FIN 381 Test 2 Chapter 6

Current approximation value of Josh's house is $180,000. He still has a $100,000 balance on his mortgage. His bank has agreed to let him borrow 80% of the value of his home. What is the maximum home equity line of credit available.

180,000*.8 = 144,000 - 100,000 = $44,000

Fico Credit Score

350-850. Higher score = less risk. A score if about 760 will get the best mortgage rate, and 720 to get the best auto loan deal.

Audra has a monthly net income of $2,100. She has a house payment of $900 a month, a car loan of $500 a month, and a credit card with a local department store with payments of $200 a month. What is her payment to income ratio?

900+500+100+200= 1700-900=800/2100= .38 or 38%.

Incidental Credit

credit arrangement that has no extra costs and no specific repayment plan

Credit Card Accountability, Responsibility, and Disclosure Act

Bans unfair rate increases one existing balances and restricts retroactive increases due to late payment, it helps protect college students and young adults.

Debit Cards

electronically subtract money from your savings or checking accounts at the moment of the purchase, most commonly used at ATMs

Installment Cash Credit

Is a direct loan of money for personal purposes, home improvements, or vacation expenses.

Home Equity Loan

Is based on the difference between the current market value of your home and the amount you still owe on your mortgage. You can borrow up to $100,000 or more on your phone, or 85% of the appraised value, less the amount you still owe on your mortgage.

Open-end Credit

Loans are made on a continuous basis and you are billed periodically for at least partial payments. (Cards issued by department stores, bank cards) Cannot apply for this to make a single purchase.

Debt-to-income Ratio

Monthly debt payments/net monthly income

Hannah has determined that her net worth is $60,000. She has also determined that the face value of her mortgage is $160,000. She has determined that the face value of the rest of her debt is $30,000. What is her debt to equity ratio?

Net worth = 60,000 so 30,000/60,000 = .5

Fair Credit Reporting Act

Requires disclosure to consumers of the name and address of any consumer reporting agency that supplied reports sed to deny credit, insurance,or employment.

Line of Credit

The maximum dollar amount of credit the lender has made available for you.

Debt-to-equity Ratio

Total liabilities/net worth

Convenience User

pays off the credit card balance each month (avoids interest)

Consumer Credit Reporting Reform Act

places the burden of proof for accurate credit information on the credit reporting agency.

Equal Credit Opportunity Act

prohibits discrimination on the basis of race, color, religion, national origin, sex, marital status, age, receipt of public assistance, or good faith.

Fair Credit Billing Act

sets procedures for promptly correcting billing mistakes, refusing to make credit card payments on defective goods, and promptly crediting payments

Vantage Score

Was launched in 2006. It does not count debt collections that have been paid off. The model allows for more predictive scores for those with short credit histories. It ignores negative credit history if affected by natural disasters

-Enables users to enjoy goods and services now and pay for them later. -It is often safer to use credit. They offer a "50 day float" with a grace period of 21-25 days -Some credit cards can can extend the warranty of goods -Platinum credit cards can provide medical evacuations for travelers. -Credit can indicate stability

What are some advantages of using credit

-The temptation to overspend -Can cause serious financial problems -It does not increase total purchasing power -It can tie up the use of future income -Credit costs money.

What are some disadvantages of using credit?

Single Lump Sum Credit

a loan that must be repaid in total on a specified day, usually within 30 to 90 days. Usually, but not always, used to purchase a single item.

Credit Rating

A good credit rating is a valuable asset that should be nurtured and protected. Limit your borrowing to your capacity to repay.

interest

A periodic charge for the use of credit or other finance charges.

Get copies of your credit report and review it Pay your bills on time Understand how your credit score is determined Learn the legal steps to take to improve your credit report Beware of credit repair scams

How to improve your credit score

Truth in Lending and Consumer Leasing Acts

Provides specific cost disclosure requirements for the annual percentage rate and the finance charges as a dollar amount. It requires disclosure of long term loans and conditions, regulates the advertising of credit terms.

Consumer Credit

Refers to the use of credit for personal needs (Except a home mortgage) by individuals and families, in contrast to credit used for business purposes.

1. Call your creditor 2. If dispute exists, notifiy creditor of error in writing within 60 days 3. Include your explanation of the error and your account number to the billing inquires address 4. They must respond within 30 days 5. Credit card compay has two billing periods but no longer than 90 days to correct your account or tell you why they think the bill is wrong 6. Your credit rating is not affected while item is in dispute.

The Steps to avoid and correct credit mistakes.

Credit Bureau

They simply collect information about consumers. They get information from banks, court records, finance companies, merchants, credit card companies, and other creditors.

Installment sales Credit

This is a loan that allows you to receive merchandise, usually high prices items, like appliances.

Revolving Check Credit (Bank line of Credit)

This is a prearranged loan for a specified amount that you can use by writing a special check.

Credit

This is an arrangement to receive cash, goods, or services now and pay for them in the future.

Co-Branding

This is the linkin of a credit card with a business trade name offering "points" or premiums toward the purchase of a product or service.

Closed-end Credit

This is when you pay back one-time loans in a specified period of time and in payments of equal amounts. (Mortgage loans, automobile loans, installment loans)

character: do you pay your bills capacity: your income capital: what are your assets and net worth collateral- what property do you have to pledge that the lender can repossess if you default the loan Conditions - What economic conditions could affect your ability to repay the loan

What creditors look for: 5 C's

1. Contact the fraud department of each of the three major credit bureaus 2. Contact the creditors for any account that have been tampered with or opened fraudeulently 3. File a police report

What to do if your identity is stolen.

-May have to pay -Make sure you can pay the loan -Understand the Consequences -Check the state law -Request a copy of the overdue payments

What to expect when cosigning a loan

Defective Goods or Services

You may withhold payment on any damaged or shoddy goods or poor services if you have paid for them with a credid card as long as you have made a sincere attempt to resolves the problem with the merchant.