PFL: Credit and Debt Flashcards
Summarize the advantages
and disadvantages of
using credit.
adv: convenience, record keeping, build credit, perks (like points), buy things you cant afford yet
dis: have to verify statement (paperwork), can deepen debt if you are careless, high cost fees (if you miss)
Explain why using a
credit card is a form of
borrowing.
when you use a credit card, you borrow money, then pay it off every month
Explain how interest rate,
compounding frequency
and loan length affect the
cost of using credit.
cost of credit: the amount extra you pay on purchases
longer loan period + smaller monthly payments = larger COC
(coc disclosure: lender must tell borrower the coc)
Calculate the total cost
of repaying a loan under
various rates of interest
and over different periods.
compound:
A = P(1+(r/n))^nt
simple:
I = PRT
Discuss potential
consequences of using
“easy access” credit
short term, high interests loans (ex pawn shop)
Explain how individuals use
debt as an investment.
leveraging: borrowing money to invest, knowing that you will make more gains , so you can pay off the debt and make a profit
Explain how credit card grace periods, methods of interest calculation and fees affect borrowing costs.
grace period = usually 21 days
borrowing cost is the total cost of a debt obligation, including interest payments and other fees.
borrowing cost of a business tends to go up when market interest rates rise during inflation.
Categorize the types of
information needed when
applying for credit
- gross annual income
- SIN (optional)
- current and previous employers
- information on other cards held
Compare the total cost of reducing a credit card balance to zero with minimum versus above minimum payments, all other terms being equal and no further purchases being made
credit card balance = the amount of charges to credit card company
paying the minimum is the slowest path to zero
Decide the most cost-effective
option for paying
for a car.
- cash (cheapest but difficult for most)
- bank loan
- dealer financing plan (often more than bank loan)
- lease (good but have to return after, limit on km)
borrowing adds to the cost of the car. cash if you can, but if you need a loan, find the cheapest
Differentiate among various types of student loans and alternatives as a means of paying for post-secondary education
- deferred student loan: start paying off the loan after
- direct subsidized loans (student must display fin need)
- direct unsubsidized loans (doesnt need fin need)
- direct PLUS loans (grad students, pay for expenses other than tuition)
- direct consolidation loans (combine all student loans into one)
Predict the potential
consequences of deferred
payment of student loans
consequences of deferred student loan - if you cant find a job right out of school, you might fall into debt, are you willing to increase the total amount you owe?
Differentiate between
adjustable- and fixed-rate
mortgages
adjustable: rate periodically adjusted based on index that shows the cost of lender borrowing on the credit market
fixed rate: obvious…
Explain the effect of debt
on a person’s net worth.
net worth = assets - liabilities
the bigger the liabilities, the lower the difference (net worth)
Weigh the potential payoffs of a positive borrowing reputation versus the potential consequences of a poor borrowing reputation.
good credit score = easy to get loans, jobs, rent
bad = might be unable to open bank account, hard to get loans, high interest rates on loans you get, security deposit on utilities, high insurance premiums
Summarize online
information about the Fair
Credit Reporting Act
regulates collection and accuracy of information in credit reports
Explain the value of credit
reports to borrowers and
to lenders
your credit report is essentially your financial reputation: for a lender, it is their way of deciding if you are trustworthy enough to borrow their money. for borrowers, it can give them a picture of what they need to improve.
Give examples of
permissible uses of a credit
report other than granting
credit
credit reports can be used for employment, court orders, insurance premiums, and child support payment determination
Identify the primary
organizations that maintain
and provide consumer
credit records
credit bureaus: maintain credit reports (which are used to dev. credit score), record borrower’s history of repaying, and have dispute resolution processes for wrong info
Categorize the information
in a credit report and how
long it is retained
- what type of credit you use
- length of time accounts have been open
- whether you’ve paid bills on time
- if you’re seeking new forms of credit
- if you’ve ever been bankrupt (ch 7 - 10 years) (ch 13 - 7 years - because you’re repaying at least a portion of the debt)
Explain the rights that
people have to examine
their credit reports
- credit reporting companies are required to give you free access you your credit report (and other stuff) once every 12 months
- ^^ fair credit reporting act
Outline the process of
disputing inaccurate credit
report data
- notify credit bureau, ask for an investigation
- they have 30 days to look into it, and they must notify the furnisher of the info (ex. bank, cc issuer) within 5 days
- if its not verified in 30 days, they have to remove the error from the report
Summarize factors that
affect a particular credit
scoring system
credit scores: 300-900
credit scores usa (fico) 300-850
amount owed - 30% payment hist. - 35% new credit - 10% length of credit history - 15% credit mix - 10% **may vary**
Analyze how a credit score
affects creditworthiness and
the cost of credit
your credit score is used by lenders to determine your creditworthiness
lenders apply a rate-for-risk policy: they sort you into groups based on your credit score, and assign interest rates to whole groups
Predict possible
consequences of excessive
debt
- low credit score
- poverty
- debt
- bankruptcy
Develop a personal
financial plan to manage
debt, including working
directly with lenders
- make a spending plan
- negotiate with lenders to consolidate your credit, or to work out a debt repayment plan
Examine the types of
services that consumer
credit counseling agencies
offer
debt reduction services:
- consolidate credit
- negotiate with creditors
- lower rate
- stop collection calls
Investigate the purpose of bankruptcy and its possible negative effects on assets, employability and credit cost and availability
bankruptcy allows a debtor to have a fresh start: debt relief with consequences
ch 13
- 30% of non-business
- dont give up property
- income too high for 7
- pay back a little
- stays on for 7 years
ch 7
- 70%
- they take all
- stays on for 10 years
Investigate how student
loan obligations differ from
other kinds of debt
- higher rates
- mortgage payments cant be calculated when they take the loan, unlike all other loans
Summarize online
information about the
Equal Credit Opportunity
Act.
- creditors can’t discriminate based on race, colour, etc, or if they are on a public assistance program, or have exercised a right in the FCRA (fair credit reporting act)
Research online information about consumer credit rights available from the Federal Trade Commission
- the FTC enforces consumer protection laws: see financial decision making
- includes warranty breaches and complaints
Give examples of how the Consumer Financial Protection Bureau (CFPB) protects borrowers and provides information about credit issues.
- protects borrowers
- gives info on credit issues
- ensures that financial companies make the true price clear to consumers so they can compare to others and make decisions that will benefit them
- enforces law
- receives consumer complaints
Research state agencies
with responsibility for
consumer protection
ugh nooo i dont live in the states how do i choose one ugh
give me national or give me death!
Describe debtors’ and creditors’ rights related to wage garnishment and repossession when an overdue debt is not paid
- wage garnishment - deduct money from salary, usually by court order
- reposession - fin institution takes back collateral
- fair debt collection act: debt collectors cant use abusive/deceptive practices to collect
Give examples of legal and illegal debt collection practices covered by the Fair Debt Collection Practices Act.
illegal
- pretend to be anyone else
- contact you before 8am or after 9pm, unless you agree
- may not call at work if you say no
legal
- contact by phone, email, letter, or text, as long as they disclose that they are a debt collector
Explain how business
owners use debt as
leverage.
leveraging, but i just had a genius idea!! BONDS are technically the company using debt to finance things!
