Quiz 2

Question 1

Cash Management

Answer 1

• How you meet your daily money needs

- Comprised of regular deposits, and payments

Question 2

Operating account

Answer 2

• The account that you use to fund your daily money needs
• The level in this account will fluctuate depending on pay and payment cycle.
• Normally a checking account

Question 3

Types of Savings

Answer 3

• Savings Accounts
• CDs (Certificate of Deposit): pros include a guaranteed rate of return for a specified time period
• Money Market Accounts: pros are market rate of return and some check writing capability; cons are higher minimum balance than savings accounts
• US Savings Bonds: pros are market rate of return, with rates varying with interest rates, low minimum deposit, government guaranteed, and exempt from state and local taxes

Question 4

Trusts

Answer 4

• A legal agreement that provides for the control of assets by one party for the benefit of the other

Question 5

Asset Management account

Answer 5

• Also called a cash management account
• Provides a complete financial service program for a single fee
• Checking account, savings account, investment account, retirement
• Lower fees due to higher balance aggregates
• Ease for tax reporting

Question 6

FDIC

Answer 6

• Insurance on your accounts

- Insures you up to $250K per person per account

Question 7

Types of Deposit institutes

Answer 7

• Commercial banks: offer a full range of services including checking, savings, lending another services. Owned by shareholders, so their goal is to make as much money as possible
• Savings and loan associates: offer specialized savings plans, loans including mortgage, and other financial planning services
• Mutual Savings banks: specialize in savings accounts and mortgage loans. Are owned by their depositors
• Credit Unions: user-owned, not for profit cooperative financial institutions. Usually most economical

Question 8

Investment companies

Answer 8

• Also referred to as Mutual Funds

- Offer a money market fund on which you can write a limited number of checks

Question 9

Interest rate

Answer 9

• also called rate of return

- The percentage or the yield relating to the increase in value due to interest

Question 10

APY

Answer 10

• Annual percentage yield
• The total amount of interest that would be received on a deposit fo ra 365 day period
• Given the same rate of return, an account that compounds more frequently will have a higher APY

Question 11

Main things you want in a savings account

Answer 11

• Safety, Liquidity, Transparency, Low Fees, High Interest Income

Question 12

Activity Account

Answer 12

• A type of checking account that has fees on checks and deposits; pay as you go account

Question 13

NOW Account

Answer 13

• (Negotiable Order of Withdrawal) An interest earning account

Question 14

Balancing Your Checkbook

Answer 14

• The process of comparing your checkbook balance to the bank statement to make sure things match up

Question 15

Credit Example: In one month, you spent $1,000 on your credit card. The interest rate is 18% per year and the minimum monthly payment is $25. What will your balance be at the beginning of the next month if you only pay the minimum payment?`

Answer 15

• 18%/12 = 1.5% per month
• 1000*1.015 = 1015
• 1015 - 25 = $990
• Your balance is $990, not $975
• The payment first goes to pay off the interest ($15), and then the rest of the payment chips away at your debt ($1000- $10 = $990)
• If you had paid off the month in full, your balance would have been $0 at the start of the next month

Question 16

Credit

Answer 16

• An arrangement to receive cash, goods, or services now, and pay for them in the future. Receive now, pay later

Question 17

Closed- End vs Open-End Credit

Answer 17

• Closed End credit are one time finite amount loans for a specific purpose and a specific amount that you pay back in a specified period of time, in payments of equal amounts (mortgage, car loan, student loan, etc)
• Open-End Credit is credit that is used as needed until reaching the credit maximum (credit card, home equity)

Question 18

Credit card Convenience users…

Answer 18

…pay balances in full each month

Question 19

10 things that can affect your credit score

Answer 19

1. Ignoring your credit reports
2. Taking cash advances
3. Paying bills late
4. Exceeding your credit limit
5. Applying for too many cards
6. Responding to offers in your mailbox
7. Abruptly closing accounts
8. Ignoring statements
9. Applying based solely on a promotional offer
10. Failure to read the fine print

Question 20

Debt Payments-to-Income ratio

Answer 20

= Monthly debt payments/After tax income

- Shouldn’t exceed 20-30% of your take home (net) pay, excluding your house payments

Question 21

Home Equity Loan

Answer 21

• A consumer loan
• Your equity is the amount of the home you own; it is the difference between current market value of the house and how much you still have to pay off (mortgage)
• You can take out a loan on up to 85% of your equity
• There are two types: normal Home Equity Loan, which is a lump sum you’re given that you start paying back right away, and Home Equity Line of Credit (HELOC), which works like a credit card where you withdraw as much as you want up the the credit line in the ‘draw” phase

Question 22

The 5 C’s Creditors Look for

Answer 22

• Character: Do you pay your bills on time? Are you reliable?
• Capacity: Can you repay the loan? Based on your income
• Capital: What are your assets and net worth? Based on your assets
• Collateral: What property do you pledge that the lender can repossess if you default on the loan?
• Conditions: What economic conditions could affect your ability to repay the loan?

Question 23

FICO score

Answer 23

• Most widely used credit score model in the US, calculated with information from a consumer’s credit file
• It indicates how credit worthy you are
• A range between 350 -850
• Each person actually has 3 credit scores that their FICO Scores are calculated from that come from the 3 Credit Bureaus
• Only use about 30% of your maximum monthly credit
• Based on the following components;
• 35%: Payment History
• 30%: Credit Utilization
• 15%: Length of credit history
• 10%: Types of credit used. Consumers can benefit by having a history of managing different types of credit
• 10%: Recent searches for credit (credit pulls)

Question 24

Bankruptcy

Answer 24

• The inability to pay obligations and is a formal and legal “reset” with creditors

Question 25

Fair Credit Billing Act

Answer 25

• If you think there’s an error in your billing, notify your creditor within 60 days
• They have 30 days to respond, and up to 90 days to correct your account or explain why they think it is accurate