PFR ch. 7-8 review
Your credit card computes interest using the average daily balance method. Your previous balance is $2000, you make purchases of $500 and payments of $300. Your annual interest rate is 18%. What is your new balance?
$2000 + $500 - $300 = $2200 (adjusted balance) $2200 x 1.5% (.015) = $33 (monthly interest charge) $2200+ $33 = $2233 (new balance)
What is the typical down payment requirement for a mortgage?
10-20%
How long is a typical billing cycle?
20-25 days
What is a balloon payment?
A type of mortgage loan that requires a large payment at the end of the loan to pay it off. Borrower gets lower payments but this messes with the amortization schedule which causes the balloon payment.
Define service credit
Ability to receive services and pay for them later (i.e. electricity bill, dentist visit)
What is a security deposit?
Amount you pay (typically one months rent) to the landlord before you move in. This is kept by the landlord until you move out to pay for any damage you may cause to the apartment.
Give an example of financial responsibility
Being able to provide for your family
Give an example of financial irresponsibility
Buying something that you cannot afford
Define collateral
Collateral is property that is pledged as security for a loan. If the loan is not repaid, the lender can repossess or foreclose on the collateral
What 5 steps should you follow when reviewing your credit card statement?
Compare charges to your receipts Verify payments you have made Verify credits (returned items) Note any fees or penalties Verify interest amount and new balance
Name the 3 benefits of credit
Convenience and rewards, increased spending power, records and protection
What is the difference between a credit card and a charge card?
Credit card does not have to be paid in full each month. Charge card must be paid off each month.
Who is the debtor and who is the creditor?
Debtor is the person borrowing money. Creditor is the person or bank lending the money.
List the 5 steps of a buying plan
Define your spending goal, choose the item to buy, define criteria, set a timeline, set a spending limit
What is the difference between depreciation and appreciation?
Depreciation means the value goes down (car). Appreciation means value goes up (generally house values go up)
What is the danger of oral contracts?
Difficult to enforce
What is the difference between variable and fixed interest rates?
Fixed rates do not change while variable rates can change without notice
What should you do before moving in with a roommate?
Have a conversation to ensure that you have compatible living habits...cleanliness, have a job, social life, etc
What does an amortization schedule tell you?
How much your payment is, how much goes to interest and principal, and what your balance is at every scheduled payment of the loan.
When can a credit card company raise your rate?
If they deem that you are a higher credit risk (i.e. late payments or open new accounts). Can also change rate by giving you a notice of the change...then you can either agree to it or cancel the card.
Why is leasing a car usually not a good idea?
If you end up buying the car, you will usually pay more in the long run by starting out on a lease. If you do not buy the car, then you will go from one lease to another and always have a car payment.
Name 3 ways to avoid credit costs
Keep number of cards to a minimum, comparison shop for credit, consider financing arranged by seller, time your purchases with your billing cycle, take advantage of rewards and rebates, pay your bills on time
Name 3 penalties or fees on a credit card
Late fee, bounced check fee, over the limit fee, cancellation fee
Why should you not click on pop-up credit offers?
May be a scam to get your personal information
What does it mean to consolidate loans?
Refinance several loans into one new loan...often used to take several student loans into one
What is the difference between revolving and installment debt?
Revolving debt can be used again and again up to a certain limit. Minimum payments are due each month but the debt is rolled over from month to month. Installment debt is a one-time loan that is paid off in monthly installments over a set period of time.
Name 2 tenant rights
Right to possess and enjoy property rented. Right to use common areas.
Name 2 landlord rights
Right to receive rent in timely manner. Right to inspect property. Retain security deposit
What is the difference between a secured and unsecured loan?
Secured loan uses collateral (i.e. car or house) where unsecured does not use collateral (loan made just on promise to pay it back). Secured loans are usually larger with lower interest rates. Unsecured are usually smaller with higher interest rates.
What is the difference between a subsidized and unsubsidized student loan?
Subsidized= interest does not start until you are out of school. Unsubsidized= interest starts from day one.
When referring to a house, what is equity?
The difference between what you owe and the value of the house. House is worth $100,000 and you owe $60,000 on the mortgage...then you have $40,000 in equity (ownership)
Why is it important to consider the economy when using credit?
When the economy is strong, interest rates are usually higher.
What does it mean to be upside down in a loan?
You owe more than what you bought is worth. Owe more on car or house than it is worth.
What is a prepayment penalty?
penalty for paying off a loan early
