Personal Finance Credit

Casey has an amortized loan payment of $400, and the interest they owe for that month is $50. By how much does Casey pay down the principal?

$350

If your credit card limit is $800 and your outstanding balance is $725, what is the largest amount you can charge on that card in the upcoming month?

$75

What value should you keep your credit utilization percentage below?

30%

What is the scale for minimum to maximum possible credit score?

300-850

the average annual percentage rate (APR) on a payday loan

400%

Why is it better to have a high credit score than a low one?

A higher credit score means you will be more likely to be approved when applying for credit, more likely to get lower interest rates, and more likely to have positive outcomes when applying for things like a job or telecommunications services (phone, TV, internet).

Schumer box

A standardized way of presenting the key terms of your credit card agreement

How does an annual percentage rate (APR) for mortgages differ from a more traditional interest rate?

APR includes other applicable fees, taxes, insurance, and penalties in addition to the interest rate

One downside of an adjustable-rate mortgage is that it is riskier than a fixed-rate mortgage. Explain why.

Adjustable rate loans have an interest rate that changes along with the broader economy and markets, making your interest rate and the amount of your monthly payment variable; you risk not being able to afford your monthly payments if interest rates rise

what action would MOST likely increase your cost of attending college?

Attending an out-of-state college

Many "buy now, pay later" loans have no interest or low-interest. How do they make a profit?

Business owners pay a fee on each transaction

Consolidating multiple student loans into one payment can help by lowering your monthly payment. But what is the downside?

By lowering your monthly payment, it can increase the total amount you will pay back.

What should you do if you find errors in your credit report?

Contact the credit reporting agency or the company that provided the information

What DOESN'T represent an installment loan?

Credit Card

What type of federal student loans can be taken out by your parents/guardian to help pay for your college education?

Direct PLUS Loans

What are the three credit reporting agencies you would possibly need to contact to report an error on your credit report?

Experian, Equifax, and TransUnion

Who qualifies for a Direct Plus Loan?

Graduate students, Parents of a college student

Describe one downside to borrowing the maximum allowed amount of federal student loans.

If you're borrowing the maximum amount, that means you'll have to take out unsubsidized loans. Those loans will start accruing interest as soon as you accept them, so you will have to make payments on that interest if you don't want it to keep piling up.

It's beneficial to use some of your available credit because...

It shows you can responsibly use credit and build your credit history

It is best to avoid these in order to improve your payment history...

Late payments

why are secured loans considered less risky to the lender?

Lenders can take valuable collateral if you fail to repay your loan

At the end of 2020, "buy now, pay later" services became increasingly popular. What are they?

Loans that allow you to pay in smaller amounts

According to data from 2020, what types of purchases are people making with "buy now, pay later" loans?

Mostly discretionary items like shoes & beauty products

If you buy a $1000 bicycle, which credit card payoff strategy will result in your paying the LEAST total amount?

Pay $250 per month until it's paid off

The video advises you to "be a deadbeat." What does that mean?

Pay your credit card bill in full and on time every single month, thus paying no interest or fees

what is true about payday loans?

Payday loans get borrowers into a sometimes inescapable cycle of borrowing money because of the high interest rates and fees

what category makes up most of your credit score?

Payment history and credit utilization

According to Lisa Servon and Joe Coleman, what need are payday lenders filling?

People often need access to credit to handle an emergency or pay for day-to-day expenses, and if you don't have a credit card there's no real way to get a small, short-term loan at a fair rate

Which word represents the total cost of the item you're purchasing on credit minus any down payment you make upfront?

Principal

When taking out student loans, what do you call the signed agreement to pay them back?

Promissory note

Your friend tells you after doing all their research they have chosen the graduated repayment plan. What assumption are they making about their future income?

Since payments will be higher in the later years of a graduated repayment plan, they are likely assuming that their income will be higher as the years go on.

Ideally, which repayment plan would you choose in order to pay the lowest total amount of interest?

Standard

What is an outstanding balance?

The amount you still owe after you have made your most recent payment

Imagine you're looking at attending a college whose tuition is $10,000 per year. Would you be able to pay your tuition only using federal student loans your first year?

The annual borrowing limits for dependent and independent students are $5,500 and $9,500, respectively. You would not be able to cover the cost of tuition during your first year using only federal student loans.

how a credit card works

The credit card company extends you a line of credit. You purchase "stuff" and then have the choice to pay the balance in full or a minimum payment each month.

how your payment history is used as a measure of your creditworthiness.

The general idea is that if you've been responsible enough to make on-time payments in the past, you can probably be trusted to make them in the future.

two statements that correctly describe a Direct Subsidized Loan and a Direct Unsubsidized loan.

The government pays the interest on a Direct Subsidized Loan while the student is in school and during the grace period, The borrower is responsible for paying all of the interest on a Direct Unsubsidized Loan

As you move through your payment schedule on an amortized loan, what will happen to the interest portion of each month's payment?

The interest portion will shrink

How do the Annual Percentage Rates (APRs) on payday loans get to be so high?

The loan amounts are small, but the fees charged are relatively high and are renewed on a very short time-scale

Why is it more difficult to get out of debt when only paying the minimum payment?

The majority of your minimum payment is going toward interest and finance charges and only a small amount toward the principal

As the months progress on an amortized loan...

The payments stay the same, but the principal is paid down more quickly

A fully amortized payment is split into which two components?

The principal and the interest

What causes the total amount of interest paid on a mortgage to be so much higher than on other types of debts?

The principal on a mortgage is high and the term is long

the details of any loan will include what 3 components?

The principle, interest rate, loan term

Why are payday loans so popular?

They are accessible to people who need to borrow small amounts of money and don't have any better options

What function do both deferment and forbearance each serve?

They both allow you to temporarily stop making payments.

In the video's amortization example, the borrower makes a $711 payment, where $375 goes toward paying interest and $336 goes toward paying the principal. Should the borrower be worried that they'll never pay off the mortgage? Why or why not?

They don't need to be worried. This is typical in the early stages of a loan, and every month, as long as some money is going toward principal, the principal decreases and then the next month's interest portion decreases.

What is one major reasons so many people are attracted to these "buy now, pay later" loans?

They inform you up front of the full amount you'll pay

What is the relationship between a person's need for payday lending and their income volatility? Why do you think this is?

Those who struggle with income volatility are more likely to use payday loans. This is because they do not have a steady flow of income and need quick access to money at times where they are not making enough money to pay bills. But, because of the high APR of payday loans, people who are already struggling financially are then hit with huge fees, making their overall financial situation worse in some cases.

Why do lenders look at credit reports?

To decide whether you are a qualified or risky candidate for credit

what action would most likely decrease a person's net worth for at least the next 6 months?

Use a loan to buy a brand new car

At what point are you no longer eligible to receive Direct Subsidized loans?

When you are no longer an undergraduate student and are now a graduate or professional student.

What is the main difference between deferment and forbearance?

With deferment, your payments will stop and interest will not accrue on any subsidized loans (interest will still accrue on unsubsidized loans). With forbearance, interest will continue to accrue, even on subsidized loans.

What is the advantage of paying your credit card balance in full each month?

You avoid paying any interest and fees

What about forbearance is true?

You don't have to make monthly payments but interest still accrues

what is a good reason to choose a 30-year, fixed-rate mortgage?

You want low, predictable monthly payments

Your friends and you notice a neighbor who always has brand new clothes, shoes, and electronics. What would you need to know in order to tell if this neighbor is actually wealthy?

You would need to know assets (such as car, house, other major possessions, as well as cash, investment accounts, etc) and how much money they OWE (do they have a large mortgage or tons of credit card debt?)

If you do not make your loan payments on time, what will happen?

You'll be charged a late fee & it can hurt your credit

How does the salary you will earn after graduating college factor into how much you should take out in student loans?

You'll want to make sure you don't take out too much in student loans because your student loan payment should only be a small percentage of your salary.

What is not on your credit report?

Your checking account balance

What is the benefit of having a fixed interest rate loan?

Your interest rate stays the same, therefore, the amount of interest you pay stays the same

a variable rate loan is not usually

a better option

ARM

adjustable rate mortgage

having a good credit score, making a larger down payment, and finding a cosigner with credit are all ways to what?

decrease your interest rate

reasons an individual could have that much debt and still consider it worthwhile

● A mortgage ● Life-saving medical care ● A loan that launches their (successful) small business

Briefly describe the interest rates associated with the different types of federal student loans.

● Direct subsidized and unsubsidized loans for undergraduate students are the lowest ● Direct unsubsidized loans for graduate or professional students are considerably higher ● Direct PLUS loans have the highest interest rates

If you're trying to gain access to a credit card before you turn 21, which of the suggestions rely on the support of a parent or guardian?

● Get a co-signer ● Become an authorized user on another person's credit card

what are some other reasons people say they are in debt?

● Student Loans ● Medical Bills ● Rent ● Speeding Tickets ● Tax Debt

What requires working with some sort of financial institution?

● Talking with existing lenders ● Using a credit union ● Using a community bank

It might seem tempting to choose an income-driven repayment plan since the remaining balance is forgiven after 20-25 years. What are some drawbacks you can think of if you were to choose an income- driven plan when you could be making higher payments?

● Your payment automatically adjusts based on your income, whether you want it to or not ● You will probably pay more in interest (and more in total) than if you were to choose a plan that gets paid off in 10 years

It's time for Roxanne to start repaying her student loans, which are amortized over the next ten years. Her first month's payment due is $396. How much should she expect to owe next month?

Exactly $396

If you can afford it, why is it a great idea to pay MORE than your amortized payment on a car, home, or other loan?

You will pay your loan off faster, You will pay less total interest, You will pay less money overall

Consolidation __________ your monthly payment and often means you will pay __________ in interest over the life of your loan.

lowers, more

Which of the four factors directly impact your total cost of using the credit card?

Annual fee, APR, and penalty fees/rates

What type of marketing techniques do predatory lenders use?

They offer instant approval and quick cash

In general, why do so many different types of companies check your credit report?

They want to make sure you're likely to make consistent and timely payments

Why should you review your credit report regularly?

To monitor how different factors are impacting your FICO score, To check your credit report for accuracy

Why is choosing an appropriate mortgage potentially even more important than choosing an appropriate auto loan?

● Homes are much more expensive, so you'll end up paying a TON in interest ● Mortgages are a much longer commitment, compared to the few years of an auto loan ● While repossession of a car and a house can both be devastating, it's often easier to find a cheaper car than a cheaper house if you can't afford your payments (due to housing markets in your area)

Observations about housing debt in the US

● Housing debt is substantially greater than non-housing debt ● Both housing and non-housing debt have been increasing in recent years ● Of non-housing debt sources, student and auto loans are the largest categories ● Student loans have been increasing faster than any other category ● Other debts, outside of housing, auto, student, and credit cards, are minimal compared to these main categories

What might be some pros and cons of asking friends or family members for financial help?

● PROS: They may be happy to help, low/no fees, maybe allow extended time for repayment, you could potentially help them out later on ● CONS: Might strain the relationships, may put conditions on the loan that you don't like, embarrassment/shame if you can't pay them back or have to ask again, judgment

If Buy Now, Pay Later loans are just breaking your payment into 4 equal parts, how could this deal possibly become problematic to the borrower?

● The smaller payments trick borrowers into thinking about that smaller amount, not the total, so they overspend more than if they had to pay it all at once ● The smaller payments are due in a relatively short amount of time, so there's not a lot of extra time to earn more money between payments ● Borrowers do more than one Buy Now, Pay Later loan at a time, which means they owe multiple "small" payments all at once