Exam 2 - Taxes and Such

Question 1

5 C’s of Credit

Answer 1

• Character
  * ability to live by your budget
  
  • Capital
    
    • net worth
  • Capacity
    
    • ability to repay the debt from your income
  • Collateral
    
    • asset that can be pledged against the loan
  • Conditions
    
    • economy

Question 2

Debt

Answer 2

• credit card: $15, 270
  * total: $856.9 billion
  
  • mortgage: $149,925
    
    • total: $7.93 trillion
  • student loan: $32,258
    
    • total: $1.049 trillion
  • total:
    
    • $11.36 trillion

Question 3

Credit Cards - Age

Answer 3

• min age is 21
  * 18 if joint account holder
  * no min age to be authorized user

Question 4

Credit Cards - Benefits

Answer 4

• emergencies
  
  • reservations
  • convenience
  • cash flow and timing
  • free services

Question 5

Credit Cards - Disadvantages

Answer 5

• increased spending (30%)
  
  • losing track of spending
  • interest charges
  • annual fees
  • late payment fees
  • consumer debt

Question 6

Credit Cards - Rules

Answer 6

• pay off ever month on time

* keep track of spending

Question 7

Credit Cards - Trouble

Answer 7

• only min payments
  
  • reaching credit limit
  • not knowing how much you owe
  • cash advances
  • turned down for credit
  • using savings
  • considering home equity loan

Question 8

Consumer Loans - 3 Facts

Answer 8

• encourage consumption instead of saving
  
  • very expensive
  • generally unnecessary

Question 9

Consumer Loans - Types

Answer 9

• single-payment
  
  • installment
  • secured
  • unsecured

Question 10

Home Equity Loans

Answer 10

• can borrow up to 80% of equity on home (“second mortgage”

Question 11

Home Equity Loans - Advantages

Answer 11

• lower interest rate

* tax deductible

Question 12

Home Equity Loans - Disadvantages

Answer 12

• limits financial flexibility
  
  • easier to be “upside down” if market falls
  • puts home at risk

Question 13

Auto Loans

Answer 13

• secured w/ an automobile
  * lower interest rate than unsecured or credit card
  * maturity of 2-6 years
  * problem: often left w/ a vehicle that is worth LESS than what you owe on it

Question 14

Payday Loans

Answer 14

• short-term: 1-2 weeks

* VERY high interest: 500% APR!

Question 15

Tammy’s Advice

Answer 15

• Don’t borrow from family members!

* Careful about loaning!

Question 16

Steps to get out of debt

Answer 16

• Balanced budget
  * allocate resources to pay beyond min payments
  
  • use some savings to pay off high-interest
  • explore ways to transfer debt from high to low interest credit cards
  • on-time min payments on all debts except high interest
  • repeat until debt paid off

Question 17

Borrowing Methods

Answer 17

• Least expensive
  * family
  * home equity
  * other secured
  
  • More expensive
    
    • credit unions
    • savings and loans
    • commercial banks
  • Most expensive
    
    • credit cards
    • retail stores
    • finance companies and payday lenders

Question 18

Credit Scores - 3 Things

Answer 18

• credit bureaus
  
  • credit reports
  • credit scoring

Question 19

Credit Scores Affect…

Answer 19

• IF they will loan $ to you

* what interest rate

Question 20

FICO scoring

Answer 20

• range: 300-850

* excellent: 700-790

Question 21

What goes into the FICO scoring?

Answer 21

• Payment History
  
  • Amounts Owed
  • Length of Credit
  • New Credit
  • Type of Credit Used

Question 22

How to improve your FICO score

Answer 22

• monitor score at least 1/year
  
  • credit cards
    
    • no more than one application/year
    • active use between 2-3 cards
    • credit limit increases
    • balance spread between 2-3 cards * keep cards active - don’t cancel
  • make all payments on time
    
    • mortgage, rent, utilities, etc.
  • reduce debt
    
    • pay off car, refrigerator, furniture, etc.

Question 23

Credit Scores + Marriage

Answer 23

• new spouse’s credit does not affect yours!
  * BUT both scores considered for mortgage together
  * add spouse as joint account holder/cosigner on everything

Question 24

Where did taxes come from?

Answer 24

• 6th Amendment
  * income tax from Congress
  * 1% paid taxes then
  * now pervasive!

Question 25

Four kinds of taxes

Answer 25

• taxes on purchases
  * sales & excise/quantity
  
  • taxes on property
  • taxes on wealth
  • taxes on earnings

Question 26

Average proportion of total income paid as taxes

Answer 26

25-33%

Question 27

How many years the fed govt. has run a surplus

Answer 27

4 years

Question 28

Federal debt

Answer 28

• $17.9 trillion
  
  • $55,969/citizen
  • $152,941/taxpayer

Question 29

Tax Fairness

Answer 29

• benefits received
  
  • ability to pay
    
    • progressive: federal income tax
    • proportional: sales tax
    • regressive: Social Security (after a point)

Question 30

Calculating federal income tax

Answer 30

• Gross Income - Adjustments = Adjuster Gross Income
  
  • • Standard Deduction OR Itemized Deduction - Personal Exemptions = Taxable Income
  • x Tax Rate(s) = Tax Liability
  • • Tax Credits (including taxes withheld) = TAX DUE (or TAX REFUND)

Question 31

Included in Gross Income

Answer 31

• wages
  
  • salaries
  • scholarships, grants in EXCESS of college expenses
  • investment income
  • business income
  • alimony received
  • TRADITIONAL 401k, IRA
  • prizes, awards…

Question 32

NOT included in Gross Income

Answer 32

• scholarships, grants NOT in excess of college expenses
  
  • interest on certain US savings bonds
  • municipal bonds interest
  • life insurance proceeds received b/c of death