Chapter 5: Checking Accounts, Credit Scores, and Credit Cards

check

a written order to a bank to pay a third party

three elements required when writing a check

1. the name of the payee

2. the date

3. the amount to be paid (numerical and written form)

money order

a prepaid check purchased with cash from a bank, credit union, or convenience/grocery store

certified check

a personal check issued by a bank that guarantees the amount will be paid; the bank charges a fee for this type of check

cashier’s check

a check of a bank or other financial institution that can be purchased by paying the amount of the check plus a service fee

traveler’s check

prepaid check purchased from a credit card company, bank, or credit union that must be signed before it can be cashed

advantages of a checking account

• liquidity

• direct deposit of paychecks

• FDIC insurance

• debit cards

liquidity

the availability of cash or how easily an asset can be converted to cash

bank routing number

a digital code on a check that helps facilitate check processing

FDIC deposit insurance coverage

coverage that provides up to $250,000 in protection for an account holder

reconciliation

balancing a monthly bank statement with a check register

traditional transaction methods

cash, coins, and checks

electronic transaction methods

debit cards and prepaid cards

hybrid transaction methods

peer-to-peer payments (P2P), cryptocurrency, and automated clearing house (ACH)

debit cards

payment made directly from the cardholder’s checking account using either a PIN or the cardholder’s signature to verify the transaction

prepaid cards

money loaded on a card in advance to be used to make payments in the future. Does not require a bank or checking account

peer-to-peer payment (P2P)

mobile apps (Apple Pay, Cash App, Venmo) allow you to transfer money electronically to people in your network

cryptocurrency

digital money (no physical coin or bill); transactions between parties are recorded on a decentralized online ledger called a blockchain

automated clearing house (ACH)

a nationwide network of banks, credit unions, and other depository institutions that send each other credit and debit transfers electronically

debit card advantages

have insurance, fraud protection, and generally low or no fees

prepaid card advantages

have limited loss liability (if financial institution goes out of business), unlimited loss liability (for fraud), and generally higher fees

automated clearing house (ACH) advantages

generally preferred by employers to pay wages and by lenders to schedule loan payments

emergency fund

money set aside for expenses that have not been budgeted

elements of a loan

• principal

• interest

• loan fees

loan principal

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

loan interest

the money paid to the lender for the use of their money— determined by the interest charged on the loan

loan fees

fees to cover processing or managing the loan

collateral

something of value that can be sold in the event that the loan payments are not made by the borrower (ex: a car or a house)

finance charges

the total amount of fees and interest charged by the lender for a loan

fixed installment loans

lending contracts where the borrower agrees to repay the money through fixed monthly payments that will not change during the life of the loan

variable installment loans

structured so that the loan will be paid off within a certain time period; however, payments may fluctuate during the repayment period due to changes in the interest rate

calculating interest (formula)

(annual loan interest rate/12 months) x (loan balance) = interest charges on loan form one month

annual percentage rate (APR)

a broad measure of the cost of borrowing — includes both the interest rate charged and any required fees for the loan

a way to simplify comparison shopping for consumers

fair debt collection practices act (FDCPA)

regulates the behavior of debt collectors; prohibits lenders and debt collectors from abusive, deceptive, and unfair debt collection practices

credit report

a summarized accounting of your credit history

credit bureau

a company that maintains housing and credit files on consumers

credit report positive actions

• borrowed money from a company and used the purchased asset (car, boat, furniture)

• applied for, been accepted, and used a credit card.

• took out a student loan

credit report negative actions

• declared bankruptcy

• lost a home to foreclosure

• had been sued and lost the court battle

• incurred court-related judgments, liens, and unpaid financial obligations (child support, unpaid fines)

inquiry

when a lender requests your credit report to determine creditworthiness

fair credit reporting act (FCRA)

requires Equifax, Experian, and TransUnion to provide you with a free copy of your report once every 12 months

identity theft

when someone else uses your personal information, such as your name and Social Security number, to obtain credit

credit score

a tally that summarizes a person’s credit risk

FICO score

the most widely used credit score was created by Fair Isaac Corporation; can range from a low of 300 to a high of 850

higher credit score = credit risk

lower

credit score range 300 to 550

low range; usually leads to rejections for new credit

credit score range 550 to 620

subprime range; indicates a high-risk borrower, high interest and fees, limits amount of credit issued.

credit score range 620 to 680

this range represents the minimum score to be accepted for most loans

credit score range 680 to 740

good credit range; terms and conditions of loans will be favorable

credit score range 740 to 850

excellent range; borrowers have stellar previous payment histories and receive the best borrowing terms

basic rules to optimize your credit score

• keep revolving debt balances low

• apply the ratio rule

• avoid applying for lots of new credit cards at one time

• vary your credit mix

bankruptcy

the legal process that allows a person who owes money to others to either repay the money over time or have the entire debt discharged

credit card

a loan that can be used at the borrower’s discretion and convenience and has flexible repayment options

co-signer

an individual, in addition to the borrower, who will be held responsible for repayment of the debt

secured credit cards

requires the borrower to deposit the full amount of the line of credit at the bank as collateral before the credit card is issued; provides a way to establish credit w/o a co-signer

credit card accountability responsibility and disclosure act

protects consumers from unfair and deceptive practices in the credit card industry