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CFP Course Prep 1 > Credit and Debt Management > Flashcards

Credit and Debt Management Flashcards

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1
Q

ADVANTAGES OF USING CREDIT:

A

Provides shopping safety
Opportunity
Emergency funds

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2
Q

DISADVANTAGES OF USING CREDIT:

A

Temptation to overspend
Credit costs, and
Low flexibility with future budgets.

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3
Q

THE CREDIT REPORT INCLUDES:

A

The credit accounts that you possess
Information on each account
Your credit limit, the loan amount, and the account balance
Public record information such as bankruptcies, tax liens, and monetary judgments, and
Information regarding anyone besides you responsible for paying the account.

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4
Q

THE DIFFERENT TYPES OF CREDIT ACCOUNTS ARE:

A

Debit Cards and Prepaid cards

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5
Q

___ can be purchased from specific retailers or can be purchased by consumers for multi-use transactions.

A

Prepaid Cards

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6
Q

_____ are issued by banks, and automatically withdraw funds from checking accounts when purchases are made.

A

Debit Cards

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7
Q

A credit agreement that establishes an outgoing line of credit covering future purchases is an ____ .

A

open-end account

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8
Q

A credit agreement covering a single purchase with a set repayment schedule is a ____

A

closed-end account

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9
Q

A regular charge account is ____

A

a credit account with a merchant, in which complete payment at the end of the billing cycle usually avoids all interest changes.

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10
Q

An open-end account with an established line of credit and rules for minimum monthly payments and interest charges on the unpaid balance is a _____.

A

revolving credit account

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11
Q

Types of Credit

A

A regular (or 30-day) account
A revolving account, or
A retail installment account.

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12
Q

_____ will do a full investigation on any disputed credit card charges,

A

credit reporting agencies known as credit bureaus

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13
Q

Credit Card Factors

A

Home Ownership
Residential and Job Stability
Education
Income
Do you have checking and savings accounts and use them regularly?
Do you use them properly, or are there frequent overdrafts?
Have you used credit properly before by repaying your debts on a timely basis?

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14
Q

What Lenders look for:

A

Character: How you have handled yourself in previous financial dealings.
Capacity: Refers to your ability to repay debt out of your future income. Here, the lender looks not only at the amount of such income but also at future commitments that might restrict it.
Capital: Refers to your financial strength, usually measured by net worth.
Debt to income ratio needs to be below 36%

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15
Q

what is the calculation to calculate how long it would take to pay off a loan?

A

you will need to amortize

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16
Q

_____ insists that fairness be applied to credit applications.

A

Equal Credit Opportunity Act (ECOA)

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16
Q

Reasons to use Credit

A

Convenience
Inflation Hedge
Emergency Fund

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17
Q

If you are denied credit, the____ entitles you to a fair and accurate credit report.

A

Fair Credit Reporting Act of 1971

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18
Q

What can be analyzed using ratios?

A

To compare data in your balance sheet and income statement with a preset target
The raw data in your balance sheet
The raw data in your income statement

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19
Q

How can excessive debt be avoided?

A

By keeping adequate liquidity assets
By keeping debt repayment obligations lower than your pay

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20
Q

The first step in Controlling debt is…

A

is to determine how much debt you can comfortably handle.

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21
Q

_____ is used by financial planners to help control debt obligations, excluding borrowing associated with education and home financing, by forcing you to repay all your outstanding debt obligations every 4 years.

A

The Debt Resolution Rule

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22
Q

______ is simply a measure of the percentage of your take-home pay or income taken up by non-mortgage debt payments.

A

The debt limit ratio

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23
Q

The debt limit ratio

A

Total Monthly Non-Mortgage Debt Payments ÷ Total Monthly Take-Home Pay = Debt Limit Ratio

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24
Q

The recommended maximum debt limit ratio should not exceed _____

A

20%

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25
Q

Current ratio==

A

= current assets / current liabilities.

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26
Q

Debt Ratio=

A

= total debt / total assets

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27
Q

______ Allows you to see if you have taken on too much debt and if you can meet your obligations

A

Debt ratio

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28
Q

Long-term debt ratio =

A

=t otal income available for living expenses / total long term

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29
Q

Living expense ratio =

A

= monetary assets / [annual living expenditures debt ratio / 12]

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30
Q

_____ ratio is the number of times you could make your debt payments with your current income.

A

Living expense ratio

31
Q

Open Credit vs Consumer Loans

A

Open credit is used for making convenience purchases like tonight’s dinner or a new pair of shoes. Consumer loans are usually used for bigger purchases, such as a car.

32
Q

The federal government created a series of laws aimed at protecting consumer credit rights that make credit practices fair and transparent. The major consumer credit laws are:

A

Truth in Lending Act
Fair Credit Billing Act
Equal Credit Opportunity Act
Fair Debt Collection Practices Act
Fair Credit Reporting Reform Act

33
Q

The Fair Credit Reporting Act ensures:

A

Accuracy of credit reports
Right to view credit report

34
Q

_____ safeguards the privacy of consumer information held by financial institutions. It imposes restrictions on when personal financial information can be disclosed to third parties.

A

The Gramm-Leach Bliley Act

35
Q

What does a credit counselor do?

A

Develops personal budgets.
Develops a workable plan to pay off your debts.

36
Q

Truth in Lending Act

A

Requires lender to disclose the true cost of consumer credit.

37
Q

Fair Debt Collection Practices Act

A

Prohibits unfair, abusive and deceptive practices by debt collectors.

38
Q

Fair Credit billing ActFair

A

Sets procedures for billing errors on open credit accounts.

39
Q

Equal Credit Opportunity Act

A

Prohibits the discrimination on the basis of sex and marital status.

40
Q

____ explain how a financial institution collects, protects and discloses personal financial information, and how customers can opt-out of certain disclosures

A

Privacy notices

41
Q

A ____ is an individual who has purchased a product or service from a financial company for their personal, family or household use. An example is someone who cashes a check with a check-cashing company.

A

consumer

42
Q

A ______ is an individual who establishes an on-going relationship with a financial company, who may also buy financial products or services as part of that relationship. An example is someone who is a client of a wealth management firm.

A

customer

43
Q

There are three major components to the privacy requirements:

A

The Pretexting Provisions
The Safeguards Rule
The Financial Privacy Rule

43
Q

Fair Credit Reporting Reform Act:

A

requires that consumers be provided with the name of any credit agency supplying a credit report that leads to the denial of credit. It gives consumers the right to know what is in their credit reports and challenge incorrect information.

44
Q

This is a liquidation type of bankruptcy that requires a debtor to sell certain assets to repay their creditor debt. Some debt cannot be eliminated such as child support, alimony, taxes, student loans and loans with secured collateral.

A

Chapter 7

45
Q

This type of bankruptcy involves repayment of the debt over a period of time, according to a payment plan created by the debtor and an attorney.

A

Chapter 13

46
Q

What are the bankruptcy implications that Financial planners must know?

A

The law expanded bankruptcy protection to retirement assets, and contributions to college savings accounts

47
Q

The two most commonly used types of personal bankruptcy are:

A

Chapter 13, the wage earner plan, and
Chapter 7, a liquidation type of bankruptcy.

48
Q

Two other types of bankruptcy are also available, but are not commonly used:

A

Chapter 11, which, although intended for business, accommodates those who exceed Chapter 13 debt limitations or lack regular income, and
Chapter 12, which is a special-purpose personal bankruptcy available only to family farmers and fishermen.

49
Q

In bankruptcy, IRA protection is limited to an aggregate account value of $1,362,800 for which types of IRA accounts?

A

Traditional IRA

Roth IRA

50
Q

Bankruptcy officially ends when….

A

assets are distributed to creditors under Chapter 7, and creditors are paid in full under Chapter 13.

51
Q

What are some debts that cannot be discharged under Chapter 7.

A

These include outstanding payments for child support, alimony, some taxes, student loans and certain condo or co-op fees. Secured debt with collateral such as home mortgages and car loans are expected to be repaid, and creditors can repossess the collateral if necessary.

52
Q

______ went into effect on October 17, 2005. This law changed key provisions in previous bankruptcy laws, by making it more difficult for consumers to file for bankruptcy and receive a discharge from debts.

A

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)

53
Q

Bankruptcy:

A

The inability to pay off your debts and find relief from creditors.

54
Q

What is the interest rate that banks charge to their most creditworthy customers?

A

Prime Rate

55
Q

____ is used for making convenience purchases like tonight’s dinner or a new pair of shoes.

A

Open credit

56
Q

____ are usually used for bigger purchases, such as a car.

A

Consumer loans

57
Q

Types of Consumer Loans

A

Single-Payment vs. Installment Loans

58
Q

A single-payment or balloon loan:

A

A loan that’s paid back in a single lump-sum payment at maturity, or the due date of the loan, which is usually specified in the loan contract.

59
Q

_____ call for repayment of both the interest and the principal at regular intervals, with the payment levels set in such a way that the loans expire at a preset date.

A

Installment Loans

60
Q

A ____ loan is guaranteed by a specific asset, while an ____ loan requires no collateral.

A

secured
unsecured

61
Q

_____ are secured by the ownership of your home in the form of a second mortgage.

A

Home Equity Loans

62
Q

_____ are secured loans made specifically for the purchase of an automobile, with the automobile being purchased used as the collateral.

A

Automobile Loans

63
Q

A ____ loan is not tied to market interest rates and maintains a single interest rate for the entire duration of the loan.

A

fixed-rate

64
Q

A _____ loan is tied to a market interest rate, such as the prime rate or the six-month Treasury bill rate. The interest rate you pay varies as that market rate changes.

A

variable- or adjustable-rate

65
Q

A ______ is a variable-rate loan that can be converted into a fixed-rate loan at the borrower’s option at specified dates in the future.

A

convertible loan

66
Q

Home equity loans come in two forms:
________, which is a home equity loan, and
______, which is a home equity line of credit.

A

Closed-end credit
Open-end credit

67
Q

_____ credit offers a fixed rate; _____credit offers a variable interest rate.

A

Closed end
open-end

68
Q

______ are revolving credit lines similar to credit cards, which allow you to borrow up to a certain amount for the life of the loan

A

Home equity lines of credit

69
Q

______ are second mortgages that are taken as a lump-sum payment and repaid monthly over a timeframe established by the lender.

A

Home equity loans

70
Q

Home equity loans are popular as they are available at ______, can provide ______ and the repayment is stretched over a long span.

A

a low interest rates

itemized income tax deduction

71
Q

Under the provisions of the Equal Credit Opportunity Act (ECOA), a potential borrower must receive a response from a creditor within _________ after an application indicating whether the request has been approved or denied.

A

30

71
Q

What is total debt to income ratio benchmark?

A

no more than 36%

72
Q

To assess a borrower’s ability to repay, lenders often look at the three Cs of credit:

A

Character: How a borrower has handled himself or herself in previous financial dealings.
Capacity: Refers to ability to repay debt out of your future income. Here, the lender looks not only at the amount of such income but also at future commitments that might cause restrictions.
Capital: Refers to financial strength, usually measured by net worth.

73
Q

According to the Tax Cuts and Jobs Act of 2017 (TCJA), deductibility of interest paid on home equity loans or HELOCs is suspended from 2018 to 2026 unless the loans are used to cover what of the following costs?

A

Acquisition
Construction
Substantial improvements

CFP Course Prep 1 (15 decks)

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