study guide PF ch 5-8

Define 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

Cite the authors’ reasoning why credit has advantages and disadvantages.

“When you use credit, you are borrowing the money from someone or some company that will require repayment at a later date, usually with interest. Interest is the cost of borrowing the money and is usually calculated as a percentage of the money you owe. The more money you borrow, the more interest you will pay. The longer the period over which you borrow the money, the more interest you will pay. The more money you pay someone else in interest, the less money you have for funding your own goals” (Walker and Walker).

What are the differences between a secured and unsecured credit card?

A secured credit requires a secured deposit equal to the credit limit and an unsecured credit card does not require a secured deposit and is only based on the promise for you to repay it back.

What is another name for a unsecured loan?

Signature loans

Explain what the five Cs of the credit decision.

Character: responsibility in repaying loan

Capacity: Enough income minus expenses to pay loan

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

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

Conditions: Economic conditions for specific industries employed

Why is a cosigner sometimes required?

It is so that if you fail to repay the credit, the responsibility of the repayment is given to the cosigner.

How is a debt-to-income ratio used?

Is used to determine how much is your ability to repay debt.

Why is there variability in the interest rate charged to different credit customers?

It is because many people are in different financial situations.

When used wisely, what are some of the advantages to using credit cards?

It will increase your credit score

To maintain a high credit rating, what is the most you should carry as a balance on a credit card?

30% of the credit limit

How do grace periods work? Why is it important to know the terms of your grace period?

It is the amount of time you have to pay your bill in full before finance charges are activated. You might not be illegible for another grace period and this means that you could be charged interest as soon as you make a purchase.

What are some things you can do to help keep your credit card interest rate and fees low?

Make sure you pay off credit as soon as you take from it and pay things off on time.

What should you watch for on 0% credit offerings?

Sometimes the lender defers the interest if you do not pay off the balance in the allotted time period.

What steps can you take to remedy an error on your credit card statement?

Call the credit card company immediately and then follow up the phone call with a written letter

How do subsidized student loans compare to unsubsidized student loans?

Subsidized student loans have the government pay your interest while in school and unsubsidized does not

What are the advantages and disadvantages with private student loans?

They are not guaranteed by the government, but they do not require a FAFSA

What options do you have for managing the repayment of your student loans?

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

Explain the process of deferment.

It postpones the principal for a specific amount of time

What is the formula for calculating your loan payment?

PVA = PMT ({1-[1-/(1+i)ⁿ]}/i)

Why is a payday or tittle loan considered predatory lending?

They charge their clients triple digit APRs

What are the disadvantages of rent-to-own contracts?

They cost more than the actual thing in the long run

What are the alternatives to a payday or title loan?

Cash advance on credit card, shop for the credit offer with the lowest cost

What is 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.

What did the Credit CARD Act of 2009 require?

requires that a consumer under the age of 21 show evidence of enough income to make payments or have an adult cosigner in order to receive a credit card in her own name.

Why is it important to establish a credit record?

It is important because you can demonstrate responsibility with credit

How do you establish a credit record?

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

What are the three national credit reporting agencies?

TransUnion, Equifax, and Experian

List what types of information can you find on a credit report.

Information on how you handle credit and personal information.

How long will a late payment incident stay on your credit report?

It will stay there for 7 years

People with the best credit have a utilization rate of no more than 7%

%.

Why should you be careful in regard to the kinds of things you choose to purchase with a credit card?

They can be shared to third party companies about your spending habits

Define FICO credit score.

A credit score method that reflects your credit risk based on a snapshot of your credit report at a particular point in time.

What is the FICO score range?

300-850

What is considered a good FICO score?

A higher FICO score

Explain what are the five most important indicators that impact your FICO score.

1

Your payment history

2

How much you owe

3

Length of Credit History

4

Recent Applications for new Credit

5

Types of Credit in Use

Of the five, which two has the most impact on your FICO score? Why?

Your payment history and how much you owe because that determines how reliable you are with paying stuff back

Where can you securely check your credit report and credit score?

Central Source Annual Credit Report Request Service and sites like CreditKarma

According to a February 2013 report from the Federal Trade Commission (FTC), a survey showed that as many as 25 % of credit reports contain errors, and 5 % include serious errors that could affect one’s credit score.

What can you do to improve your credit score?

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

What options do you have if you find an error on your credit report?

Report the error to the credit bureau.

How long does negative information stay on your report?

7 years

Define identity theft.

the crime of obtaining the personal information of another and assuming that identity to commit theft or fraud

What actions can you take to protect yourself against identity theft?

Check financial statements, monitor credit report, Don’t give out personal information, Buy a shredder, Empty your wallet, Lock it up, protect your mail, Practice good cell phone security.

Define phishing.

bogus marketing schemes by phone, mail, or e-mail designed to gain personal information for the purpose of stealing your identity

What should you carry in your wallet?

Only necessary ID and debit card.

Define skimming.

stealing information from a credit card by swiping it through a processing machine that gathers the information

What steps should you take if you become a victim of identity theft?

Contact credit bureau and place fraud alert, obtain credit report and find errors, contact police and file a report, obtain copy and the report number, contact all creditor for fraud and close all accounts for fraud, file a complaint with the Federal Trade Commission, place a freeze on your credit reports at all three credit bureaus, monitor for future identity theft

What are the side effects of irresponsible use of debt?

Can lead you to default on your payments and have a lower credit score, with higher interest rates and the possibility of not qualifying for a future loan

What steps can you take to build your credit rating as you enter the independent life stage?

Make your payments on time and not use more than 30% of your credit line. Also review your financial statement for errors.

In Step 1: Analyze Needs versus Wants, what are some things to consider for your needs when you are shopping for a vehicle?

• How many passengers do you need to transport?
• How much cargo do you carry?
• What type of driving experience do you want?
• How does the climate where you live impact what you need?
• Are you looking for speed, acceleration, and handling or fuel economy?
• Do you prefer manual or automatic transmission?
• How important is a GPS or an entertainment system?
• Do you need two-wheel drive, all-wheel drive, or four-wheel drive?

How do you determine how large an auto payment you can afford?

• Multiply your monthly gross income by 36% to determine how much you can put to service your debt, then subtract all your monthly debt obligations. If you have a positive balance, then you can afford the payment for a new car

What is your monthly vehicle payment dependent upon?

• The number of months you finance your vehicle, the amount financed, and the interest rate.

What are the advantages of buying a used automobile?

• It is less expensive

What are the advantages of buying a new automobile?

• You can get a lower interest rate
• Might be eligible for dealer and government rebates and incentives
• Comes with the latest safety features

What are the advantages of leasing (rather than buying) an automobile?

• Are lower than loan payments

In a private sale of a vehicle, what are some of the things you need to do before completing the sale?

• Check the VIN, registration, and title to be sure that the car is the actual owner

How can you make sure you are treated fairly if you decide to complete a trade-in?

• Make sure to conduct research to make sure that you benefit fairly from the trade in

Why are “0% interest” and “$0 down” offers not always the best deals?

• The overall cost might be more than not taking the offer

In Step 8: Complete After-Sale Activities, what are the three things you need to complete before you sign and enjoy your new ride?

• Do a thorough walk around the exterior and look closely through the interior
• Call your insurance agent and make sure you have insurance coverage before driving away
• You need to transfer the title and buy new license plates if the car is used

Define mortgage.

Is the legal document used to allow a lender to use real property as collateral

What are the advantages of renting?

• No unexpected repair bills
• No property tax
• No HOA fees
• Low initial cost
• May not have to pay utilities

Define sublease.

• involves transferring the rental agreement from you, the current tenant, to a new tenant.

What are the advantages of buying your own home?

• Most homes maintain or increase in value in the long term. As you pay down your mortgage and your house appreciates, the equity in your home will grow

Define equity.

• is the difference between the value of what you own and what you owe.

What selection criteria should you use when buying a home?

• Price
• Location
• Maintenance
• School Systems
• Insurance
• Taxes
• Homeowners Associations
• Resale Value

What role does a realtor have in brokering the sale of a home?

• links buyers with sellers, works for the seller, and is paid a commission on the sale of the property

Why would a lender require you to have private mortgage insurance (PMI)?

• If you put less than 20% down

When can you request to have PMI dropped?

• Once your LTV ratio is 80% or less

What is an advantage of a fixed-rate/fixed-term mortgage?

• The benefit is that you know how much the mortgage interest and principal payments will be for the life of the loan.

What are advantages the authors discuss in regards to adjustable-rate mortgages (ARMs)?

• The closing costs are usually less and credit criteria may be less stringent

During the Great Recession, what happened to people with ARMs?

Their houses lost value to only 50-75% of their initial purchase price

Describe one of your “hopes” with a balloon-payment mortgage?

• You hope to sell the house before the balloon-payment comes due so you will not need to refinance

Define closing.

• final steps in a home sale where document s ore signed and recorded and ownership of the property is transferred

Describe some of the closing cost fees.

• Loan Application Fee: A charge for preparing the application, typically ranging from $75 to $300.
• Loan Origination Fee: Usually a 1% charge of the amount of the mortgage loan. Some lenders may offer a different origination fee for acceptance of a different interest rate.

What should you do if you have a credit score below 600?

• Wait for a period of time and build up your credit score before applying for a loan to refinance your home

When does it make sense to refinance your home?

• When the interest rates are lower so then you can lock in a lower rate

What kinds of home equity loans exist?

• HELOC
• Fixed-Rate/Fixed-Term Loan
• Balloon-Payment Loan

How do people typically use a home equity loan?

• When money is needed for a major purchase or expense

What precaution do you need to take if you choose to use a home equity loan for debt consolidation purposes?

• The interest rate on a home equity loan may be lower than that of a credit card, but if you fail to pay on your credit card, you still have your home.

During the Great Recession, how were people not prepared for the event?

• They had no emergency fund, credit card debt ballooned up

What are some of the early warning signs of financial trouble?

• Living paycheck to paycheck
• Paying the minimum on your credit cards
• Decreasing net worth each month

What is the recommended minimum amount to have in an emergency fund?

• $1000

After you have reached the minimum, what is the next goal for your emergency fund?

• Save three to six months income in the emergency account

What are some of the signs of out-of-control credit card spending?

• Failing to make minimum payments
• Tapping home equity to pay off credit cards
• Getting cash advances on credit cards
• Using a payday lender

How does fiscal fitness compare to physical fitness in reference to climbing out of debt?

• To avoid financial crisis, you must develop a plan to stay in good fiscal shape

What does it mean to be frugal?

• Avoid waste and be resourceful

Why is cost per unit (CPU) important for comparison shopping?

• It makes it easier to compare an item’s cost per pound or ounce

Why is it important to pay yourself first?

• It is a good habit to develop your financial security

What are some reasons to tap your emergency fund? If you must use your emergency fund, what will you need to do ASAP?

• If you need to repay your debt
• If you use the emergency fund, then pay it back as soon as possible

What are some of the tips for stopping little leaks?

• Cut coupons
• Make shopping easier
• Change your everyday habits
• Cut out convenience foods
• Pack your lunch
• Return unwanted purchases

What are the steps to digging out of debt?

• Stop using credit cards
• Create a realistic budget
• Exercise the “ten seconds” and “month-end” holds
• Don’t buy things you cannot afford
• Pay off debt
• Make payments on time
• Increase your income

When Mickey D’s started taking credit cards, what happened to people’s spending habits?

• They were more likely to spend their credit cards and this made it way easier to get into debt.

What is the “month end” method?

• Force yourself to wait until the end of the month and give it consideration when reviewing the budget.

What is the recommendation to pay off debt?

• Pay off the debt with the highest interest rate, and you will save more money

What are some strategies for managing past credit card debt?

• Do the one with highest interest rate or do the one with the smallest amount owed

What risk does debt consolidation bring?

• It treats only the outcomes, not the source of the problem

What are the three categories of people who seek credit counseling?

• Single session to help them
• Too much debt for counseling to help
• Sign up for debt management plan

How do you identify legitimate credit counselors who can help you dig out of debt?

• No big fees
• Make sure there is accreditation
• Your bills are paid

What types of activities are not permitted under the FDCPA?

• Call you before 8am or after 9 pm
• Harassment
• Conceal their identity on the phone
• Lie or falsely imply you have committed a crime

What is seriously delinquent?

• Seriously delinquent loans are residential mortgages 60 days or more past due or already in foreclosure

If you are in a position in which you cannot make payments on your home, what should you do to prepare for a meeting with your mortgage lender?

• Before calling the lender, review the original mortgage loan papers. Reevaluate your budget and personal cash flow statement. Make sure the documents are up to date.

How does a bank benefit from mortgage loan modification?

• The bank would receive payments on a loan it would otherwise have to foreclose on.
• The interest on these payments counts as income to the bank

Define reinstatement.

• a temporary solution to the risk of foreclosure that involves reestablishing a loon if the terms of a new agreement are met; this typically includes making back payments by a specific date.

Define forbearance.

• a temporary reduction or suspension of the mortgage payment s for th ree or four months, followed by a new repayment plan for the loan.

Define short sale

• when a residential property cannot be sold for the full amount of the loon and the lender accepts the selling price as satisfying the mortgage

What are your short-term and long-term options for maintaining your credit if you are at risk of foreclosure?

• Short-term:
• Reinstatement
• Forbearance
• Repayment plan
• Long-term:
• Loan modifications
• Partial claim

What can you do to protect your credit score in the event that you are no longer able to make your mortgage payments?

• Sale
• Short sale
• Assumption of loan
• Deed-in-lieu of foreclosure

Define bankruptcy.

• the legal process by which a person declares an inability to pay debts owed to others

Define liquidation.

• a sale of a debtor's nonexempt property and the distribution of the proceeds to creditors

Define wage earner bankruptcy.

• Chapter 13 bankruptcy for individuals with a regular source of income

How does Chapter 7 bankruptcy compare to Chapter 13 bankruptcy?

• Ch 7 is the liquidation of assets with the proceeds distributed to the creditors and ch 13 is where the debt plans to reorganize to keep their assets and pay creditors over a time period of 3-5 years

Summarize the consequences of bankruptcy.

• You lose all of your assets, it lowers your credit score, and it stays on your credit record for a long time.

What steps can you take to restore your credit after bankruptcy?

• Establish good credit
• Pay everything on time
• Don’t use credit
• Establish a secured credit card