Midterm 4/1/19 Flashcards
What is the difference btwn earned and unearned income?
Earned Income: income from a job or self-employment, incl bonuses / tips → pay federal tax, state tax, medicare, and social security
Unearned income: dividends, interest, capital gains, passive income from real estate → do NOT pay Social Security tax; do have to pay Kiddie Tax and (if you make more than $200k annually, or you and your spouse make more than $250k annually) Health Care Reform act via Medicare
What is the difference between sales, revenues, and profits in regards to income?
Revenue: aka sales; total amount of income generated by the sale of goods or services
Profits: revenue minus expenses
What goes into calculating your FICO score?
35% = record of paying pills on time over time
30% = debt-to-credit ratio (considering everything)
15% = length of credit history
10% = new account and applications for credit
10% = mix of credit cards and loans
How good is each score? Provide ranges.
780 - 850 = Best 720 - 779 = Good 661 - 779 = OK 620 - 660 = Subprime 560 - 619 = Bad 500 - 559 = Worst 300 - 499 = Toxic
What is the debt to credit ratio?
Stay below a 50% debt-to-credit ratio on EACH credit card
30% ratio is best for top scores!
Pay down what you owe or increase your credit limits to lower your ratio; do not charge any more purchases on these cards
What you should do to establish good credit?
If you exceed your credit limit, your bank can’t charge you an over the limit fee than the amount you’re over the limit by
Pay at least the minimum balance due → usually 2.5 to 3% of outstanding balance, but may be as high as 5%
If you are paying more than the minimum, you will be paying of the interest of the debt w the highest interest rate
If you’re a victim of credit card theft, what’s the first thing you do?
Contact credit card issuer or bank as soon as you discover the loss → close account immediately, ask for a new card on a new account
Within two days of discovery, current law states your loss is limited to $50
- Beyond two days, you may be liable for up to $500 in losses.
- Beyond 60 days, you may be liable for the FULL AMOUNT of charges
If you find the “lost” card after being issued the new one, destroy it.
What about identity theft?
Initiate a security freeze / fraud alert by individually contacting EACH of the three major credit bureaus
- Security freeze can be used to deny access to your credit info so that a potential new creditor is not able to access your information in order to approve new bank accounts under your name
Close all of your accounts ASAP and reopen new accounts, incl banks / credit card / amazon account / itunes / etc
Contact all of your creditors
File a police report and keep the number of the report
Keep a detailed of who you contact and when
What is a credit hold?
A pending transaction enacted by a service provider (eg hotel, car rental agency, etc) to protect them against any damages incurred during your stay / usage of their service
Holds may take a few days to go away
Unused credit holds may NOT create an overdraft charge unless the hold is executed
Eg. When you check into a hotel, they will ask to see your credit card. If the room is $200, they may put a “hold” on your credit card account for $350 to cover any damages or other purchases you make. It is only after your check out that they release the hold money
Under the CC act, what’s the max rate of interest you can be charged?
Aka the Credit Card Accountability, Responsibility, and Disclosure Act ; shorthanded to “Card Act”
Applies only to consumer credit cards, not business ones
When a new account is opened, there can be no interest rate increase for the first 12 months unless an introductory rate has come to an end (below), or you are more than 60 days late with a payment (below), or unless you are on a variable rate tied to an index.
Once the introductory rate expires, the interest rate will revert back to your “go-to” rate plus the variable rate BUT the card holder must be notified 45 days in advance of any rate change
If you are more than 60 days late in making the minimum payment, the issuer may charge you the interest default rate, which is typically 28% to 25% ;; however, if you make your payments on time for six consecutive months, the original rate must be restored
For an account in good standing, interest rate increases can only be applied to new charges
What are the three biggest credit reporting agency + the website you should know?
TransUnion
Equifax
Experian
www.AnnualCreditReport.com
Only federally mandated website for free reports
Does a higher credit score mean a higher rate of interest?
NO ;; higher credit scores mean lower rates of interest → means more money that you can invest elsewhere to save up for later!
What is the difference btwn a DEBIT vs CREDIT card?
DEBIT: secured bank card that takes money out of your bank account IMMEDIATELY to pay for purchases you have made → good for people that have difficulty in managing credit cards BUT does not help to establish credit bc BANK IS NOT TAKING ANY RISK
- Merchants prefer debit cards in order to avoid paying interchange fees needed to process credit cards
- Some banks have an overdraft fee if you exceed your limit
CREDIT: unsecured line of credit, which represents the fact that a bank or other lender is willing to lend you money
- Loan is based upon your good faith and your credit history; lender can access your credit reports which track your financial history
- Has an interchange fee for merchants to process your card
How many credit scores does a person usually have?
Three different bureaus mean up to THREE different FICO scores
Information may not be transmitted to all bureaus by every merchant or creditor, let alone at the same rate → thus, each credit bureau may have slightly different information to calculate your credit score with
What is a prepaid card?
Fastest growing segment of the plastic money industry
Offers by banks and non-banks → they profit by having activation fees, inactivity fees, fees to load money onto the card, fees if you DO NOT load the minimum amount into the card each month, fees to check balance information, fees to use an ATM for cash, fees for using a check to close an account
IF STOLEN, THE MONEY IS (PROBABLY) GONE FOREVER
If you cancel an inactive CC, will that raise or lower your FICO score?
IT DEPENDS → canceling a card may increase your overall debt-to-credit ratio, which might lower your FICO score
Do not destroy or cancel older cards if you can help it → preserving your credit history is important too! It’s good to carry cards long term.
What should you know about BANKRUPTCY?
What can you not get rid of? Bankruptcy DOES NOT relieve you of obligations for taxes, student loans, alimony, child support.
Can negatively impact your credit score for up to 10 years
What is a retail charge card?
Credit card that is issued by a “retailer” allowing you to charge purchases made only with their store → usually tempt consumers by offering a large savings for the purchase made in store that day (ie at the cashier)
Usually carry high rates of interest and sometimes don’t have a grace period, so interest will begin on the date of purchase
IT IS A CREDIT CARD, SO IT HAS THE POTENTIAL TO AFFECT YOUR CREDIT SCORE
Can you increase credit score by increasing CC limit?
IT DEPENDS
30% is good for improving your score, and you should never be more than 50%.
Increasing your credit card limit might drop your ratio to below 30% (still good bc under 50%, but not the best ratio anymore!)
How often is interest on a CC balance calculated?
CALCULATED DAILY
Why? You end up paying more on your borrowing → banks make more money off of you
What is the distinction between a CREDIT REPORT vs CREDIT SCORE?
Credit report is your individual financial report card which tells whether you have been making your credit card and loan payments on time. It also includes a lot of other personal information about you.
Credit score is determined by the total information about you on your credit report.
What is an overdraft fee?
Allow you to make the purchase even if you don’t have enough in your bank account to do it
Bank is “covering” for you, but you will have to pay the money you are overspending by PLUS the overdraft fee for the bank to front it
When you “accept” most modern day contracts, you are probably agreeing to overdraft fees
IF YOU DO NOT AGREE TO AN OVERDRAFT FEE AND ATTEMPT TO PURCHASE SOMETHING THAT IS GREATER THAN YOUR BALANCE, your bank will reject the charge
What are STOCK OPTIONS?
Provide the RIGHT, but NOT THE OBLIGATION to buy a stock at a set price within a specified period of time
Granted by the board of directors, who also set the price at which the employee can purchase shares of the stock sometime in the future
Designed to attract, retain, and reward employees, THUS making them stakeholders and incentivising their role as part owners of the enterprise
If the stock INCREASES in price, the options have VALUE and are IN THE MONEY
- Vs if the stock DECREASES in price, the options have NO VALUE and are OUT THE MONEY
If the options are not exercised by the expiration date, they terminate
What are exchange traded funds (ETF)?
Aka index funds; can be purchased directly through major investment and brokerage firms
Securities that track an index, but trade on an exchange like a stock
Typically consist of a bundle of stocks IDENTICAL to those that comprise a SPECIFIC INDEX, thus providing INSTANT GRATIFICATION within an industry, geographic area, or other specified category → Will track the price of stocks and mimic the ups/downs of that particular index
Low expenses bc the investment is run by a computer program which automatically does the tracking by continuously buying and selling the individual shares during market hours
Usually pay quarterly dividends, which are taxable
Have the same holding as stocks for tax purposes
WHAT ARE THE DISCIPLINES WHEN BUYING STOCKS?
1 - 4
(1) Never borrow money to buy / invest into stocks
(2) Market timing is almost impossible → there is never a right or wrong time to invest as there is hardly ever a notable amount of certainty involved
(3) It is best to invest in stocks with money you will not need for five years.
(4) Identify trends in order to find the best stock or fund of a category → better chance at being in the right class of asset at the right time
WHAT ARE THE DISCIPLINES WHEN BUYING STOCKS?
5 - 6
(5) Dollar-cost averaging is investing a set amount of money in shares of a stock on a regular time schedule REGARDLESS OF THE PRICE of the shares at that time → mathematically speaking, you will buy more shares at lower prices rather than higher prices
- Essential to successful long term investment program regardless of what happens to stock prices
(6) DIVERSIFY ! Not only does this substantially lower your risk of losing money into stocks, spreading your investments over different industries or sectors / areas of the work w different risks and growth rates / companies of different sizes, ETFs, funds, and stocks in such a way where there is no overlap will generate unexpected concentration of revenue
- It takes at least five stocks in five VERY DIFFERENT industries to diversify
WHAT ARE THE DISCIPLINES WHEN BUYING STOCKS?
7 - 11
(7) Stage and stagger your purchases → relates to the dollar-cost-averaging theory
(8) At least once a year, review the allocation of assets in your portfolio and consider rebalancing some parts of it
(9) Forecast trends in the range of 6 to 18 months → research your investments and plan your strategy
(10) Do your homework! Don’t blindly trust anyone – not even a professional. IT IS YOUR MONEY, NOT THEIRS.
(11) Keep it simple and stay informed → relates to dollar-cost-averaging theory PLUS trending
What is the wash sale rule?
For tax purposes, you CANNOT declare a loss on security if you purchase the identical security within 30 days before or after the sale
Remains a loss but it’s NOT a tax deductible loss
