Economics Unit 4

Check

A written order to a bank to pay a third party

• Checks require the payee’s name, date, and amount (both numerically and written)

Money Order (Check)

A prepaid check purchased from a bank or convenience/grocery store

Certified Check (Check)

A personal check issued by a bank that guarantees the amount will be paid; typically charges a fee

Cashier’s Check (Check)

A check from a bank that can be purchased by paying the amount of the check plus a service fee

Traveler’s Check (Check)

Prepaid slip requiring a signature to cash; mostly outdated due to electronic payment systems

*Bank Routing Numbers and Account Numbers Create:

A payment trail for transferred funds

Endorsement

How you sign a check to receive payment or transfer ownership

Blank Endorsement

Simply signing your name (allows anyone to cash it)

Special Endorsement

Specifies who can receive the money (“Pay to the order of…”)

Restricted Endorsement

Limits how the check can be used (“For deposit only…”)

Federal Deposit Insurance Corporation (FDIC)

Insures deposits up to $250,000 per depositor, per bank

Reconciliation

The process of matching your records with the bank’s records

*Traditional Payment Methods

Include cash, coins, and checks

*Electronic Payment Methods

Include debit cards, prepaid cards, and digital transfers

Liquidity

Refers to how quickly and easily you can access cash

Prepaid Card

Has money loaded in advance and don’t require a bank account

Debit Card

Allows direct access to funds in a checking account

Check-to-Electronic Conversion

Transforms paper checks into electronic payments at point-of-sale

Automated Clearing House (ACH)

A network for electronic transfers between institutions

Direct Debit

An electronic withdrawal directly from a bank account without a card

Peer-to-Peer Payment

Apps enable transfers between individuals

Cryptocurrency

Digital currency that allows transfers without a bank or broker

*Debit Card Liability Protection

$0 if reported before use, $50 if within 2 days, $500 if within 60 days

*Credit Card Liability Protection

Limited to $50 for unauthorized charges

*Prepaid Card Liability Protection

Often have unlimited liability (no protection)

*Each Payment Method May:

Have different fees associated with it

Credit Report

A summary of your credit history maintained by credit bureaus

*Credit Report Characteristics

• Credit reports include personal information, account details, inquiry history, and public records

• Negative items can remain on credit reports for 7 years (10 years for bankruptcies)

Credit Bureau

A company that maintains housing and credit files on consumers

*Credit Bureau Characterisitics

• Major credit bureaus: Equifax, Experian, and TransUnion

• Credit bureaus must investigate disputes within 30 days

Fair Credit Reporting Act (FCRA)

Grants you free access to your credit report once every 12 months

FICO (Fair Isaac Corporation) Score

Ranges from 300-850, with higher scores indicating lower risk

Credit Score

Summarizes your credit risk in a numrical value

*Credit Score Characteristics

• Credit score inputs include payment history (35%), amount of credit (30%), length of history (15%), new credit (10%), and types of credit (10%)

• Credit scores are not affected by age, race, sex, martial status, religion, nationality, or medical history

Utilization Ratio

Compares your credit limit to how much you’ve used

Finance Charge

The total amount of fees and interest charged

Loans

Consist of principal (amount borrowed), interest (cost of borrowing), and fees

Principal

The amount of money you borrow (the loan) that must be repaid

Interest

The cost of borrowing;

Calculated based on the remaining loan balance

Loan Fees

Extra charges from a lender for making, managing, or missing payments on a loan

Amortized Loan (and Amortization)

A loan paid off through regular, equal payments over time. Amortization is the process of paying down a loan with regular payments

Collateral

Something of value that secures a loan

Annual Percentage Rate (APR)

The total yearly cost of a loan, combining the interest rate and required lender fees

Fixed Installment Loan

Maintains the same interest rate throughout the term

Variable Installment Loan

Has interest rates that can change during repayment

*Loan Payment Characteristics

• Each loan payment covers both interest and principal

• Early loan payments have higher interest portions; later payments have higher principal portions

Credit Card

Revolving credit that can be used at the borrower’s discretion

*Credit Card Characteristics

• Credit card costs can include annual fees, interest, and account setup fees

• Credit cards have different APRs (annual percentage rate) for purchases, balance transfers, and cash advances

Traditional Loans

Typically amortized with fixed payments

Co-Signer

An additional person responsible for the debt if the primary borrower defaults

Secured Credit Card

Requires a deposit equal to the credit limit as collateral

Reward Credit Card

Provides benefits based on purchase amounts

Grace Period

The time allowed to pay without incurring interest (minimum 21 days for new purchases)

Minimum Payment

Typically a percentage of the balance or a fixed amount, whichever is higher

CARD (Credit Card Accountability, Responsibility, and Disclosure) Act of 2009

Requires clear monthly statements showing payment information