ch. 5

check

written order to a bank to pay a 3rd party

3 elements required to write a check

1. the name of the person/company that gets the money

2. the date

3. the amt. to be paid

is it possible to make a check payable to “CASH” instead of a person/company?

yes, but when you do this, anyone who comes into possession of the check can cash it

order of numbers appearing on bottom of check

routing number, account number, check number

federal reserve act of 1913

bank routing numbers w/ a bank account number allows a check written in one city at one bank to be cashed in another city at another bank

check and check alternatives ex.

money orders

certified checks

cashier’s checks

traveler’s checks

checks and check alternatives are rapidly being replaced with…

electronic payments

to link your checking acct. w/ only or other electronic pmt. tools, you’ll need to know…

your routing number & account number

advantages of checking accts.

• liquidity

• direct deposits of paycheck

• FDIC insurance

• debit cards

liquidity

quick & easy way to access cash

direct deposit of paycheck

a way for an employer to transfer your earnings directly to your bank or credit union account

FDIC insurance

protection of all deposits up to $250k in case the bank/credit union fails

debit cards

usually comes w/ a checking acct. acts as an electronic version of a check

checking account reconcilliation

the process of comparing your check/debit card register with your monthly bank statement

(use a check register?)

how often should you check your bank statements?

at least 1x a week

bank routing number

a digital code on a check that helps facilitate check processing

reconcilliation

balancing a monthly bank statement w/ a check register

FDIC deposit insurance coverage

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

electronic transactions are quickly becoming…

the standard

traditional transaction methods used

cash, coins, checks

electronic payment transaction methods used

debit cards & prepaid cards

hybrid transaction methods used

Peer-to-peer pmt (P2P)

Automated Clearing House (ACH)

Blockchain technology (ex. bitcoin)

blockchain technology

chains of block w/ unique codes that can’t change; chains can grow

Automated Clearing House (ACH)

a nationwide network of financial institutions that send each other credit and debit transfers electronically

• make up a high percentage of pmts made in the U.S.

credit transfers through ACH

money coming into an institution

wages, salaries, SS benefits, tax refunds

debit transfers through ACH

money flowing from an institution

payments for mortgages, utility bills, & credit card pmts.

debit cards have…

FDIC or NCUA insurance, fraud protection (usually 2-day period), & generally low/no fees

prepaid cards have…

loss potential & generally higher fees

ACH is generally preferred by…

employers to pay wages

lenders to schedule loan pmts

emergency fund

money set aside for expenses that haven’t been budgeted

without an emergency fund, you may need to…

borrow money by obtaining a loan if large expenses occur, such as paying for unexpected car repairs/college tuition

mainstream financial service providers

banks, credit unions, & other deposit institutions

alternative financial service providers

auto title loans, payday loans, tax refund loans, pawn shops, or rent-to-own stores

elements of a loan

principal, interest, loan fees

principal

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

interest

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

loan fees

fees to cover processing/managing the loan

collateral

something of value that can be sold in the event that the loan pmts are not made by the borrower

ex. a car, house, pokemon cards, Soobin blue hour

finance charges

the total amt. of fees & interest charged by the lender for a loan

loan repayment cost =

principal + interest + fees

(interest + fees = finance charge)

fixed installment loans

lending contracts where the borrower agrees to repay money via fixed monthly pmts for the life of the loan

• borrower gets all the money at once and repays over time

• loan balance decreases until it’s paid in full

• ex. auto loans, education loans, & mortgages

variable installment loans

structured so that the loan will be paid off within a certain time period, however, payments may fluctuate

• if the interest rate changes, then the payments due & interest charged will change each month

• the change in interest charged may increase or dec. the loan pmts. or change the length of the loan

• ex. adjustable rate mortgages (ARMs)

interest charged on loan for one month (or whatever time period)

(loan interest rate / 12 months) * loan balance

OR

outstanding loan balance * interest rate for the time period

calculating EB using amort table

find interest

pmt - interest = principal

BB - principal = ending balance

APR (annual percentage rate)

a way to simplify comparison shopping for consumers (disclosure is required by the federal govt.)

• A broad measure of the cost of borrowing— includes both the interest rate charged & any required fees for the loan

how does the ikea theory relate to finances?

you need to get involved w/ them; ex. know your spending, APR, etc.

does the lowest APR mean you’re getting the best deal?

not necessarily; there are other non-monetary factors

calculating finance charges

find the pmt (in months), multiply by n, subtract from PV

credit report

summarized accounting of your credit history

how do lenders use your credit report?

to determine creditworthiness when you apply for credit

credit bureau

a company that maintains housing & credit files on consumers

what are the 3 primary national credit bureaus?

Equifax

TransUnion

Experian

Fair Isaac Corporation (FICO)

the nation’s leading credit-scoring company

is there one version of FICO?

no, there are many diff ones. your credit score can vary like 10-15 points across diff. versions

what actions increase a credit score?

• borrowing money from a company & used the purchased asset as collateral (ex. buying a car, boat, motorcycle, furniture)

• applied for, been accepted, & used a credit card

• took out a student loan

• declared bankruptcy (ch. 13, ch. 7)

how long does a chapter 7 bankruptcy stay on your credit report?

10 years

your credit score is impacted/determined by…

your character habits & traits

what actions decrease a credit score?

• lose a home to foreclosure

• fallen behind on reported debt

• had delinquent child support report required by govt. agency

when ppl file for bankruptcy, they’re sometimes targeted for CCs and other stuff. this can make people…

fall back into habits & file again

should you use credit for what you need or what you want?

what you need

inquiry

when a lender requests your credit report to determine creditworthiness

soft & hard inquiries

if you’re denied for a CC, should you just keep applying without changing anything?

no, because several denials can hurt your credit score

when do credit card companies report to the bureau?

at the statement date

higher utilization than usual & paying in full at the CC pmt date can __ your credit score

lower

(ex. going from 15-20% to 60% utilization)

current creditors

firms you have borrowed money from

the info that goes into your credit report comes primarily from…

current creditors

additional info in a credit report comes from…

credit applications that you submit & that contain employment info & addresses

does info from public records go into a credit report? like what?

yes, like

• bankruptcy filings

• court ordered liens

• court judgments

list of info shown in a credit report

• summary of current accounts

• negative items

• inquiry history

• personal statement (optional)

fair credit reporting act (FCRA)

requires Equifax, Experian, & TransUnion to provide you w/ a free copy of your report once every 12 months

(right now you can check once a week)

if you find an error on your credit report, you can…

contact the credit bureau to have the info corrected

where to check your credit

annualcreditreport.com

does checking your credit score often hurt it?

no

do you need to hold a balance on your credit card?

no

what happens when you’re an authorized user on someone’s CC

can help/hurt you based on their utilization

should you get a copy of your credit report?

yes, to make sure everything is accurate. print them out (from each bureau)

identify theft

occurs when someone else uses your personal info, such as your name and SS number, to obtain credit

can identify theft occur by someone you know, ex. friends & family?

yes

what to do if you’re a victim of identify theft or a credit scam

• write to each of the bureaus directly, telling them that the info is inaccurate

• write to the merchant(s) to dispute any items purchased that you didn’t buy

• contact the FTC & your state’s Attorney General’s office

• can also report the crime to local law enforcement

credit score

a tally that summarizes a person’s credit risk

the info within a credit report analyzed & then reduced into a number

bad credit risk

someone who has a history of not paying bills on time/not repaying their loans

most widely used credit score

FICO score

higher credit score =

lower credit risk

FICO breakdown

• payment history - 35% (lenders look for on-time pmts on loans)

• amt of credit - 30% (available credit)

• length of credit - 15% (longer = better)

• new credit - 10% (less is more)

• types of credit - 10% (mix of types)

should you read the fine print when it comes to your credit?

yes

300-550 credit score range

low (usually rejected)

550-620 credit score range

subprime (high risk borrower, high fees & interest)

620-680 credit score range

minimum score to be accepted

680-740 credit score range

good

740-850 credit score range

excellent

vantage score breakdown

pmt history - 40%

age & type of credit - 21%

% of credit limit used - 20%

total balances / debt - 11%

recent credit behavior & inquiries - 5%

available credit - 3%

strategy to building a good credit score

start w/ one application

1. open a line of credit (ex. CC)

2. buy necessary items

3. pay off balance with the first monthly statement

4. repeat each month, keeping account active

if you get a credit card and start to change your behavior, what should you do?

STOP

credit cards nudge you to spend & get pts. beyond what you planned to doho

what % of your credit limit should you aim to spend?

15-20%, do not go over 30%.
try to be consistent

what credit limit % to use to optimize FICO score

less than 15%

what happens if you miss a credit payment?

you should get & stay current as quickly as possibly

try to never miss a payment

basic rules to optimize your credit score

• keep revolving debt balances low

• apply the ratio rule (credit usage ratio)

• avoid applying for lots of new CCs at one time

• vary your credit mix

credit card

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

co-signer

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

does family or money come first?

family

ask: if you don’t get that $ back, would it affect that relationship? (yes = don’t do it)

treat lending like a gift