Chapter 16, 17, 18 ,19 test Flashcards
Credit
Money borrowed to buy something now with the agreement to pay for it later.
Credit
Money borrowed to buy something now with the agreement to pay for it later.
Borrower/Debtor
When you borrow money or use credit
Creditor
Person or company who loans money or extends credit
Capital
Property you possess that is worth more than your debts.
Bank accounts, investments, and other assets
Collateral
Property pledged to assure repayment of a loan.
Repossessed
Principal
Amount borrowed
Balance due
Principal and interest for the time you have the loan
Finance charge
Total dollar amount of all interest and fees you pay for the use of credit
The price you pay for the privilege of using someone else’s money
Minimum Payment
Least amount you must pay every month based on your credit agreement
Due Date
When credit payments are due
Late Fee
If you don’t pay within the time allowed, added to balance due
Installment Agreement
Agree to make regular payments for a set period of time
May have to do this on expensive purchases
Example: Car payment
Advantages of Credit
Expand purchasing potential and raise standard of living
Enjoy more expensive items earlier in life
Safer than carrying around a lot of cash
Convenient
Deferred billing
Disadvantages of Credit
May cost more than cash purchases Higher prices Finance charges Balance and time to pay Tie up future income Can lead to overspending Possible bankruptcy
Open-ended credit
Agreement to lend the borrower an amount up to a stated limit and to allow borrowing up to that limit again.
Open 30-Day Accounts
Revolving Credit Accounts
Closed-End Credit
18 months same as cash
Furniture, car, major appliances
Installments
Service Credit
Agreement for service now and pay later
Utilities, doctors, dry cleaners, hospitals, lawyers, repair shops
Open 30-day Accounts
Promise to pay full balance owed each month
aka; Charge Card
Revolving Credit Accounts
Option to pay in full or make payments at least as high as the stated minimum
Visa, MasterCard, Discover, Retail store cards, Gasoline company cards
Annual Percentage Rate
Cost of credit expressed as a yearly percentage
Must be disclosed to you and noted on each monthly bill.
This is a variable rate.
Free Period
Grace period
Allows you to avoid the interest charge by paying your current balance in full before the due date.
Annual Fees
Must pay the fee whether or not you use the card.
Can be from $15-$35 or more.
Transaction Fees and Late Fees
Charged for: access check, pay by phone, next day processing, go over limit
Method of Calculating the Finance Charge
Will depend on the method the issuer uses
more in Chapter 18
Sources of Credit
Finance Companies,Pawnbrokers,Private Lenders,Life insurance/CD’s
FICO Score
What is it? Credit score created by Fair Isaac Corporation Summarizes credit risk based on your credit report What is the range? 300-850 What is the purpose of a FICO score? Get loans faster Credit decisions are more fair Helps determine interest rate
Credit Bureau
Company that gathers, stores, and sells credit information to business subscribers
TransUnion
Experian
Equifax
Credit Report
Written statement of a consumer’s credit history
Fair Credit Reporting Act requires each of the three companies to provide you with a FREE copy of your credit report once every 12 months
Creditworthiness
Character Capacity Capital Conditions Collateral
Character
Will you repay?
Looking for a person who pays bills on time and has stability
Capacity
Can you repay?
Are you “capable?”
Capital
Is the creditor fully protected if you fail to repay?
Conditions
What economic conditions impact repayment?
Job Security
Collateral
What can you sell to give creditors their money if you can’t pay your bill?
What’s In Your Credit Report?
Information stays in the file for 7 years
Information found in a credit report
Personal Information
Name, address, SS#
Accounts
Credit accounts you have open (mortgage, auto loan, etc.)
Inquiries
Lenders who access your report (voluntary vs. involuntary)
Negative Items
Delinquency information, bankruptcies, foreclosures, etc
What a FICO Score Considers
Payment History
Amounts Owed
Length of Credit History
New Credit
Types of Credit in Use
Inquiries
Requests that a lender makes for your credit report or score
Inquiries usually have a small impact
Large #’s of inquiries mean higher risk
Many kinds of inquiries are ignored completely
Does not count when you request, or if a lender makes a request to pre-approve you, employers not counted either
The score allows for “rate shopping” Auto or mortgage loan Do your shopping within 14 days to avoid a lowering of your scoreYou Landlords Employers Businesses Creditors
Consumer Credit Protection Act of 1968 (Truth-in-Lending Law)
Requires lenders to fully inform consumers about all costs of a credit purchase before an agreement is signed.
Must disclose finance charge, APR
Limits liability to $50 for lost or stolen cards.
No liability if card is reported lost prior to fraudulent use.
Fair Credit Reporting Act
Right to one free copy of your credit report from each of the 3 major reporting services.
If there is a mistake you have the right to dispute the mistake.
May see your file at no charge within 30 days of a credit denial.
Right to have inaccurate information corrected/deleted
Fair Credit Billing Act
Creditors must resolve billing errors within specified period of time.
Must provide a billing statement
Must be disputed in writing and mailed within 60 days after you get the statement
Equal Credit Opportunity Act of 1975
Designed to prevent discrimination
Credit cannot be denied based on race, color, religion, national origin, sex, marital status, age, or because you receive public assistance.
See page 418 and 419
Fair Debt Collection Practices Act
Prohibits use of threats, obscenities, and false and misleading statements to intimidate the consumer into paying.
Also restricts time and frequency of collection practices.
Protecting Yourself From Credit Card Fraud
- Sign the back
- Carry only the cards you need
- Keep a list of your cc#’s, expiration dates, and phone # and address of each company
- Notify creditors immediately if card is lost/stolen
- Watch card during transaction and get it back immediately
- Shred any carbon paper that contains account info
- Do not lend your card to anyone
- Destroy expired cards by shredding them
- Don’t give cc#’s by phone to anyone you don’t know
- Keep sales receipts and verify all charges on statements
avoiding unnecessary credit costs
Accept only the amount of credit that you need
Make more than the minimum payment
Do not increase credit spending when your income increases
Keep the number of credit cards to a minimum
Pay cash for purchases under $25
Understand the cost of credit
Shop for loans
Take advantage of rebate programs
Credit Costs Vary
Source of credit, amount financed and length of time, ability to repay debt, type of credit selected, secured loan, prime rate, economic conditions,busisness costs of providing credit
Simple Interest Example
Interest = Principal x Rate x Time
finance charge
Finance Charge = Total Price Paid – Cash Price
APR
=2 x n x f/P(N+1)
Adjusted Balance Method
Apply finance charge ONLY on the amount owed after you have paid your bill
Previous Balance Method
Finance charge imposed on entire amount owed from the previous month
Average Daily Balance Method
Calculate your balance on each day of the billing cycle
Two-Cycle Billing
Calculates the finance charge on average daily balance over the last 2 billing periods instead of just one
Bankruptcy
The legal process whereby you are declared legally insolvent – having insufficient income and assets to pay your debts (liabilities)
Should be a last resort
2 Goals of Bankruptcy Law in the U.S.
Protect a debtor by giving him/her a fresh start, free from creditors’ claims
Give fair treatment to creditors competing for a debtor’s assets
20/10 Rule
Don’t borrow more than 20% of your yearly take-home pay
Never agree to monthly payments that are more than 10% of your monthly take-home pay
Non-Profit Credit Counseling
Offer advice/counseling; not loans
Private or Government Sponsored
Some free; Some small fee based on ability
Commercial Debt-Adjustment Firms
Charge a fee
Repayment plan
Often times you will pass over all your payment rights to the firm
Involuntary Bankruptcy
Creditors file a petition to courts, which then determine if you should be declared bankrupt
If court agrees, it takes over your property and other assets and pays off your debts proportionally to your creditors
Not as common because creditors would rather get paid in full than settle for a portion of your assets
Voluntary
You file a petition with federal court asking to be declared bankrupt
Creditors are given notice and then can file claims against your assets
The court collects your assets, sells your property as needed, and distributes the proceeds equitably among your creditors
More common than involuntary
Reaffirmation
Creditors ask debtor to repay debts after bankruptcy is completed
Not required of debtor
Causes of Bankruptcy
Business Failure
Emotional Spending
Failure to Budget and Plan
Catastrophic injury or illness
Advantages of Bankruptcy
Most debts are erased (Chapter 7) and many are discharged (Chapter 13)
Some assets are exempt and can be kept
Certain incomes are unaffected
The costs are relatively small to file bankruptcy
Disadvantages of Bankruptcy
Credit can be damaged
Chapter 7 – 10 years
Chapter 13 – 7 years
Property is Lost
Not all debt is erased
Some debts can be reaffirmed (fraudulent representation)
Cosigners usually still responsible to pay
Borrower/Debtor
When you borrow money or use credit
Creditor
Person or company who loans money or extends credit
Capital
Property you possess that is worth more than your debts.
Bank accounts, investments, and other assets
Collateral
Property pledged to assure repayment of a loan.
Repossessed
Principal
Amount borrowed
Balance due
Principal and interest for the time you have the loan
Finance charge
Total dollar amount of all interest and fees you pay for the use of credit
The price you pay for the privilege of using someone else’s money
Minimum Payment
Least amount you must pay every month based on your credit agreement
Due Date
When credit payments are due
Late Fee
If you don’t pay within the time allowed, added to balance due
Installment Agreement
Agree to make regular payments for a set period of time
May have to do this on expensive purchases
Example: Car payment
Advantages of Credit
Expand purchasing potential and raise standard of living
Enjoy more expensive items earlier in life
Safer than carrying around a lot of cash
Convenient
Deferred billing
Disadvantages of Credit
May cost more than cash purchases Higher prices Finance charges Balance and time to pay Tie up future income Can lead to overspending Possible bankruptcy
Open-ended credit
Agreement to lend the borrower an amount up to a stated limit and to allow borrowing up to that limit again.
Open 30-Day Accounts
Revolving Credit Accounts
Closed-End Credit
18 months same as cash
Furniture, car, major appliances
Installments
Service Credit
Agreement for service now and pay later
Utilities, doctors, dry cleaners, hospitals, lawyers, repair shops
Open 30-day Accounts
Promise to pay full balance owed each month
aka; Charge Card
Revolving Credit Accounts
Option to pay in full or make payments at least as high as the stated minimum
Visa, MasterCard, Discover, Retail store cards, Gasoline company cards
Annual Percentage Rate
Cost of credit expressed as a yearly percentage
Must be disclosed to you and noted on each monthly bill.
This is a variable rate.
Free Period
Grace period
Allows you to avoid the interest charge by paying your current balance in full before the due date.
Annual Fees
Must pay the fee whether or not you use the card.
Can be from $15-$35 or more.
Transaction Fees and Late Fees
Charged for: access check, pay by phone, next day processing, go over limit
Method of Calculating the Finance Charge
Will depend on the method the issuer uses
more in Chapter 18
Sources of Credit
Finance Companies,Pawnbrokers,Private Lenders,Life insurance/CD’s
FICO Score
What is it? Credit score created by Fair Isaac Corporation Summarizes credit risk based on your credit report What is the range? 300-850 What is the purpose of a FICO score? Get loans faster Credit decisions are more fair Helps determine interest rate
Credit Bureau
Company that gathers, stores, and sells credit information to business subscribers
TransUnion
Experian
Equifax
Credit Report
Written statement of a consumer’s credit history
Fair Credit Reporting Act requires each of the three companies to provide you with a FREE copy of your credit report once every 12 months
Creditworthiness
Character Capacity Capital Conditions Collateral
Character
Will you repay?
Looking for a person who pays bills on time and has stability
Capacity
Can you repay?
Are you “capable?”
Capital
Is the creditor fully protected if you fail to repay?
Conditions
What economic conditions impact repayment?
Job Security
Collateral
What can you sell to give creditors their money if you can’t pay your bill?
What’s In Your Credit Report?
Information stays in the file for 7 years
Information found in a credit report
Personal Information
Name, address, SS#
Accounts
Credit accounts you have open (mortgage, auto loan, etc.)
Inquiries
Lenders who access your report (voluntary vs. involuntary)
Negative Items
Delinquency information, bankruptcies, foreclosures, etc
What a FICO Score Considers
Payment History
Amounts Owed
Length of Credit History
New Credit
Types of Credit in Use
Inquiries
Requests that a lender makes for your credit report or score
Inquiries usually have a small impact
Large #’s of inquiries mean higher risk
Many kinds of inquiries are ignored completely
Does not count when you request, or if a lender makes a request to pre-approve you, employers not counted either
The score allows for “rate shopping” Auto or mortgage loan Do your shopping within 14 days to avoid a lowering of your scoreYou Landlords Employers Businesses Creditors
Consumer Credit Protection Act of 1968 (Truth-in-Lending Law)
Requires lenders to fully inform consumers about all costs of a credit purchase before an agreement is signed.
Must disclose finance charge, APR
Limits liability to $50 for lost or stolen cards.
No liability if card is reported lost prior to fraudulent use.
Fair Credit Reporting Act
Right to one free copy of your credit report from each of the 3 major reporting services.
If there is a mistake you have the right to dispute the mistake.
May see your file at no charge within 30 days of a credit denial.
Right to have inaccurate information corrected/deleted
Fair Credit Billing Act
Creditors must resolve billing errors within specified period of time.
Must provide a billing statement
Must be disputed in writing and mailed within 60 days after you get the statement
Equal Credit Opportunity Act of 1975
Designed to prevent discrimination
Credit cannot be denied based on race, color, religion, national origin, sex, marital status, age, or because you receive public assistance.
See page 418 and 419
Fair Debt Collection Practices Act
Prohibits use of threats, obscenities, and false and misleading statements to intimidate the consumer into paying.
Also restricts time and frequency of collection practices.
Protecting Yourself From Credit Card Fraud
- Sign the back
- Carry only the cards you need
- Keep a list of your cc#’s, expiration dates, and phone # and address of each company
- Notify creditors immediately if card is lost/stolen
- Watch card during transaction and get it back immediately
- Shred any carbon paper that contains account info
- Do not lend your card to anyone
- Destroy expired cards by shredding them
- Don’t give cc#’s by phone to anyone you don’t know
- Keep sales receipts and verify all charges on statements
avoiding unnecessary credit costs
Accept only the amount of credit that you need
Make more than the minimum payment
Do not increase credit spending when your income increases
Keep the number of credit cards to a minimum
Pay cash for purchases under $25
Understand the cost of credit
Shop for loans
Take advantage of rebate programs
Credit Costs Vary
Source of credit, amount financed and length of time, ability to repay debt, type of credit selected, secured loan, prime rate, economic conditions,busisness costs of providing credit
Simple Interest Example
Interest = Principal x Rate x Time
finance charge
Finance Charge = Total Price Paid – Cash Price
APR
=2 x n x f/P(N+1)
Adjusted Balance Method
Apply finance charge ONLY on the amount owed after you have paid your bill
Previous Balance Method
Finance charge imposed on entire amount owed from the previous month
Average Daily Balance Method
Calculate your balance on each day of the billing cycle
Two-Cycle Billing
Calculates the finance charge on average daily balance over the last 2 billing periods instead of just one
Bankruptcy
The legal process whereby you are declared legally insolvent – having insufficient income and assets to pay your debts (liabilities)
Should be a last resort
2 Goals of Bankruptcy Law in the U.S.
Protect a debtor by giving him/her a fresh start, free from creditors’ claims
Give fair treatment to creditors competing for a debtor’s assets
20/10 Rule
Don’t borrow more than 20% of your yearly take-home pay
Never agree to monthly payments that are more than 10% of your monthly take-home pay
Non-Profit Credit Counseling
Offer advice/counseling; not loans
Private or Government Sponsored
Some free; Some small fee based on ability
Commercial Debt-Adjustment Firms
Charge a fee
Repayment plan
Often times you will pass over all your payment rights to the firm
Involuntary Bankruptcy
Creditors file a petition to courts, which then determine if you should be declared bankrupt
If court agrees, it takes over your property and other assets and pays off your debts proportionally to your creditors
Not as common because creditors would rather get paid in full than settle for a portion of your assets
Voluntary
You file a petition with federal court asking to be declared bankrupt
Creditors are given notice and then can file claims against your assets
The court collects your assets, sells your property as needed, and distributes the proceeds equitably among your creditors
More common than involuntary
Reaffirmation
Creditors ask debtor to repay debts after bankruptcy is completed
Not required of debtor
Causes of Bankruptcy
Business Failure
Emotional Spending
Failure to Budget and Plan
Catastrophic injury or illness
Advantages of Bankruptcy
Most debts are erased (Chapter 7) and many are discharged (Chapter 13)
Some assets are exempt and can be kept
Certain incomes are unaffected
The costs are relatively small to file bankruptcy
Disadvantages of Bankruptcy
Credit can be damaged
Chapter 7 – 10 years
Chapter 13 – 7 years
Property is Lost
Not all debt is erased
Some debts can be reaffirmed (fraudulent representation)
Cosigners usually still responsible to pay
