test#3 Flashcards
why do we use credit?
- Avoiding paying cash for large outlays
- Meet a financial emergency
- Convenience
- Investment purposes
what are some improper uses of credit?
- meeting basic living expenses
- make impulse purchases
- purchase non-durable goods
- using credit to make payment on other debt
what are credit types?
- service credit
* sales credit
what is service credit?
credit extended by the merchant from whom you have purchased the good or service
what is sales credit?
card issued by a financial institution giving the holder an option to borrow funds usually at the point of sale
what are types of accounts in sales credit?
- Regular charge accounts
- open ended accounts
- Closed-end accounts
- revolving account
what are regular charge accounts?
billed for purchases at end of month
what are open end accounts?
revolving credit account with an agreement that continues as long as account is open
what are closed-end accounts?
there is a separate installment contract for each purchase
what are revolving charge accounts?
the credit limit is determined by credit record and net worth
for revolving credit cards, interest is calculated in what several ways?
- previous balance method
- adjusted balance method
- average daily balance method (including current purchases and excluding current purchases)
- two cycle average daily balance method
what is the previous balance method?
interest rate applied to balance at end of previous month
what is the adjusted balance method?
equal to the previous balance less any payments or returns made during the current billing cycle
what are some ways to establish a good credit history?
- not getting over extended
- fulfilling all credit terms
- paying on time
- notifying creditors if unable to pay
- being truthful
monthly consumer credit payments (excluding mortgage) should not exceed what percent of monthly net income?
20%
what do credit cards and other open account credit accounts include?
- credit extended to consumer prior to purchase
- consumer can buy up to a specified credit limit
- offered by retailers and financial institutions
- monthly credit statements
- pay balance in full to avoid interests
what is the most popular open account credit?
bank credit cards
bank credit cards have what characteristics?
- Line of credit depends on applicant’s financial status and ability to pay
- cash advances and balance transfers
- interest rates and fees
what are other fees in credit cards?
- high interests (prime rate + a percentage)
- annual fees
- transaction fees
- late payment fees
- over the limit fees
- balance transfer fees
- foreign transaction fees
what are some special types of bank credit cards?
- reward cards
- affinity cards
- secured (collateralized) credit cards
- student credit cards
characteristics of debit cards
- looks like a credit cards but works like writing a check by accessing a checking account
- no line of credit
- greater liability exposure if fraudulent
what are revolving credit lines?
- open account credit offered by banks or other financial institutions
- usually offer higher credit lines and lower interest rates than credit cards
- access money by writing checks
what are forms of revolving credit?
• overdraft protection lines • unsecured personal credit lines (available on as-needed basis) • home equity credit lines -secured by equity in owner's home -interest tax deductible
what are the steps in opening an account?
- credit card application
- credit investigation
- credit bureau
what are the three primary credit reporting bureaus?
- Trans union
- Equifax
- Experian
what is the role of the credit bureau?
- the credit bureau does not decide who receive credit
- it acts as a clearing house for information on the part use of credit
- the credit bureau stores information on legal actions against you
- they store all credit inquiries for the last year and all employment related inquiries for the last two years
- is sells this information to lenders
what are the contest of a credit report?
- all existing credit accounts
- public record information
- who has obtained a copy of the report
what information on each credit account is included in a credit report?
- credit limit, amount borrowed, account balance, and payment history
- who’s responsible for paying the account
what are some reasons you could be denied credit?
- missing information
- age of applicant
- earnings of applicant
- negative information
- too much debt
- unstable employment history
according to the truth in lending act, lenders must disclose what two things?
annual percentage rate and method used in computing finance charges
what are consumer loans?
- formal negotiated contracts
- one time transactions usually for big ticket items
- no more credit is available once repaid
what are some different types of loans?
- auto loans
- other durable goods
- education loans
- personal loans
- consolidation loans
what are single payment loans?
- specified period
* lump sum payment due
what are installment payments?
•Fixed, scheduled payments
what are fixed payments?
interest rate and payments remain the same
what are variable-rate payments?
interest rate and payments change periodically
where can you get consumer loans?
- consumer finance companies
- sales finance companies
- captive finance companies
- credit unions
- S&L’s
- life insurance companies
- commercial banks
ways to keep track of your credit
- keep inventory sheet of debt
- know total monthly payment
- know total debt outstanding
- check your debt safety ratio
what is the simple interest method?
calculated on outstanding balance
what is the discount method?
interest is subtracted form loan amount and reminder goes to borrower
what are some loan considerations?
- payment penalties
- credit life insurance
- buy on time or pay cash?
the typical american family pays more than 1/3 of gross income in various taxes
.
what is the progressive tax structure?
- the larger the taxable income, the higher the tax rate
* as taxable income moves to a higher tax bracket, the higher rate applies only to the additional taxable income
what is the marginal tax rate?
tax rate paid on the next dollar of taxable income
what is the average tax rate?
• rate at which each dollar is taxed on average (divide tax liability by taxable income)
what happens when taxes are due on a pay-as-you-go basis?
- employer withholds taxes all year
* self-employed deduct and pay taxes
taxes include
- Federal, state, & local income taxes
* FICA and other withholding taxes
its what income what matters?
taxable income
what is taxable income?
the amount of income subject to taxes
what are three kinds of income?
- active income
- portfolio
- passive income
what is active income?
wages, salaries, bonuses, pension
what is portfolio?
interest, dividends, capital gains
what is passive income?
income from real estate, limited partnerships
what is gross income?
any and all income subject to federal tax
examples of gross income
- wages and salaries
- bonuses, commissions and tips
- interest and dividends
- alimony received
- prizes, lottery, and gambling
what are the steps in the flow diagram?
- Step a. determine adjusted gross income
- Step b. calculate taxable income
- step c. calculate tax using tax tables or tax rate schedules
what things can be subtracted from gross income?
- higher education (limited)
- IRA contributions(limited)
- self-employment tax (limited 50/50%)
- alimony paid
- penalty on early withdrawal of savings
- moving expenses (limited)
what is capital gains?
when an asset is sold for more than its original cost
capital gains when it comes to taxes
- most capital gains are included in portfolio income
- IRS limits capital losses during a given year
- A capital loss must result from sale of some income-producing asset to quality as a deductible
if taxable income is less than $100,000 use
tax rate table
if taxable income is more than $100,000 use
tax schedule
subtracted amount of taxes and credit include:
- child and independent care expense
- adoption tax credit
- foreign tax credit
- credit for qualified electric car
characteristics of the form 1040EZ
- under age 65
* taxable income under $100,000
characteristic of the form 1040
taxable income over $100,000
what are other filing considerations?
- Quarterly payment of estimated taxes
- April 15 filing deadline
- filing extensions
- amended returns(1040x)
- audited returns
what are some tax preparation services?
- private tax preparers
- tax services
- CPA’s
- enrolled agents
- tax attorneys
- computer based tax returns
