Personal Finance: Chapter 5- Consumer Credit
Calculate APR (one time or monthly)
=2 x Number of payment periods in one year x Dollar cost of credit/ Loan amount (total number of payments to pay off the loan + 1) = 2 x n x I/ P(N+1)
Using market values and net worth of home to determine borrowing ability
Capital is the amount of your assets that exceed your liabilities or the debts you owe. Lenders want to be sure that you have enough capital to pay back a loan.
Cash advances vs. credit card payments
Cash Advance- a loan billed to your credit card -it is more expensive to take out a cash advance than to charge a purchase to your credit card. Use cash advances only for real emergencies
Calculate monthly interest given APR
Cash advance fee + interest for one month
What is a credit bureau?
an agency that collects information on how promptly people and businesses pay their bills
Calculating interest
interest = principal x rate x time I = P x R x T
20% rule
is the maximum percentage you can spend of your net worth
What should you do if you are denied credit?
-ECOA gives you the rights to know the reasons -after receiving info you can contact the credit bureau and ask for a copy of your credit report -can not get charged a fee if you ask to see files within 60 days of notification of denial -entitled to ask to investigate inaccurate records
Calculating add‐on interest, monthly payments, and APR
-Interest is calculated on the full amount of the original principal, no matter how frequently you make payments.
What is consumer credit? Why is it important? What are two types?
-refers to the use of credit for personal needs (except a home mortgage) 1. Closed-end credit: One-time loans that the borrower pays back in a specified period of time and in payments of equal amounts. 2. Open-end credit: A line of credit in which loans are made on a continuous basis and the borrower is billed periodically for at least partial payment.
What if someone stole your identity? How can you better protect yourself online?
1. Contact the credit bureaus 2. Contact the creditors 3. File a police report -Tearing or shredding any papers w/ personal info -Carefully look at ATM machine to see if there are extra wires, strings, or cords that should not be there
Name the two general rules of measuring credit capacity
1. Debt Payments-to-income ratio: calculated by dividing your monthly debt payments by your net monthly income. 2. Debt-to-equity ratio: The debt-to-equity ratio is calculated by dividing your total liabilities
What two main things should you remember when you borrow money?
1. Make sure the benefits of purchasing now outweigh the cots of using credit 2. When misused, credit can result in default, bankruptcy and loss of creditworthiness
What should you do if there is a billing error on your statement?
1. Notify your creditor in writing and include info to support case 2. Pay the portion of the bill that is not in question 3. Creditor must acknowledge letter within 30 days 4. Within TWO billing period (not longer than 90 days) the creditor must adjust your account or tell you why bill is correct 5. If there IS a mistake you don't have to pay any finance charges on the disputed amount 5. If there is NOT a mistake creditor must send an explanation of situation and state what you owe
Calculate a cash advance fee
2% of Cash advance amount
Calculate a debt payment‐to‐income ratio
Divide monthly debt payments (not including house payment) by net monthly income
What does it mean to "live within your means?"
Don't spend more than you have