study guide PF ch 5-8

Credit

A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest.

Secured credit card

Requires a secured deposit equal to the credit limit.

Unsecured credit card

Does not require a secured deposit and is based on the promise to repay.

Unsecured loan

Another name for a signature loan.

Five Cs of the credit decision:

1.      

Character: responsibility in repaying loan

2.      

Capacity: Enough income minus expenses to pay loan

3.      

Collateral: asset of value that secures a loan; this item is given to lender if the borrower defaults on the loan

4.      

Capital: Net worth; other assets that could be sold to pay the loan

5.      

Conditions: Economic conditions for specific industries employed

Cosigner

A person who is responsible for repaying the credit if the borrower fails to do so.

Debt-to-income ratio

Used to determine the ability to repay debt.

why is there variability in interest rates for different credit costumers

Due to different financial situations of credit customers.

Advantages of using credit cards

Increase credit score.

What is the maximum balance you should have on a credit card

30% of the credit limit.

Grace periods

Amount of time to pay the bill in full before finance charges are activated.

Tips to keep credit card interest rate and fees low

Pay off credit immediately and pay on time.

Watch for on 0% credit offerings

Deferred interest if balance not paid off in allotted time.

Steps to remedy an error on a credit card statement

Call credit card company and follow up with a written letter.

Subsidized vs Unsubsidized

Subsidized loans have government-paid interest while in school and unsubsidized does not

Advantages and disadvantages of private student loans

Not guaranteed by the government but do not require FAFSA.

Options for managing repayment of student loans

Consolidation, refinancing, deferment, forbearance, alternate payment options.

Deferment

Postpones principal payment for a specific amount of time.

Formula for calculating loan payment

PVA = PMT ({1-[1-/(1+i) n ]}/i).

Why is a payday or tittle loan considered predatory lending?

They charge clients triple-digit APRs.

Disadvantages of rent-to-own contracts

Cost more than the actual thing in the long run.

Alternatives to payday or title loans

Cash advance on credit card, shop for lowest cost credit offer.

Perma-debt

The condition of having an outstanding balance on credit cards that is barely reducible over time because one is able to make only the minimum payments and is being charged a high annual rate.

Credit CARD Act of 2009

Requires evidence of enough income or adult cosigner for individuals under 21 to receive a credit card.

Importance of establishing a credit record

Demonstrates responsibility with credit.

How to establish a credit record

Apply for a credit card, use it wisely, pay on time and in full.

Three national credit reporting agencies

TransUnion, Equifax, Experian.

Information found on a credit report

Credit handling information and personal information.

Duration of a late payment incident on credit report

7 years.

Utilization rate for best credit

No more than 7%.

Importance of careful credit card purchases

Spending habits can be shared with third-party companies.

FICO credit score

Reflects credit risk based on credit report at a particular point in time.

FICO score range

300-850.

Good FICO score

Higher score.

Five most important indicators impacting FICO score

Payment history, amount owed, length of credit history, recent applications for new credit, types of credit in use.

Two indicators with most impact on FICO score

Payment history and amount owed.

where can you securely check credit report and score

Central Source Annual Credit Report Request Service, CreditKarma.

Percentage of credit reports with errors

25% contain errors, 5% include serious errors.

Tips to improve credit score

Pay bills on time, keep credit card balances low, pay off debt, limit new credit accounts, catch up on missed payments.

Options if error found on credit report

Report error to credit bureau.

Duration of negative information on credit report

7 years.

Identity theft

Crime of obtaining personal information to commit theft or fraud.

Actions to protect against identity theft

Check financial statements, monitor credit report, avoid giving out personal information, use a shredder, protect your wallet and mail, practice good cell phone security.

Phishing

Bogus marketing schemes to gain personal information for identity theft.

What to carry in your wallet

Only necessary ID and debit card.

Skimming

Stealing credit card information by swiping it through a processing machine.

Steps to take if victim of identity theft

Contact credit bureau, obtain credit report, contact police, file a report, contact creditors, file complaint with FTC, freeze credit reports, monitor for future identity theft.

Side effects of irresponsible debt use

Defaulting on payments, lower credit score, higher interest rates, difficulty qualifying for future loans.

Steps to build credit rating in independent life stage

Make payments on time, use no more than 30% of credit line, review financial statements.

Considerations for needs when shopping for a vehicle

Passengers, cargo, driving experience, climate, preferences, transmission, GPS/entertainment system, type of drive.

Determining affordable auto payment

Multiply monthly gross income by 36%, subtract monthly debt obligations.

Monthly vehicle payment dependent on

Months financed, amount financed, interest rate.

Advantages of buying a used automobile

Less expensive.

Advantages of buying a new automobile

Lower interest rate, rebates/incentives, latest safety features.

Advantages of leasing an automobile

Lower payments.

Private sale of a vehicle

Check VIN, registration, title for ownership verification.

Fair treatment in trade-in

Conduct research for fair trade-in value.

Downsides of "0% interest" and "$0 down" offers

Overall cost might be higher.

After-sale activities for a new vehicle

Thorough inspection, insurance coverage, transfer title and buy new license plates.

Mortgage

Legal document allowing a lender to use real property as collateral.

Advantages of renting

No unexpected repair bills, property tax, HOA fees, low initial cost, may not have to pay utilities.

Sublease

Transferring rental agreement to a new tenant.

Advantages of buying a home

Potential for appreciation and equity growth.

Equity

Difference between what you own and what you owe.

Selection criteria for buying a home

Price, location, maintenance, school systems, insurance, taxes, HOAs, resale value.

Realtor's role in home sale

Links buyers with sellers, works for the seller, paid commission.

Private mortgage insurance (PMI)

Required if less than 20% down payment.

Requesting PMI drop

Once loan-to-value ratio is 80% or less

Benefit of fixed-rate mortgage

Knowing the exact amount of mortgage interest and principal payments for the entire loan duration.

Advantages of adjustable-rate mortgages (ARMs)

Lower closing costs and less stringent credit criteria.

Consequence of ARMs during the Great Recession

Houses lost value to only 50-75% of their initial purchase price.

Hope with balloon-payment mortgage

Selling the house before the balloon-payment comes due to avoid refinancing.

Definition of closing

Final steps in a home sale where documents are signed, recorded, and ownership of the property is transferred.

Examples of closing cost fees

Loan Application Fee, Loan Origination Fee.

Recommendation for credit score below 600

Wait and build up credit score before applying for a loan to refinance a home.

When to refinance a home

When interest rates are lower to lock in a lower rate.

Types of home equity loans

HELOC, Fixed-Rate/Fixed-Term Loan, Balloon-Payment Loan.

Common use of home equity loans

Obtaining money for a major purchase or expense.

Precaution when using a home equity loan for debt consolidation

Failure to pay on credit cards can still put your home at risk.

Lack of preparation during the Great Recession

No emergency fund and increased credit card debt.

Early warning signs of financial trouble

Living paycheck to paycheck, paying minimum on credit cards, decreasing net worth each month.

Recommended minimum amount for an emergency fund

$1000.

Next goal after reaching the minimum emergency fund

Save three to six months' income in the emergency account.

Signs of out-of-control credit card spending

Failing to make minimum payments, tapping home equity, getting cash advances, using payday lenders.

Comparison of fiscal fitness to physical fitness in climbing out of debt

Developing a plan to stay in good fiscal shape to avoid financial crisis.

Definition of frugal

Avoiding waste and being resourceful.

Importance of cost per unit (CPU) for comparison shopping

Easier comparison of an item's cost per pound or ounce.

Importance of paying yourself first

Developing financial security.

Reasons to tap emergency fund and immediate action needed

Repaying debt; pay back the emergency fund as soon as possible.

Tips for stopping little leaks

Cutting coupons, making shopping easier, changing everyday habits, cutting out convenience foods, packing lunch, returning unwanted purchases.

Steps to digging out of debt

Stop using credit cards, create a realistic budget, exercise "ten seconds" and "month-end" holds, don't buy things you cannot afford, pay off debt, make payments on time, increase income.

Impact of credit card acceptance by McDonald's on spending habits

Increased likelihood of spending on credit cards and getting into debt.

Definition of "month end" method

Waiting until the end of the month to consider purchases in the budget.

Recommendation for paying off debt

Pay off the debt with the highest interest rate to save more money.

Strategies for managing past credit card debt

Prioritize either highest interest rate or smallest amount owed.

Risk of debt consolidation

Treating outcomes but not addressing the source of the problem.

Categories of people seeking credit counseling

Single session help, too much debt for counseling, signing up for a debt management plan.

Identifying legitimate credit counselors

No big fees, accreditation, bills are paid.

Activities not permitted under the FDCPA

Calling before 8am or after 9 pm, harassment, concealing identity, lying about committing a crime.

Definition of seriously delinquent

Residential mortgages 60 days or more past due or already in foreclosure.