PF 6

Simple interest is based on three factors:

Principal Interest rate Amount of time principal is borrowed /

consumer credit

the use of credit for personal needs / major force in American economy

Credit bureaus: Credit bureaus get their information from:

Agency that collects information on how promptly people and businesses pay their bills. / Banks Finance companies Stores Credit card companies Other lenders

grace period

a time period during which no finance charges will be added to your account / Number of days to pay off a credit card balance in full by the due date without incurring a finance charge

cosigning

agreeing to be responsible for loan payments if the other person fails to make them

credit

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

creditor

an entity that lends money / can be: Financial institution Merchant Individual

Calculate debt payments-to-income ratio by:

dividing total monthly debt payments by your monthly net income.

Rates

Fixed insurance rate stays the same Variable rate changes Default rate for paying late

If thinking of taking out loan or applying for credit card, first step should be to figure out: Two key factors in decision will be:

How much the loan will cost you Whether you can afford it / Finance charge Annual percentage rate (APR)

Most common method of calculating interest is ??? Other variations of this formula include:

simple interest formula / Simple interest on the declining balance Add-on interest

Prevent identity theft by:

Immediately closing any accounts accessed by identity thief Insisting on password-only access when opening new accounts Stopping payment on stolen or misused checks Canceling a lost or stolen ATM card and getting another one with a new PIN

The Truth in Lending Act requires that open-end creditors:

Inform consumers how finance charge and APR will affect their costs. Explain how they calculate the finance charge. Inform you when finance charges on your credit account begin to accrue.

If you fail to repay credit card balance:

Lose good credit reputation. Lose some of your income and property, which may be taken from you in order to repay your debts.

APR

the cost of credit on a yearly basis, expressed as a percentage / Finance charge, or total dollar amount you pay to use credit, is calculated using the annual percentage rate (APR). / All organizations must state true APR that they charge customers. This makes it easy to compare the cost of credit.

net income

the income you receive (take-home pay, allowance, gifts, and interest)

simple interest

the interest computed only on the principal, the amount that you borrow

line of credit

the maximum amount of money a creditor will allow a credit user to borrow

minimum monthly payment

the smallest amount you can pay and remain a borrower in good standing

finance charge

the total dollar amount you pay to use credit

open-end credit

credit as a loan with a certain limit on the amount of money you can borrow for a variety of goods and services / Examples include: Department store credit cards Bank credit cards (Visa or MasterCard) / Use credit card to make as many purchases as you wish, as long as you do not exceed your line of credit.

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 / Used for specific purpose / Involves definite amount of money. / Examples of closed-end credit include: Mortgages Vehicle loans / Installment loans for purchasing furniture or large appliances / Usually carry lower interest rates than open-end credit.

Universities say they lose more students to ??? than to academic failure

credit card debt

using credit

Make sure benefits of making the purchase now outweigh the costs of credit

Declaring Personal Bankruptcy

Should be last resort Severely damages credit rating

Consumer Credit Protection Laws

Truth in Lending and Consumer Leasing Acts Equal Credit Opportunity Act (ECOA) Fair Credit Opportunity Act Fair Credit Reporting Act Consumer Credit Reporting Reform Act

If agency or user is found guilty, consumer may be awarded:

Actual damages Court costs Attorneys' fees

Never use a credit card for purchase under $?? or eating out

10

Experts suggest that you spend no more than ?? percent of your net income on debt payments, which include:

20 / Credit card payments Loan payments

Nearly ?? college freshmen max out their credit card by the end of the year

3/5

poor

300-579

fico score breakdown

35% of score is based on payment history 30% of score is based on amounts owed 15% of score is based on length of credit history 10% of score is based on credit mix 10% of score is based on new credit

fair

580-669

To protect your card, you should:

Be sure your card is returned to you Keep record of credit card numbers. Notify credit card company immediately if credit card is stolen.

loan

Borrowed money with agreement to repay it with interest within certain amount of time. / Before going to bank to take out loan, consider: Inexpensive loans (family members) Medium-priced loans (commercial banks, savings and loan associations, credit unions) Expensive loans (finance companies, retail stores, banks) Home equity loans

If you believe lender is not following consumer credit protection laws:

First try to solve problem directly with lender. Use more formal complaint procedures if that fails.

If you lost source of income, you could repay your loan:

From savings By selling assets

May not know your identity has been stolen until you:

Get bills for credit card account you never opened See charges to your account for things that you did not purchase

If credit application is denied, ECOA gives you right to know the reasons. If the denial is based on credit report from a credit bureau, you are entitled to:

Know what specific information in the report led to the denial. Contact the credit bureau and ask for copy of credit report. Ask bureau to investigate any inaccurate or incomplete information and correct its records.

Some people who seem wealthy are just barely keeping their heads above water financially. They may:

Lack self-discipline and do not control their impulses Use poor judgment Fail to accept responsibility for managing their money

When selecting financing, you have to make trade-offs. Consider:

Length of loan Size of monthly payments Interest rate / Term versus interest costs (choosing long-term financing despite the increased interest charges) / Lender risk versus interest rate (taking a more expensive loan because of its minimum down payment or low fixed payments)

If pay only minimum amount on monthly statement, you need to:

Plan your budget more carefully. Understand the longer it takes for you to pay off a bill, the more interest you pay.

Creditors turn bad debts over to debt collection agencies. The Federal Trade Commission, however, enforces the Fair Debt Collection Practices Act (FDCPA), which:

Prohibits certain practices by debt collectors Does not erase the legitimate debts that consumers owe Does control the ways in which debt collection agencies do business and deal with consumers in debt

The Equal Credit Opportunity Act (ECOA) gives all credit applicants the same basic rights. States that lender may not discriminate based on:

Race Nationality Age Sex Marital status Redlining (discrimination against you based on race or nationality of people in neighborhood where you live)

The Fair Credit Reporting Act:

Regulates the use of credit reports Requires the deletion of out-of-date information Gives consumers access to their files as well as the right to correct any misinformation that the files may include Places limits on who can obtain your credit report

Other types of cards include:

Smart cards Travel and entertainment (T&E) cards (American Express)

Benefits of credit

Starting and building a good credit history Emergencies Large purchases Convenience Identification Internet shopping Safety

Credit report may be issued only to properly identified persons for approved purposes. It may be:

Supplied in response to court order or by your own written request Provided for use in connection with credit transaction or some other legitimate business need / You may obtain a copy of your credit report free of charge if you have been denied credit.

According to law, creditor may not:

Threaten your credit rating or do anything to damage your credit reputation while you are negotiating a billing dispute Take any action to collect the amount in question until your complaint has been answered

Consequences of credit abuse

Turned down for job/internship Unable to buy home/car or rent apartment Turned down for student loans Higher interest rates Higher insurance premiums Sued and/or wages garnished Creditors calling at home or work Depression Family problems/divorce Bankruptcy

Cost of credit card depends on:

Type of credit card you have Terms set forth by lender

Find nonprofit credit counseling services through:

Universities Credit unions Military bases State and federal housing authorities Usually charge little to nothing for assistance.

If you cosign a loan and borrower does not pay debt, you may have to pay:

Up to the full amount of the debt Any late fees or collection costs If the debt is not repaid, that fact will appear on your credit record.

Steps to recognize, avoid, and report online fraud:

Using secure browser Keep records of online transactions Review monthly bank and credit card statements Read privacy and security policies of Web sites you visit Keep personal information private Don't download files sent to you by strangers

To reduce lender risk and increase chance of getting loan at lower interest rate, consider:

Variable interest rate Secured loan Up-front cash A shorter term

credit rating

a measure of a person's ability and willingness to make credit payments on time

% of students acquire their first credit card during their freshman year of college

55

good

670-739

Most information in credit file may be reported for only ?? years. If you have declared personal bankruptcy, that fact may be reported for ?? years.

7 / 10

very good

740-799

About ??% of college students graduate with more than one credit card

80

exceptional

800-850

late fees

A fee charged if a credit card payment is received after the due date

The Consumer Credit Counseling Service (CCCS) is concerned with preventing problems as much as it is with solving them. Its activities are divided into two parts:

Aiding families with serious debt problems by helping manage money better and setting up realistic budget Helping people prevent indebtedness by teaching importance of budget planning, educating about pitfalls of unwise credit buying, and encouraging credit institutions to withhold credit from people who cannot afford it

The Federal Trade Commission (FTC):

Cannot resolve individual problems for consumers Can act against company if it sees pattern of possible law violations

Two choices in declaring personal bankruptcy:

Chapter 7 (a straight bankruptcy) Chapter 13 (a wage-earner plan bankruptcy) Both choices undesirable Neither should be considered an easy way to get out of debt.

Most lenders use the "five C's of credit" to determine who will receive credit. These C's are:

Character Capacity Capital Collateral Credit history

annual fee

Charged every year for the privilege of having access to a credit card, similar to a membership fee

Take one or more of the following steps if you feel you have been discriminated against:

Complain to creditor. Let creditor know you are aware of the law. File complaint with government. Sue creditor if all else fails.

If having trouble paying bills and need help, you can:

Contact creditors and try to work out an adjusted repayment plan. Contact non-profit financial counseling program, such as the Consumer Credit Counseling Service, which operates nationwide.

Effects of Bankruptcy

Could have trouble obtaining credit after filing for bankruptcy. / Bankruptcy reports kept on file in credit bureaus for ten years, so declare bankruptcy only when there are no other options. / Best way to solve financial problems is to avoid them by maintaining good credit.

Record of complete credit history is:

Credit report, or credit file Collected and maintained by credit bureaus

Warning signs of being in financial trouble:

Make only minimum monthly payment on credit cards. Total credit card balance increases every month. Miss loan payments or often pay late. Use savings to pay for necessities such as food and utilities. Borrow money to pay off old debts. Exceed credit limits on credit cards.

Typical credit bureau file contains your:

Name Current and previous address Social Security number and birth date Employer, position, and income Previous employer Homeowner or renter status Checks returned for insufficient funds Detailed credit information

To dispute billing errors:

Notify your creditor in writing. Include any information that might support your case. Pay the portion of the bill that is not in question.

Credit reporting agency cannot disclose information in your credit file that is more than seven or ten years old unless:

You are being reviewed for a credit application of $75,000 or more. You apply to purchase life insurance of $150,000 or more.

According to Fair Credit Billing Act, you may tell your credit card to stop payment if:

You purchase a defective item. The store will not accept a return. You must have made a sincere attempt to resolve the problem.

Bankruptcy

a legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts

debit

money comes directly from bank account

credit

money is borrowed from a company who pays the retailer