Ch. 7 Personal Finance

checking account

a deposit account held at a bank that allows withdrawals and deposits

Old version of a checking account

demand deposit account (because the deposit can be demanded at any time

Direct deposit

employer, government, payee makes a direct deposit to your account

automatic payments

are used to take care of periodic payments

debit card

immediately transfers funds at time of transaction

automated teller machine (ATM)

allows immediate access to the cash in your bank

Capital markets

are used for longer term, higher borrowing

Intermediary

the individual between the lender and the borrower (middleman)

Retail banks

focus consumer saving a borrowing

Commercial banks

focus on business loans and cash management

Investment banks

have focused on long-term financing for business

Credit union

cooperative membership organizations with depositors as members (similar to retail banks)

Savings account

interest-bearing deposit account held at a bank or other financial institutions

Certificates of deposit

offers a higher interest rate for those who enroll

Annual Percentage Rate (APR)

the rate at which your principal compounds

Default risk

the risk of nonpayment on a loan

Revolving credit

being able to delay payment for different items from different vendors (credit card or charge card)

Charge card

should be paid off every period or credit cycle

Credit rating

agencies specialize in evaluating borrowers’ credit risk or default risk for lenders

Credit score

lenders use to determine their willingness to lend money

Identity theft

when someone poses as you using your personal information

Grace period

the time between the credit purchase and the time the purchase is charged

Interest rate risk

the risk that interest rates will fluctuate over the majority of the loan

The prime rate

the rate where banks charge their very best

Benefit of lending money (assets or liquidity)

the desire for liquidity is large, and people are willing to pay for liquidity

The longer you lend you liquidity…

the more compensation you need for you increased opportunity cost and risk

When saving/investing individuals will use…

…capital markets

Intermediation

allows for the amount loaned or borrowed to be flexible and for maturity of the loans to vary

Playing a role as intermediary is important so…

banks are regulated by federal and state governments

Since bank failures during the Great Depression

banks are insured up $250,000 through FDIC

When individual savers are choosing intermediaries, they should choose

accounts are FDIC or NCUA

FV

future value

PV

Present value

Debt

used to finance purchases of assets (car or home)

default risk

risk of nonpayment

Revolving credit

extends the ability to delay payment for different items from different vendors

Consumer credit

a revolving, installment, or personal loan

Credit Scores…

range from 300 to 900, the higher the score the less risky you appear to be

Canceling a credit card can result in

lowers credit rate by lower credit history and decreasing diversity of their accounts

Fraud alert messages

notify potential credit grantors to verify identification in case someone has manipulated your account without your consent

Lenders are protected against default risks…

by screening applicants to try to determine their probability of defaulting

Character

is an assessment of the borrower’s attitude towards debt and its obligations

Capacity

represents your ability to repay by comparing the size of your proposed debt obligations to the size of your income, expenses, and current obligations

Capital is

your wealth to asset base

Collateral

insures the lender against the default risk by claiming a valuable asset

Because debt is long term

the lender is exposed to interest rate risk

Managing finances

about managing finances for consumption and investment

the five factors that determine your credit score are

1. Your Bill Payment History (35%)

2. Your Level of Debt Matters (30%)

3. Age of Credit (15%) considers the age of your old accounts or the age of current accounts

4. Types of Credit on Your Report (10%)

5. Number of Credit Inquiries (10%)

How should credit cards be used?

Credit cards should be used as a cash management system