Personal Finance Midterm: Ch 1-7
What to do if your credit application is denied.
- You have the right to know why. - Contact credit bureau and ask for a copy of credit report (no fee if within 60 days of denied notification) - Ask bureau to investigate any inaccurate/incomplete info
A personal check with guaranteed payment is a:
Certified check
Tax-exempt income
Income that is not taxed
Tax-deferred income
Income will be taxed at a later date.
Simple interest
Interest computed only on the principal and without compounding
An example of tax-exempt income is:
Interest from municipal bonds
The fewest financial services would probably be offered by a(n):
Investment company
APR is important because:
It helps you compare interest rates between credit options
What are publicly supported community law offices that provide legal assistance to consumers who cannot afford their own attorney?
Legal aid societies
A Consumer Credit Counseling Service is a :
Local, nonprofit organization affiliated with the National Foundation for Consumer Credit
What are the credit implications to the consumer of only making the minimum payment every month?
Decreased ability to obtain additional credit, inability to obtain lower interest rates on additional credit purchases, Financial problems due to unexpected expenses.
Traditional IRA
Deduction is available only to people who do not participate in employer-sponsored retirement plans or who have an adjusted gross income under a certain amount.
Rule of 72
Divide 72 by the interest rate to find the # of years it will take for your money to double.
Advantages of credit
Enables people to enjoy goods and services now or it can provide for emergencies, and it can pay for them all through payment plans based on future income.
Itemized deductions
Expenses that can be deducted from adjusted gross income, such as medical expenses, real estate property taxes, home mortgage interest, charitable contributions, casualty losses, and certain work-related expense
A deduction directly reduces the amount of taxes owed. True or False?
False
A general sales tax is also referred to as an excise tax. True or False?
False
Consumer information from business organizations is usually the most objective type of data available to help in a buying decision. True or False?
False
Cooperative housing involves the purchase of an individual living unit in a multiunit complex or building. True or False?
False
Demand deposits refer to money deposited in savings accounts. True or False?
False
Most financial records should be kept in a safe-deposit box. True or False?
False
Several financial benefits are associated with renting your place of residence. True or False?
False
When a simple interest is paid back in more than one payment, the method of computing interest is known as the add-on interest method. True or False
False
A common advantage associated with home ownership is:
Financial benefits
A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities.
Financial plan
Definite financial obligations are referred to as:
Fixed expenses
Variable expenses
Flexible payments that change from month to month
Roughly 85% of instances of identity theft involve:
Fraudulent use of an individual's existing account
What warranty covers most repairs of a product?
Full
Adjusted Gross Income (AGI)
Gross income reduced by certain adjustments, such as contributions to an individual retirement account (IRA) and alimony payments.
Most real estate professionals believe that the most important factor in selecting a home is:
Location
Investment income
Money received in the form of dividends, interest, or rent from investments; also called portfolio income.
Escrow account
Money, usually deposited with the lending financial institution, for the payment of property taxes and homeowner's insurance.
Debt payments to income ratio
Monthly debt payments (no including house payment)/net monthly income
What is deductible as an itemized deduction?
Mortgage interest
What component of financial planning is career planning apart of?
Obtaining
Financial planning activities
Obtaining, planning, saving, borrowing, spending, managing risk, investing, retirement and estate planning
Commercial banks
Offer a full range of financial services, including checking, savings, lending, and most other services.
Payment services
Offer an ability to transfer money to others for daily business activities.
The process of managing your money to achieve personal economic satisfaction
Personal financial planning
Stored-value cards
Prepaid cards for telephone service, transit fares, highway tolls, laundry service, library fees, and school lunches.
Points
Prepaid interest charged by the lender (1 point = 1% of loan amount)
Capital gains
Profits from the sale of a capital asset such as stocks, bonds, or real estate.
Savings
Provides safe storage of funds for future use.
Financing options for underbanked individuals do not include:
Relatives
The Federal Trade Commission can help you:
Restore you identity
An example of open-end credit is:
Revolving check credit
Goal Setting Guidelines
S- specific M- measurable A- action oriented R- realistic T- time based
The most common method of calculating the cost of credit is the:
Simple interest formula
To ensure wise purchasing decisions, you should use information and:
Take the time required to make an informed decision
Interest rates
The cost of borrowing money
Line of credit
The dollar amount, which may or may not be borrowed, that a lender makes available to a borrower
An important thing to pay attention to when using rebates is:
The expiration date
Insolvency
The inability to pay debts when they are due because liabilities far exceed the value of assets.
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.
Annual percentage yield (APY)
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.
Marginal tax rate
The rate used to calculate tax on the last (and next) dollar of taxable income.
Amortization
The reduction of a loan balance through payments made over a period of time
Abritration
The settlement of a difference by a third party whose decision is legally binding.
Economics
The study of how wealth is created and distributed
Tax avoidance
The use of legitimate methods to reduce one's taxes.
Often, closed-end credit is easier to obtain than open-end credit because:
There is collateral on the loan
Why is making only the minimum payment amount is favorable to creditors?
They can charge higher rates of interest based on an extended payback period
An underbanked individual is one who uses high-cost financial services when:
They have a bank account
Debt to Equity Ratio
Total liabilities/net worth
Average tax rate
Total tax due divided by taxable income.
Opportunity cost refers to:
Trade-offs when a decision is made
A personal balance sheet reports the financial position of a person or family on a given date. True or False?
True
A savings account with daily compounding will have higher earnings than an account with quarterly compounding. True or False?
True
Credit encourages overspending and ties up future income. True or False?
True
Inflation reduces the buying power of a dollar True or False?
True
National name products usually cost more than store brands or private label items. True or False?
True
Savings and investment programs are the main method for achieving financial goals True or False?
True
When making an online purchase, you should:
Use a secure buying website
Opportunity cost
What you give up by making a choice
If you make more than one interest payment during the year, the APR:
Will be higher than the stated interest rate
Assets
cash and other property with a monetary value
Closed-end credit
credit as a one-time loan that you will pay back over a specified period of time in payments of equal amounts
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.
Based on the CARD Act, credit card companies are now required to show you on your credit card statement:
how long it will take to pay the balance making only the minimum monthly payment
Disadvantages of Credit
overspending, higher cost, impulse buying
Net worth
the difference between total assets and total liabilities
What's in your credit files?
• Your employer, position, and income • Your previous address • Your previous employer • Your spouse's name, Social Security number, employer, and income • Whether you rent or own your home • Checks returned for insufficient funds
5 C's of Credit
Character, Capacity, Capital, Collateral, Conditions
CPI
Consumer price index
Fixed expenses
Costs that do not change from month to month
Financial strategies refer to:
Courses of action to achieve financial goals
What is an example of a liquid asset?
A checking account
Types of financial goals
-Short-term goals (1-1.5 yrs) -Intermediate goals (2-5 yrs) -Long-term goals (5+ yrs)
What to do if you are a victim of identity theft.
1. Contact credit bureaus 2. Contact creditors 3. File a polece report
Phone or utilities fraud accounts for approximately What percent of all identity theft issues?
14%
How many people in America are "unbanked"
17 million
Liquid assets
Cash and items of value that can easily be converted to cash.
The savings plan that is likely to have a set rate of return is a:
Certificate of deposit
Contingency Clause
A clause in a real estate sales contract that makes the agreement conditional on such factors as the availability of financing, property inspections, or obtaining expert advice
Tax audit
A detailed examination of your tax return by the Internal Revenue Service.
Installment cash credit
A direct loan of money for personal purposes, home improvements, or vacation expenses
Mutual savings bank
A financial institution that is owned by depositors and specializes in savings accounts and mortgage loans.
Balance Sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date.
What allows a person to borrow on the paid-up value of a home?
A home equity loan
Ajustable-rate mortgage (ARM)
A home loan with an interest rate that can change during the mortgage term due to changes in market interest rates; also called a flexible-rate mortgage or a variable-rate mortgage.
Open-end credit
A line of credit in which loans are made on a continuous basis and the borrower is billed periodically for at leas partial payment
Installment sales credit
A loan that allows you to receive merchandise, usually high-priced items
Single lump-sum credit
A loan that must be repaid in total on a specified day, usually within 30 to 90 days.
Earnest Money
A portion of the price of a home that the buyer deposits as evidence of good faith to indicate a serious purchase offer
Revolving check credit
A prearranged loan from a bank for a specified amount; also called a bank line of credit
Compounding
A process that calculates interest based on previously earned interest.
An exemption refers to:
A reduction from adjusted gross income.
Inflation
A rise in the general level of prices
Certificate of Deposit (CD)
A savings plan requiring that a certain amount be left on deposit for a stated time period to earn a specified interest rate.
Money market fund
A savings-investment plan offered by investment companies, with earnings based on investments in various short-term financial instruments.
Excise tax
A tax imposed on specific goods and services
Warranty
A written guarantee from the manufacturer or distributor of a product that specifies the conditions under which the product can be returned, replaced, or repaired.
Roth IRA
Allows a $5,500 (2014) annual contribution, which is not tax-deductible; however, the earnings on the account are tax-free after five years.
Liquidity
Allows you to withdraw your money on short notice without a loss of value or fees.
Interest Calculation
Amount in savings x Annual interest rate x Time period = Interest
Liabilities
Amounts owed to others
Service contract
An agreement between a business and a consumer to cover the repair costs of a product
Tax credit
An amount subtracted directly from the tax owed
529 plan
An education savings plan that helps parents save for the college education of their children.
Appraisal
An estimate of the current value of the property.
Tax shelter
An investment that provides immediate tax benefits and a reasonable expectation of a future financial return
A legally binding decision by a third party is:
Arbitration
According to the Federal Reserve Board, interest rates on open-end credit:
Are usually much higher than closed-end credit
Calculating net worth
Assets - Liabilities = Net Worth
Renting a home vs buying a home can what?
Can be more or less expensive