End Credit

Consists of one-time loans that must be repaid by a certain date. These loans are generally for a specific purpose, such as the purchase of a car, and borrowers are usually charged interest

Insurance Policies

Contracts issued by an insurance company indicating the conditions and the type of risk covered for the policyholder

Types of Credit Card Users

Convenience users and borrowers

Renter's Insurance

Covers the loss of a renter's personal property due to fire, theft, or other events

Example of Open-End Credit

Credit cards

Sales Credit

Credit offered to consumers by retail businesses in the form of store charge accounts and credit cards used to obtain a good or service, with an agreement to pay later

Average daily Balance

Creditors figure your account balance each day of the billing cycle, and you pay a daily portion of interest based on each day's balance. Thus, each day they will add all outstanding balances and purchases together and divide by the number of days in the billing cycle to calculate the average daily balance.

Adjusted Balance

Creditors subtract payments and any returns made during the month from the beginning balance, and you pay interest on the difference

Creditor/lender

The one who extends the credit (makes the loan)

Example of trade credit

How restaurants order produce on a daily basis but only their tab once a month

Past-Due Balance

If you have not paid at least the minimum due within the grace period, card issuers will charge interest on the entire past-due balance. It may be at a higher interest rate

Personal Risk

Include illness, injury, disability, unemployment, loss of income, old age, or premature death

Property Insurance

Insurance, such as homeowner's or renter's insurance, protects against damage or loss caused by theft, fire, flood, wind, or other hazards

Liability Risks

Involve injury or damage to another person or another person's property resulting from an accident, negligence, or unforeseen circumstances

What acronym should you remember when signing any credit contract? What does it stand for?

KWYS; Know What You're Signing

Real Property

Land and any attachments such as a home, garage, barn, and other buildings

Examples of Bank Cards

Mastercards, Visas, etc

What is the exception to the 20-10 Rule

Mortgage payments

Personal Insurance

Normally in the form of health insurance, life insurance, disability insurance, or major medical policies, protects against illness, accidental injury, disability, loss of income, unemployment, old age, and premature death

Types of sales credit

Open-end and closed-end credit

Convenience Users

Pay the entire balance for all their purchases every month

Amortization

Paying off the loan in installments

Debtor/borrower

Person receiving the credit

Types of Insurance

Personal, property, and liability

Insurance

Planned protection, provided by sharing economic losses

Claims

Policyholders' requests for payment for an economic loss covered by the insurance policy

Fair Debt Collection Practices Act

Prevents abuse by professional debt collectors

Equal Credit Opportunity Act

Prevents discrimination on the basis of sex, race, color, religion, and age and gives the same basic rights to all credit applicants

Formula for calculating simple interest

Principal × Interest Rate × Amount of Time = Simple Interest

Fair Credit Reporting Act

Protects the privacy and accuracy of information in a credit check AND regulates the use of credit reports

Fair Credit Billing Act

Provides a procedure for consumers to correct mistakes appearing on consumer credit accounts

What are the two categories property is organized into

Real property and personal property

Previous Balance

Regardless of payments made during the month, you pay interest on the opening balance. This method is usually the most expensive

Collateral

Something of value that the debtor owns—usually of equal or greater value than the amount of the loan—which the creditor can claim if the debtor misses payments or cannot repay the loan

Insurance Provisions

Specify the exact coverage and the terms of the contract. Coverage is limited to the policy statement

Truth in Lending Act

States a consumer must be fully informed of all costs and conditions associated with a loan

What characteristics do lenders evaluate on a credit application

The 5 Cs (character, capacity, capital, collateral, credit history)

Who assigns the best known credit score

The Fair Isaac Corporation, whose FICO score is commonly used when determining risk factors for people applying for mortgage loans

Deductible

The amount a policyholder must pay before the insurance company pays a claim

Debit Card

The amount of a purchase is automatically debited, or deducted, from a linked bank account. Using a debit card is similar to paying with a check or cash, because you are paying at the time of purchase

Terms

The conditions associated with obtaining credit or borrowing money

Premiums

The costs for insurance coverage that are paid by the policyholder. Premium payments are made as specified in the policy, usually monthly, every six months, or annually

Posting Date

The date that the credit card purchase was posted as a debit to your account

Transaction Date

The date that you actually purchased the goods or services

Principal

The dollar amount that an individual borrows

What are the two key factors when applying for a loan

The finance charges and the annual percentage rate (APR)

Delinquency-Rate APR

The interest rate increases if your payment is late or you do not pay the minimum each month

Three types of credit

loan, sales, and trade credit

Ways to repay closed-end credit

single payment or installment payments