Personal Finance LU3 (Chapters 4 and 5)

Problematic Financial Businesses:

An estimated 17 million people in the US are un-banked, while another 20% of the population are under-banked. PAWN SHOPS: -loans through pawnshops are based on the value of the tangible possessions or other valuable items. -many low to moderate-income families use these to obtain cash loans quickly. -charge higher fees -interest rates vary from 3%-100% annually CHECK-CASHING OUTLETS (CCOs)/CURRENCY EXCHANGES: -most financial institutions will not cash a check unless you have an account -the more than 6,000 check-cashing outlets charge from 1-20% of the face value of the check; the average being 2-3%. -generally offer electronic tax filing, money orders, private postal boxes, utility bill payment, and the sale of transit tokens. PAYDAY LOAN COMPANIES/CASH ADVANCES/CHECK ADVANCE LOANS/POSTDATED CHECK LOANS/DELAYED DEPOSIT LOANS: -most consumer organizations caution against these organizations. -desperate borrowers pay annual interest rates of as much as 780% and more -the most frequent users are workers who have become trapped by debts or poor financial decisions RENT-TO-OWN CENTERS (RTO): -defined as stores that lease products to consumers who can own the item if they complete a certain number of monthly or weekly payments. -may have interest rates over 300% CAR TITLE LOAN COMPANIES: -when in need of money, people with poor credit ratings might obtain a cash advance using their automobile title as security for a high-interest loan. -these loans, usually due in 30 days, typically have a cost similar to payday loans, often exceeding 200%

Proper Check Writing Procedure:

1.) record the date 2.) write the name of the person or organization receiving the payment 3.) record the amount of the check in numerals 4.) write the amount of the check in words 5.) sign the check 6.) note the reason for payment

Automatic Teller Machine (ATM)

A computer terminal used to conduct banking transactions; also called a cash machine.

Debit Card/Cash Card

A plastic access card used in computerized banking transactions.

Money Market Fund

A savings-investment plan offered by investment companies, with earnings based on investments in various short-term financial instruments.

Payment Reporting Builds Credit (PRBC)

A system that will check on payment patterns and report to a creditor the history of payments that are typically not included on a traditional credit report.

Loading

Adding funds to.

Credit

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

Overdraft Protection

An automatic loan made to checking account customers to cover the amount of checks written in excess of the available balance in the checking account.

Security

Another word for collateral

Sources of Consumer Credit

As found on page 148

Promotional Certificates of Deposit

Beware of these, which attempt to attract savers with gifts or special rates.

Skimming

Involves the recording of the data on the magnetic strip of a CC or debit card.

Mobile Commerce

The ability to purchase using a mobile device.

Redlining

The banning of discrimination against you based on the race or nationality of the people in your neighborhood where you live or want to buy your home.

START OF CHAPTER 5 ON PAGE 141

YES

Compounding

A process that calculates interest based on previously earned interest.

Endorsements:

Each check you deposit requires this--your signature on the back of the check to authorize the transfer of funds into your account. THREE ENDORSEMENT FORMS: 1.) Blank Endorsement: just your signature. 2.) Restrictive Endorsement: consists of the words for deposit only, followed by your signature. 3.) Special Endorsement: allows you to transfer a check to someone else with the words pay to the order of followed by the name of the other person and then your signature.

Trust

A legal agreement that provides for the management and control of assets by one party for the benefit of another. This type of financial arrangement is usually created through a commercial bank or a lawyer. Parents who want to set aside certain funds for their children's education may use a trust.

Revolving Check Credit/Bank Line of Credit

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

Fair Credit Reporting Act of 1971

Enacted by Congress to regulate the use of credit reports. Requires the deletion of out-of-date information and gives consumers access to their files as well as the right to correct any misinformation that the files may include. Also places a limit on who can obtain your credit report.

Stop-Payment Order

May be necessary if a check is lost or stolen.

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.

Fair Credit Billing Act of 1975

Sets procedures for promptly correcting billing mistakes, refusing to make credit card or revolving credit payments on defective goods, and promptly crediting your payments.

The Check Clearing for the 21st Century Act (AKA Check 21)

Shortens the processing time for checks. This law establishes the substitute check, which is a digital reproduction of the original paper check, and is considered a legal equivalent of the original check.

Closed-End Credit

Used for a specific purpose and involves a specific amount. Mortgage loans, automobile loans, and installment loans for purchasing furniture or appliances are examples of this. THREE TYPES: 1.)Installment Sales Credit: a loan that allows you to receive merchandise, usually high-priced items. You make a down payment and usually sign a contract to repay the balance, plus interest and service charges, in equal installments over a specified period. 2.) Installment Cash Credit: A direct loan of money for personal purposes, home improvement, or vacation expenses. No down payment. 3.) Single Lump-Sum Credit: a loan that must be repaid in total on a specified day, usually within 30 to 90 days. Generally used to buy a single item.

Open-End Credit

Using a CC issued by a department store, using a bank credit card to make purchases at different stores, charging a meal at a restaurant, and using overdraft protection are examples of this. This is a line of credit in which loans are made on a continuous basis and the borrower is billed periodically for at least partial payment.

General Rules of Credit Capacity

DEBT PAYMENTS-TO-INCOME RATIO: the debt payments-to-income ratio is calculated by dividing your monthly debt payments (not including house payment, which is a long-term liability) by your net monthly income. Experts suggest that you spend no more than 20% of your net (after-tax) income on consumer credit payments. DEBT-TO-EQUITY RATIO: calculated by dividing your total liabilities by your net worth.

Factors to Calculate a Credit Score

-the number and type of account you have -whether you pay your bills on time -how much of your available credit you are currently using -whether you have any collect actions against you -the amount of your outstanding debt -the age of your accounts

Considerations for Loans

-variable interest rate -a secured loan -up-front cash -a shorter term

5 Cs of Credit

1.) Character: the borrower's attitude toward his or her credit obligations 2.) Capacity: the borrower's financial ability to meet credit obligations 3.) Capital: the borrowers assets or net worth 4.) Collateral: a valuable asset that is pledged to ensure loan payments 5.) Conditions: the general economic conditions that can affect a borrower's ability to repay a loan

Asset Management Account

Used to simplify financial services and is offered by financial businesses to consolidate accounts. This is also called a cash management account, and provides a complete financial services program for a single fee. Investment companies and other offer this type of account, with checking, an ATM card, a credit card, online banking, and a line of credit as well as access for buying stocks, bonds, mutual funds, and other investments.

Simple Interest

principal x rate of interest x time

Equal Credit Opportunity Act (ECOA)

Gives all credit applicants the same basic rights. States that race, nationality, age, sex, marital status, and other factors may not be used to discriminate against you in any part of a credit dealing.

Federal Deposit Insurance (FDIC)

Prevents a loss of money due to the failure of the insured institution. Insures up to $250,000 per depositor per insured financial institution. Also provides deposit insurance for certain retirement accounts up to $250,000.

Annual Percentage Rate (APR)

The percentage cost, or relative cost, of credit on a yearly basis. The APR yields a true rate of interest for comparisons with other sources of credit.

Financial Supermarkets

The term to describe the one-stop financial service operations.

Finance Charge

The total dollar amount paid to use credit.

Finance Charge

The total dollar amount you pay to use credit.

The Truth in Savings Act

Requires financial institutions to disclose the following information: (1) fees on deposit accounts; (2) the interest rate; (3) the annual percentage yield (APY); (4) other terms and conditions of the savings plan.

FICO AND VANTAGESCORE

Your FICO score is available from myfico.com for a fee. It is composed of 35% payment history, 30% amounts owed, 15% length of credit history, 10% types of credit used, and 10% for new credit. It is between 350 and 850.

Types of Financial Services:

1.) Savings/Time Deposits: provides safe storage of funds for future use. This is money in savings accounts or certificates of deposit. 2.) Payment Services: which offer an ability to transfer money to others for daily business activities. Checking accounts and other payment methods are generally called demand deposits. 3.) Borrowing: in which is used by most people at some point during their lives. Credit alternatives range from short-term accounts, such as credit cards and cash loans to long-term borrowing such as a home mortgage. 4.) Other Financial Services: including insurance, investments, tax assistance, and financial planning.

Bank Account Reconciliation Process:

1.) Compare the checks written with those reported as paid on the statement. Use the canceled checks, or compare your check register with the check numbers reported on the bank statement. Subtract from the bank statement balance the total of the checks written but not yet cleared. 2.) Determine whether any deposits made are not on the statement; add the amount of the outstanding deposits to the bank statement balance 3.) Subtract fees or charges on the bank statement and ATM withdrawals from your checkbook balance 4.) Add any interest earned to your checkbook balance

Prepaid Debit Cards

Have become the fastest growing payment methods. Comparisons of features and fees for prepaid debit cards are available

Line of Credit

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

Credit Report/File

The record of your complete credit history. Maintained and collected by credit bureaus.

Near-Field Communications (NFC)

This technology stores credit card and bank account information.

Borrowing Cardholders

Those who do not pay off their balances each month.

Convenience Cardholders

Those who pay off their balance in full each month.

Annual Percentage Yield (APY)

Truth in Savings (TIS) defines this as the percentage rate expressing the total amount of interest that would be received on a $100 deposit based on the annual rate and frequency of compounding for a 365-day period. APY reflects the amount of interest a saver should expect to earn.

Managing Certificates of Deposits

-when first buying or rolling over a CD (buying a new one at maturity), investigate potential earnings and costs. -do not allow your financial institution to automatically roll over your money into another CD for the same term. -consider creating a CD portfolio with CDs maturing at different times, for example, $2000 in a 3-month CD, $2000 in a 6-month CD, $2000 in a 1-year CD, and $2000 in a 2-year CD. This will give you some degree of liquidity and flexibility when you reinvest your funds.

National Credit Union Association (NCUA)

Credit Unions may obtain deposit insurance through this. Also provides deposit insurance for certain retirement accounts up to $250,000.

Other Payment Methods:

1.) Certified Check: a personal check with guaranteed payment. 2.) Cashier's Check: a check issued by a financial institution. 3.) Money Order 4.) Traveler's Checks: allow you to make payments while you are away from home.

Frequent Mistakes When Managing Current Cash Needs

1.) Overspending as a result of impulse buying and overusing credit. 2.) Having insufficient liquid assets to pay current bills. 3.) Using savings or borrowing to pay for current expenses. 4.) Failing to put unneeded funds in an interest-earning savings account or investment plan.

Considerations for Savings Plans:

1.) Rate of Return: earnings on savings can be measured by this, or yield, the percentage of increase in the value of your savings from earned interest. 2.) Inflation: The rate of return should be compared with the inflation rate. 3.) Taxes: like inflation, taxes reduce the interest earned on savings. 4.) Liquidity: allows you to withdraw your money on short notice without a loss of value or fees. 5.) Safety: most savings plans at banks, savings and loan associations, and credit unions are insured by agencies affiliated with the federal government. 6.) Restrictions and Fees

Your Credit Report:

CREDIT BUREAUS: an agency that collects information on how promptly people and businesses pay their bills. The three major credit bureaus are Experian, TransUnion, and Equifax. WHAT'S IN YOUR CREDIT FILES? -your employer, position, and income -your previous address -your previous employer -your spouse's name, SS number, employer, and income -whether you rent or own your home -checks returned for insufficient funds

Types of Savings Plans:

1.) Regular Savings Account: previously called passbook or statement accounts, usually involve a low or no minimum balance and allow you to withdraw money as needed. At a credit union, these are called share accounts. 2.) Certificates of Deposit (CD): higher earnings are available to savers when they leave money on deposit for a set time period. This is a savings plan requiring that a certain amount be left on deposit for a stated time period (ranging from 30 days to five or more years) to earn a specific rate of return. TYPES OF CDs -Rising-Rate or Bump-Up CDs: may have higher rates at various intervals, such as every six months. -Liquid CDs: offer an opportunity to withdraw money without a penalty. This type may have other restrictions such as a waiting period before any funds may be withdrawn or a limit on the number of withdrawals allowed. -Zero-Coupon CD: is purchased at a deep discount with no interest payments. -Indexed CDs: have earnings based on the stock market. In times of strong stock performance, your earnings can be higher than those on other CDs. This is based on the consumer price index and can result in higher returns as inflation increases. -Callable CDs: start with higher rates and usually have long maturities, as high as 10 to 15 years. 3.) Interest-Earning Checking Accounts: usually have a low interest rate 4.) Money Market Accounts and Funds: a money market account is a savings account that required a minimum balance and has earnings based on the changing market level of interest rates. Both money market accounts and money market funds offer earnings based on current interest rates, and both have minimum-balance restrictions and allow check writing. The major difference is safety. Money market accounts at banks and savings and loan associations are covered by federal deposit insurance. This is not true of money market funds, which are a product of investment and insurance companies. Since money market funds invest mainly in short-term (less than a year) government and corporate securities, however, they are usually quite safe. 5.) U.S. Savings Bonds: these are a low-risk savings program guaranteed by the federal government that have been used to achieve various financial goals. The Treasury Department offers several programs for buying savings bonds. TYPES OF BONDS: -EE Bonds: series EE bonds may be purchased for any amount greater than $25. These are bought online at face value. Papers savings bonds, while no longer issued at financial institutions, are still available through payroll savings plans or by using part or all of your federal tax refund. -HH Bonds: these are no longer sold, are also called current-income bonds with interest deposited electronically to your bank account every six months. -I Bonds: has an interest rate based on two components: (1) a fixed rate for the life of the bond and (2) an inflation rate that changes twice a year. BUY BONDS AT www.treasurydirect.gov

Types of Financial Institutions:

1.) Commercial Banks: which offer a full range of financial services, including checking, savings, lending, and most other services. Commercial banks, organized as corporations with investors (stockholders) contributing the needed capital to operate, have several types: national banks, regional banks, community banks, and online-only banks. 2.) Savings and Loan Associations (S&Ls): which traditionally specialized in savings accounts and mortgages. Today, many of these organizations offer the same services as a traditional bank. 3.) Mutual Savings Banks: which are owned by depositors, also specialize in savings accounts and mortgages. Located mainly in the northeastern U.S., the profits of a mutual savings bank go to the depositors through higher rates on savings. 4.) Credit Unions: which are user-owned, nonprofit, cooperative organizations. Although members traditionally had a common bond such as work location, church, or community affiliation, credit union membership today is more flexible, with more than 80 million people belonging to one. Annual banking studies consistently report lower fees and lower loan rates with higher satisfaction levels for credit unions compared to other financial institutions. NON-DEPOSIT INSTITUTIONS: 1.) Life Insurance Companies 2.) Investment Companies/Mutual Funds: which offer a money market fund. The company uses the money from many investors to purchase a variety of short-term financial instruments. These are not covered by federal deposit insurance. 3.) Brokerage Firms: which employ investment advisers and financial planners, serve as an agent between the buyer and seller for stocks, bonds, and other investment securities. These companies earn their earnings from commissions and fees. 4.) Credit Card Companies: which specialize in funding short-term retail lending. 5.) Finance Companies: which provide loans to consumers and small businesses. 6.) Mortgage Companies: which are organized primarily to provide loans for home purchases.