Unit 6 Test

banks

provide services for people to manage their money, make a profit by charging more interest for loans than they give on savings

credit unions

nonprofits that provide banking services to different groups of people based on their location, work, religion, or other factors

checking account

hold money for depositors that they can access on demand

debit cards

allows you to transfer money electronically

savings accounts

holds money in an account that pays interest

balance

amount of money in a checking or savings account

money market account

savings accounts which offer a higher but variable interest rate, require a minimum balance

certificate of deposit

savings accounts that require a large minimum (usually $25,000-$50,000), must be left in for a specified amount of time (usually 6 months to 5 years)

fees

fixed payments for bank services

overdraft fees

charged when the bank covers a check or debit-card purchase for more money than a person has in their checking account, insufficient funds

stock market investments

another way of saving money, risky investments, do not pay interest, rely on the value of companies to increase

investment firms

handles investments for groups of investors who agree to pool (deposit together) their money in an account

money management firms

deals with an investor that is an individual institution, such as a university (handles investments for a fee)

reasons why a bank or credit unions makes loans

mortgages, renovation projects, cars, business expansion, paying off other debt

annual fees

paid once a year for the privilege of using a credit card

late fees

extra payments that must be paid when a debt is paid after the date on which the payment was made

fixed interest

rate doesn’t change for the loan term

variable interest

rate can change (go up or down)

compound interest

interest on interest as well as on the principle

cryptocurrency

virtual, digital money, allows users to bypass banks and other financial institutions to make financial transactions

consumer finance companies

make credit loans to consumers and earn profit by borrowing money to make loans at a lower rate than the interest rate they charge (loans money to individuals)

sales finance companies

makes loans to businesses, can also purchase loans made by other companies (loans money to businesses)

pawn shops

customers use personal property as collateral for short-term loans, if loan isn’t repaid then the shop can sell the property, high interest rate

payday loan agencies

short-term loans with a high interest rate that customers repay when they get their paycheck

3 steps in establishing credit

get a checking and/or savings account, get a secured credit card, get an unsecured credit card

mortgage services

helps people find mortgages by shopping for different rates and lenders for them

credit monitoring

keeping track of your credit score and history

identity theft

crime of using someone else’s identity to gain access to their credit or tax refunds

credit report

detailed record of your credit history

credit worthiness

likelihood a borrower will repay a debt

payment history

shows how you have repaid your loans

debt to income ratio

total amount a person owns (debt) divided by their gross income (<30% is ideal)

hard hit

temporary impact on credit score because they are the result of a credit application

soft hit

used for pre-qualification, doesn’t impact your credit score from a company or potential employer looking at a credit report

3 major credit bureaus in the US

Equifax, Experian, TransUnion

factors that impact credit score

payment history, credit history length, new credit (credit applied for within past 2 years)

4 debt management strategies

auto-pay bills, new spending plan to reduce spending, using snowball plan or avalanche plan, take on a second job

snowball plan

paying off smallest debt first

avalanche plan

paying ogg highest interest rate first

good debt

helps generate wealth (buying a house, college loans)

bad debt

items that are from instant gratification and decrease in value (car loans)

secured debt

loans backed by collateral (car loans, home loans)

unsecured debt

loans without collateral (medical debt, student loans)

FICO

shows all loans on a credit report

Vantage

greater weight to credit utilization, history length, and credit mix than FICO

credit utilization

total limit of credit used divided by the amount of credit limit

excellent score for a business according to FICO

700 or above

reasons why a business would take out a loan

expand, buy equipment, buy inventory

estate planning

how a person plans how their assets will be handled if they are no longer able to make decisions and how their property will be divided if they die

insurance

pooling risks so that the needs of a few people with claims can be offset by the money paid toward insurance by people who do not have claims

deductible

money the insured my pay before insurance begins to pay on a claim

coverage limits

amount insurance will pay on a claim

renter’s insurance

protects a renter from the loss of their property from causes that were not their fault

homeowner’s insurance

covers a person’s house and its contents from accidents

health insurance

covers part of the healthcare cost

disability insurance

provide a person with income if they become disabled and unable to work due to accidents or illness

life insurance

for working adults and replaces someone’s income in the home for their family if they die

beneficiary

person(s) who suffer financial harm from a person’s death

death benefit

enables a family to continue to pay their bills

durable power of attorney

legal document that fives one person (an agent) the right to make all decisions for another person

healthcare power of attorney

limits the agent to only healthcare decisions

living will

a legal document made in advance that spells out what someone would and would not want done to keep them alive

living trust

allows a trustee to make financial decisions for another person on behalf of that person’s beneficiary and to distribute their assets after their death

transfer on death deed

immediately gives ownership of a property to a person upon the death of the person making the deed

last will and testament

a person’s legal document stating how they want to distribute their property after they die

codicil to a will

amendment or change to a will

comprehensive car insurance

covers damage to car, injuries to the drivers and passengers if you are at fault or the other driver doesn’t have insurance

liability car insurance

covers damage to other cars and passengers if you are at fault

flood insurance

purchased through FEMA

children’s health insurance program (CHIP)

covers children whose parents earn to much money to have medicaid but still need public assistance