Personal Finance II

The Five Cs of Credit

Character refers to your reputation— Capacity is your ability to repay the debt when it is due. Capital refers to your assets and your net worth. Collateral is something you own that is of equal or greater value than the loan amount. Credit history is the record of your past credit and financial practices.

borrowers

Credit card owners that do not pay their balance in full at the end of the month.

convenience user

Credit card owners that pay their balance in full at the end of each month.

Disadvantages to Leasing

Lease payments provide no ownership in the vehicle, which is returned at the end of the lease. Leases usually limit the number of miles that the car can be driven, and there is a fee for each mile over that limit. There may be fees or penalties for excessive wear and tear, ending the lease early, or other restrictions. Leases require a very stringent process of credit approval.

Types of Insurance

Personal, Property, Liability

Credit Score

The best-known credit score is assigned by the Fair Isaac Corporation, whose FICO score is commonly used when determining risk factors for people applying for mortgage loans. The score reflects your creditworthiness. Scores typically range from 300 to 850, with a higher number indicating less credit risk for the lender. People with a higher score may be able to get lower interest rates and fees. A lower credit score indicates a greater credit risk for the lender, and thus greater fees and higher interest rates for you. A FICO score of 620 is usually the lowest allowed for someone to qualify for a loan through Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). Other mortgage lenders may go as low as 580 but are likely to charge higher rates. Credit scores are important. You need to maintain a good credit rating, so be vigilant about preventing credit problems, and quickly correct any errors that you discover.

Loan Credit

borrowing money for a specific purpose. It usually involves a written contract stating the terms, principal, finance charges, interest rate, time, and repayment schedule. Loans are available through banks, credit unions, savings and loan associations, and other consumer finance institutions.

Advantages to Leasing

The down payment (up-front cost) for a lease is usually less than when buying on credit. Monthly lease payments are often lower than monthly car-loan payments. Leased vehicles are usually relatively new.

Trust

The relationship between the debtor and the creditor.

Credit bureaus

The three major credit bureaus—Equifax, Experian, and TransUnion—each maintain more than two hundred million credit files. Eventually, your name and credit history will make its way into one or more of these databases. As you learned above, the Fair and Accurate Credit Transactions Act states that each year you can obtain a free copy of your credit report from each of the three major credit reporting agencies, which are listed below. Furthermore, if you have been denied credit in the past sixty days based on information in a credit report, you have the right to request a free report from the credit bureau whose information led to that decision.

personal catastrophic policy

can be purchased to supplement the basic liability policy. This policy covers lawsuits that might result from something negative or untrue you say or write that damages the reputation of another person. These policies are for one million dollars or more and sometimes cover more than libel and slander.

Comprehensive Medical Insurance

combines all the policies discussed above: regular medical, hospital, surgical, and major medical. The comprehensive medical policy maintains the coverage and coinsurance features that would be included in the separate policies. There is generally one deductible. Premiums for the comprehensive medical policy generally come to less than the combined premium totals for the individual policies.

Insurance Policies

contracts issued by an insurance company indicating the conditions and the type of risk covered for the policyholder. The insurance company and the policyholder agree to the terms of the insurance policy.

Consumer Credit

When individuals borrow for personal needs,

rider

a contract added to the main policy.

open-end 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. Credit cards are an example of open-end credit. Goods and services can be charged anywhere the card is accepted. The credit balance, or at least a minimum payment as specified by the creditor, must be paid when it is billed (usually monthly). Interest is usually charged on the unpaid balance

Promissory Note

a written agreement to repay a loan.

Consolidated Omnibus Budget Reconciliation Act

allows individuals to continue health insurance if they change jobs or become unemployed. The Act says that if an employee was covered by a group policy and loses her job, she can continue participating in the group insurance coverage for a specified period of time. The former employee, however, is responsible for paying the full premiums. applies to those who have worked for private companies or state and local governments. The coverage usually is available for eighteen months after an employee leaves a job or is terminated, but it can last up to thirty-six months if a qualifying claim is filed during that time.

Credit

an arrangement to receive cash, goods, or services now and pay for them later. When an agreement is reached, credit is extended. It is understood that the debt must be paid back in accordance with the terms of the agreement.

Adjusted Rate Mortgage

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

Health maintenance organizations

are alternatives to health insurance

Preferred provider organizations

are health-insurance delivery systems made up of a group of health care providers (physicians, clinics, and hospitals) who contract with an employer to provide medical services to its employees.

Premiums

are 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. Normally insurance premiums have no grace period. If the payment is not made on time, there is no insurance coverage.

bank cards

are the most popular and widely accepted type of credit card, and two of the best known are MasterCard® and Visa®. As we discussed earlier, these multipurpose credit cards differ depending on the bank that issued the card. These cards are accepted widely at stores, hotels, restaurants, airlines, and other types of businesses. When you make a purchase using a credit card, you are often required to sign a credit sales-slip (either paper or electronic). Some types of stores, such as quick-serve restaurants and pay-at-the-pump gas stations, do not require the cardholder to sign a credit sales-slip. You should, however, receive a sales receipt for all credit card purchases.

Truth in Lending Act

(1968): Consumers must be fully informed of all costs and conditions associated with loans and borrowing. Before a contract is signed, lenders must inform borrowers in writing about the total sale price; the amount financed; all charges included in the financed amount; the finance charge (total dollar amount); the annual percentage rate (APR); the payment schedule and total amount of payments; the prepayment and late payment penalties (if any); and any insurance charges.

Fair Credit Billing Act

(1974): If mistakes appear on consumer credit accounts, there is a correction procedure. For instance, if you purchase a defective product using a credit card and the store will not allow you to return it, you may instruct the credit card company to stop payment for that item.

Fair and Accurate Credit Transactions Act

(2003) This law updates the Fair Credit Reporting Act. Consumers canobtain an annual free credit report from each major credit reporting agency. See the section below titled Credit Bureaus for contact information. Although the law entitles you to a free copy of your credit report, it does not entitle you to a free copy of your credit score.

Fair Credit Reporting Act

1971): This law regulates the use of credit reports. The privacy and accuracy of information are protected in a credit check. Outdated information (generally more than seven years old for most information, but ten years in the case of bankruptcy) is not to be disclosed. Under certain circumstances, the older information can be used—for instance, a loan application for more than $75,000 or the purchase of a life insurance policy for more than $150,000. Consumers have access to their credit reports and have the right to seek correction of any misinformation.

Equal Credit Opportunity Act

1974 The ECOA gives the same basic rights to all credit applicants. Discrimination is prohibited on the basis of sex, race, color, religion, national origin, marital status, age, or receipt of public assistance. The ECOA regulations are very specific about how age can and cannot be used by creditors—whether you are 18 or 80. The age at which you can enter into a legal contract is usually 18 to 21 years old, depending on the state in which you reside.

Fair Debt Collection Practices Act

1977): Abuse by professional debt collectors or anyone employed to collect debts owed to others is prohibited. The act regulates the way in which debts are collected, but does not erase the debts themselves. However, if banks or businesses are collecting their own accounts, they are not bound by the provisions of this act.

Major Medical Insurance

covers high-cost medical expenses resulting from serious injuries or long illnesses. Major medical insurance provides protection against economic risk beyond the provisions of regular medical, hospital, and surgical coverage. Stated in terms of maximum amount, the coverage may be $250,000 or higher. Generally, the policy carries a deductible requiring the policyholder to pay the first part, which may be $500 or more. In addition, the policy will likely include a coinsurance clause, meaning the policyholder pays a percentage of the total cost associated with major medical. Generally the policyholder pays twenty to twenty-five percent of the total cost after the deductible. As with all types of insurance, premiums are lower when there are higher deductibles and when the insured pays a higher percentage under coinsurance clauses. If the insurance section is stated in terms of maximum coverage, the lower the coverage, the less the premiums will be. Deductibles and coinsurance clauses are designed to discourage the filing of minor claims and to help keep down the cost of medical expense

Regular medical insurance

covers nonsurgical medical care, including doctor's office appointments, along with any required diagnostic and laboratory expenses. The policy might cover home care or hospital visits that do not involve surgery. Appointments at a doctor's office often require co-payment, or a co-pay, which is the amount the policyholder must pay for each office call. The patient's co-pay is usually in the range of $10 to $50 for each appointment. After the policyholder pays the co-pay, the insurance company pays the remainder as determined by the policy. In general, the higher the co-pay, the lower the premiums. Many people have insurance policies called basic health coverage, which combine regular medical, hospital, and surgical coverage.

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. will cover the judgment against you up to the limits of the insurance policy you have purchased.

Property Insurance

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

Personal Risk

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

Liability Risks

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

Deductible

is the amount a policyholder must pay before the insurance company pays a claim. For example, if a car insurance policy has a deductible of $500, the policyholder must pay the first $500 of any claim before the company pays the rest of the claim's cost.

Risk

is the possibility of suffering a loss or injury.

as is

it has no express or implied warranty. meaning the vehicle may or may not perform as intended. If a car has any problems, the buyer must pay the cost of repairs

express warranty

make certain promises beyond the implied warranty. An express warranty must be in writing and state what it covers (parts, labor, or both), how long it is in effect (time or mileage), and requirements and limitations. Most new cars and some used cars have express warranties.

line of credit,

maximum amount that can be borrowed

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.

Sales Credit

offered to consumers by retail businesses in the form of store charge accounts and credit cards

closed- end credit

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. There are many reasons for using closed-end credit, and the interest is usually much lower than that associated with open-end credit. There are two ways to make payments: single payment and installment payments.

warranty of fitness

or a particular purpose, meaning the product will do what the seller promises it will do. always apply unless the product is sold "as is" (in its present condition) or the seller says in writing that there is no warranty.

Amortization

paying off the loan in installments. Part of each payment reduces the unpaid balance, and the rest of the payment is the interest. An amortization schedule is a table that breaks down principal and interest for each payment and lists the unpaid balance after each payment is made.

medical payments coverage

pays minor injury costs ($5,000 or less) if a visitor is injured on your property, regardless of who is at fault. (This does not include injuries to you or your family members, which must be covered by your own separate medical insurance.)

claims adjuster

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

Insurance

planned protection, provided by sharing economic losses.

Claims

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

hospitalization insurance

provides coverage for illnesses or injuries requiring the insured's stay and/or care in a hospital. Hospital insurance pays the charges for a hospital room, food, an operating room, anesthesia, laboratory tests, X-rays, and other related cost

financial responsibility laws

require drivers to prove they can pay for an accident if they are at fault.

prepayment penalty

some loans require the borrower pay all or some of the finance charges, or there may be a prepayment fee equal to a percent of the loan, or a flat dollar amount. If the penalty is high, it may not be to your advantage to repay the loan early. Read prepayment clauses carefully. It is best if the contract includes a statement such as, "This loan contains no prepayment penalties."

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. For instance, a homeowner's policy may cover damage from fire and wind but not from floods or earthquakes.

unexpired manufacturer's warranty

the manufacturer's warranty may be transferred to the new owner.

Debtor

the person receiving the credit.

warranty of merchantability

the product will do what it is designed to do.

Property Risks

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

lemon laws

to protect consumers and provide avenues for resolving the problem. Resolutions may involve returning the vehicle for a refund or a replacement. There is a time limit for taking action under lemon laws, however, and you will need to have complete records and receipts detailing the vehicle's problems.

implied warranty

understood and do not have to be in writing. For a vehicle, that means it will run and get you from one place to another.

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. For instance, most restaurants order what vegetables they need from their produce distributors on a daily basis, but this "tab" is only paid off about once a month.

Workers' compensation

was established by state governments. Now passed by all state legislatures, it is an insurance plan providing medical and survivor benefits to workers if illness, injury, disability, or death occur on the job or due to their job.

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. Mortgage payments are not counted as part of the 20 percent, but do include all other types of credit—credit cards, vehicle loans, student loans, and medical debts. Although this rule is only a guideline, creditors often use the formula to help them decide whether to extend credit.