FCHE Chapter 5
calculating interest charges
(loan interest rate / 12 months) * (loan balance) = interest charged on loan for one month
benefits of credit cards
- Can be used at the borrower's discretion and convenience - has flexible repayment options. - nearly essential when renting cars, reserving hotel rooms, or booking airline and other travel tickets. - Responsible use of credit cards can also help build your credit score so that it will be easier to qualify for other loans, such as auto loans and mortgages. Caution: if individuals become careless or reckless in their use of credit cards, they could suffer serious financial difficulties.
getting a copy of your credit report
1. Gather the following information: - Name - Addresses for the past 2 years - Social Security number - Date of birth - Payment information, such as student loan or car loan payment 2. Go to the annualcreditreport.com website. 3. Input your personal information and request your credit report from each of the credit bureaus. 4. Print out your credit report from each of the credit bureaus and keep it in a safe place.
building good credit
1. Open a line of credit; for example, apply for and obtain a credit card. 2. Buy necessary items like groceries and gas. 3. With the first monthly statement, pay off the balance. 4. Repeat this process each month - keeping the account active.
three required elements of written check
1. The name of the person or company that gets the money. 2. The date. 3. The amount to be paid. The amount needs to be recorded both in numerical and written form.
checking account advantages
1.Liquidity: Quick and easy way to access cash. 2.Direct deposit of paychecks: A way for an employer to transfer your earnings directly to your bank or credit union account. 3.FDIC insurance: Protection of all deposits up to $250,000 in case the bank or credit union fails. 4.Debit cards: Usually comes with a checking account. Acts as an electronic version of a check.
credit score ranges
300-550: This range is low - usually leads to rejections for new credit. 550-620: This range is considered subprime - indicates a high-risk borrower. High interest and fees. Limits amount of credit issued. 620-680: This range represents the minimum score to be accepted for most loans. 680-740: This range represents individuals with good credit. Terms and conditions of loans will be favorable. 740-850: This range is considered excellent. Borrowers have stellar previous payment histories and receive the best borrowing terms.
who reports on credit
A credit bureau is a company that maintains housing and credit files on consumers. There are three primary national credit bureaus: Equifax, TransUnion, and Experian. Fair Isaac Corporation (FICO), the nation's leading credit-scoring company.
how credit reports are used
A lender will request your credit report to determine creditworthiness when you apply for credit.
secured credit card
A type of credit card that is backed by a savings account used as collateral on the credit available with the card. - Provides a way to establish credit without a co-signer - Requires the borrower to deposit the full amount of the line of credit at the bank as collateral before the credit card is issued
FICO score: new credit
Applying for new credit or just receiving new credit can decrease your FICO score in the short run. (The good news is that these inquiries have only a 14-day negative effect on your overall score.)
federal reserve act of 1913
Bank routing numbers with a bank account number allows a check written in one city at one bank to be cashed in another city at another bank.
payment methods compared
Debit cards have FDIC or NCUA insurance, fraud protection and generally low or no fees. Prepaid cards have loss potential and generally higher fees. ACH is generally preferred by employers to pay wages and by lenders to schedule loan payments.
FICO score: payment history
Essentially, lenders are looking for individuals who make on-time payments on credit cards, department store credit cards, retail accounts, mortgage loans, and installment loan
avoid applying for lots of new credit cards at one time
Individuals with a longer positive credit history tend to have a higher credit score. Opening new credit lines can decrease your score, as can having a flurry of credit (loan) applications. Scores will drop because other lenders will see that you may be on the verge of going into more debt in the future
credit usage ratio
Lenders look at the total amount of credit lines available to you and compare that to how much you have used. Total Credit Used/Total Credit Available < 30%
loan providers
Mainstream financial service providers: Banks, credit unions, and other deposit institutions. Alternative financial service providers: Auto title loans, payday loans, tax refund loans, pawn shops, or rent-to-own stores. tend to be more expensive but more convenient
inputs influencing credit score
Payment History - 35% - Lenders look for on-time payments on loans Amount of Credit - 30% - Available credit Length of Credit - 15% - Longer = better New Credit - 10% - Less is more Types of Credit - 10% - Mix of types
hybrid methods
Peer-to-peer payment (P2P) and Automated Clearing House (ACH)
elements of a loan
Principal: The amount of money you borrow (the loan) that must be repaid. Interest: The amount paid to the lender for the use of their money - determined by the interest rate charged on the loan. Loan fees: Fees to cover processing or managing the loan.
vary your credit mix
Someone with 10 credit cards and no other credit will have a lower score than someone with a blend of credit cards, car loans, student loans, and other accounts. This will likely happen naturally over time as you may have a need for student, auto, and housing loans.
collateral
Something of value that can be sold in the event that the loan payments are not made by the borrower. For example, a car or a house.
FICO score: amount of credit
The amount of credit someone currently has accounts for approximately 30% of a person's FICO score. This gets a little tricky, but in general, a high credit limit—the maximum amount you may borrow—is a good sign.
loans and APR
The annual percentage rate (APR) is a way to simplify comparison shopping for consumers (disclosure is required by the federal government). - A broad measure of the cost of borrowing: includes both the interest rate charged and any required fees for the loan.
periodic interest rate
The interest rate per period. It can be found by dividing the annual interest rate by the number of periods per year.
debit vs check
The key difference is that with a check, money is usually transferred from your account to the merchant only after the seller deposits the check. With a debit card, the transaction occurs instantaneously.
finance charges
The total amount of fees and interest charged by the lender for a loan.
revolving debt balances low
This means you should pay off as much of your unsecured debt as you can on a monthly basis.
FICO score: types of credit
Types of credit make up the remaining 10% of a FICO score. To have the highest credit score possible, you need a mix of credit types. Revolving credit includes credit cards (think Visa®, MasterCard®, and Discover®). Installment credit includes student loans, mortgages, personal loans, and car loans. The big difference between the two types of credit is that the monthly payment on a revolving line of credit can vary, whereas installment loan payments tend to be fixed.
inquiry
When a lender requests your credit report to determine creditworthiness. The lender uses the report to determine the probability that you will make timely payments in the future. Every 30 days or so, the lender will report information to the credit bureaus about your outstanding balance and payment timeliness.
developing credit scores
Within the financial world, credit scores are used to predict which people are likely to manage their debt wisely in the future. The most widely used credit score was created by Fair Isaac Corporation, referred to as a FICO® score. FICO scores can range from a low of 300 to a high of 850. Higher credit score = lower credit risk
FICO score: length of credit history
Your length of credit history is the third input of a FICO score (15%). The longer you have had an account, the better your score. This is the reason some consumer advocates recommend keeping a credit card active even if you rarely use the card.
credit card
a loan that can be used at the borrower's discretion and convenience and has flexible repayment options. - Generally essential when renting cars, reserving hotel rooms, or booking airline and other travel tickets. - Responsible use of credit cards can also help build your credit score making it easier to qualify for other loans, such as auto loans and mortgages.
automated clearing house
a nationwide network of banks, credit unions, and other depository institutions that send each other credit and debit transfers electronically, is growing in importance.
credit score
a number assigned to a person that indicates to lenders their capacity to repay a loan. A consumer's credit score is related to, but not included in, the actual credit report. FICO uses a proprietary algorithm to determine someone's score based on their credit report.
credit report
a summarized accounting of your credit history.
check
a written order to a bank to pay a third party.
public records
additional info such as bankruptcy filings, court ordered liens, or court judgments that are included in your credit report
co-signer
an individual, in addition to the borrower, who will be held responsible for repayment of the debt. If a borrower lacks a credit history and has a lower income, lenders are much more willing to approve the application if there is a co-signer with a strong credit history that guarantees prompt repayment.
credit applications
applications you submit and that contain employment information and addresses and give additional info on your credit report
traditional methods
cash, coins, checks
prepaid card
consists of money loaded on to the card in advance that can then be used to make payments in the future. Unlike a debit card, you don't need a bank or checking account to get a prepaid card.
electronic methods
debit or prepaid cards
current creditors
firms that you have borrowed money from. The information that goes into your credit report comes primarily from current creditors
peer to peer payment
for example, an app that allows you to transfer money from your bank to someone else in your personal network. The transfer occurs from one smartphone to another.
ACH credit transfers
include wages, salaries, Social Security benefits, and tax refunds (Money coming into an institution).
fixed installment loans
lending contracts where the borrower agrees to repay money via fixed monthly payments for the life of the loan. - The borrower gets all the money at once and repays over time. - The loan balance decreases until it's paid in full. - Common fixed installment loans include auto loans, education loans, and mortgages.
check alternatives
money orders, certified checks, cashier's checks, and travelers checks: all rapidly being replaced by electronic payment methods
identity theft
occurs when someone else uses your personal information, such as your name and Social Security number, to obtain credit.
Fair credit reporting act
requires Equifax, Experian, and TransUnion to provide you with a free copy of your report once every 12 months. - You ought to get a copy just to make sure that everything in your report is accurate. Credit reports can have errors. - If you find an error on your credit report, you can contact the credit bureau to have the information corrected.
amortization table
shows the amount of interest and principal associated with each fixed loan payment over the entire loan term.
a bad credit risk
someone who has a history of not paying bills on time or not repaying their loans.
variable installment loans
structured so that the loan will be paid off within a certain time period, however, payments may fluctuate. - If the interest rate changes, then the payments due and interest charged will change each month. - Caution - the change in interest charged may increase or decrease the loan payments or change the length of the loan. - Example, Adjustable Rate Mortgages (ARMs)
calculating loan payments
the amount paid per period can be found by multiplying the periodic interest rate by the loan balance. monthly loan payment = interest charged + loan principle. loan balance is reduced by the principle payment amount each month
loan term
the length of time one has to repay the loan.
checking account reconciliation
the process of comparing your check or debit card register with your monthly bank statement.
The best protection against borrowing is ...
to have an emergency fund: money set aside for expenses that have not been budgeted. Without one, you may need to borrow money by obtaining a loan if large expenses occur, such as paying for unexpected car repairs or college tuition.
transaction methods
traditional, electronic and hybrid methods
ACH debit transfers
typically are payments for mortgages, utility bills, and credit card payments (Money flowing from an institution.)
overextended
when your credit ratio is too high - suggests you might be unable to make minimum payments in the future.
basic rules to optimize credit score
• Keep revolving debt balances low • Apply the ratio rule - Credit Usage Ratio • Avoid applying for lots of new credit cards at one time • Vary your credit mix and make payments on time!
what to do if you are a victim of identity theft or credit scam
•Write to each of the credit bureaus directly, telling them that the information is inaccurate. •Write to the merchant(s) and dispute any items purchased that you did not buy. •If these actions do not work, contact the Federal Trade Commission and your state Attorney General's office. •You can also report the crime to local law enforcement.
increase credit
↑ Borrowed money from a company and used the purchased asset as collateral (e.g., buying a car, boat, motorcycle, furniture). ↑ Applied for, been accepted, and used a credit card. ↑ Took out a student loan
decrease credit
↓ Declared bankruptcy ↓ Lost a home to foreclosure ↓ Had been sued and lost the court battle. ↓ Incurred court-related judgments, liens, and unpaid financial obligations (e.g., child support, unpaid fines).
