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Personal finance > test#3 > Flashcards

test#3 Flashcards

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1
Q

why do we use credit?

A
  • Avoiding paying cash for large outlays
  • Meet a financial emergency
  • Convenience
  • Investment purposes
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2
Q

what are some improper uses of credit?

A
  • meeting basic living expenses
  • make impulse purchases
  • purchase non-durable goods
  • using credit to make payment on other debt
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3
Q

what are credit types?

A
  • service credit

* sales credit

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4
Q

what is service credit?

A

credit extended by the merchant from whom you have purchased the good or service

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5
Q

what is sales credit?

A

card issued by a financial institution giving the holder an option to borrow funds usually at the point of sale

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6
Q

what are types of accounts in sales credit?

A
  • Regular charge accounts
  • open ended accounts
  • Closed-end accounts
  • revolving account
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7
Q

what are regular charge accounts?

A

billed for purchases at end of month

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8
Q

what are open end accounts?

A

revolving credit account with an agreement that continues as long as account is open

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9
Q

what are closed-end accounts?

A

there is a separate installment contract for each purchase

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10
Q

what are revolving charge accounts?

A

the credit limit is determined by credit record and net worth

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11
Q

for revolving credit cards, interest is calculated in what several ways?

A
  • previous balance method
  • adjusted balance method
  • average daily balance method (including current purchases and excluding current purchases)
  • two cycle average daily balance method
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12
Q

what is the previous balance method?

A

interest rate applied to balance at end of previous month

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13
Q

what is the adjusted balance method?

A

equal to the previous balance less any payments or returns made during the current billing cycle

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14
Q

what are some ways to establish a good credit history?

A
  • not getting over extended
  • fulfilling all credit terms
  • paying on time
  • notifying creditors if unable to pay
  • being truthful
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15
Q

monthly consumer credit payments (excluding mortgage) should not exceed what percent of monthly net income?

A

20%

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16
Q

what do credit cards and other open account credit accounts include?

A
  • 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
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17
Q

what is the most popular open account credit?

A

bank credit cards

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18
Q

bank credit cards have what characteristics?

A
  • Line of credit depends on applicant’s financial status and ability to pay
  • cash advances and balance transfers
  • interest rates and fees
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19
Q

what are other fees in credit cards?

A
  • high interests (prime rate + a percentage)
  • annual fees
  • transaction fees
  • late payment fees
  • over the limit fees
  • balance transfer fees
  • foreign transaction fees
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20
Q

what are some special types of bank credit cards?

A
  • reward cards
  • affinity cards
  • secured (collateralized) credit cards
  • student credit cards
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21
Q

characteristics of debit cards

A
  • 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
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22
Q

what are revolving credit lines?

A
  • 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
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23
Q

what are forms of revolving credit?

A 
• 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
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24
Q

what are the steps in opening an account?

A
  1. credit card application
  2. credit investigation
  3. credit bureau
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25
Q

what are the three primary credit reporting bureaus?

A
  • Trans union
  • Equifax
  • Experian
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26
Q

what is the role of the credit bureau?

A
  • 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
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27
Q

what are the contest of a credit report?

A
  • all existing credit accounts
  • public record information
  • who has obtained a copy of the report
28
Q

what information on each credit account is included in a credit report?

A
  • credit limit, amount borrowed, account balance, and payment history
  • who’s responsible for paying the account
29
Q

what are some reasons you could be denied credit?

A
  • missing information
  • age of applicant
  • earnings of applicant
  • negative information
  • too much debt
  • unstable employment history
30
Q

according to the truth in lending act, lenders must disclose what two things?

A

annual percentage rate and method used in computing finance charges

31
Q

what are consumer loans?

A
  • formal negotiated contracts
  • one time transactions usually for big ticket items
  • no more credit is available once repaid
32
Q

what are some different types of loans?

A
  • auto loans
  • other durable goods
  • education loans
  • personal loans
  • consolidation loans
33
Q

what are single payment loans?

A
  • specified period

* lump sum payment due

34
Q

what are installment payments?

A

•Fixed, scheduled payments

35
Q

what are fixed payments?

A

interest rate and payments remain the same

36
Q

what are variable-rate payments?

A

interest rate and payments change periodically

37
Q

where can you get consumer loans?

A
  • consumer finance companies
  • sales finance companies
  • captive finance companies
  • credit unions
  • S&L’s
  • life insurance companies
  • commercial banks
38
Q

ways to keep track of your credit

A
  • keep inventory sheet of debt
  • know total monthly payment
  • know total debt outstanding
  • check your debt safety ratio
39
Q

what is the simple interest method?

A

calculated on outstanding balance

40
Q

what is the discount method?

A

interest is subtracted form loan amount and reminder goes to borrower

41
Q

what are some loan considerations?

A
  • payment penalties
  • credit life insurance
  • buy on time or pay cash?
42
Q

the typical american family pays more than 1/3 of gross income in various taxes

A

.

43
Q

what is the progressive tax structure?

A
  • 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

44
Q

what is the marginal tax rate?

A

tax rate paid on the next dollar of taxable income

45
Q

what is the average tax rate?

A

• rate at which each dollar is taxed on average (divide tax liability by taxable income)

46
Q

what happens when taxes are due on a pay-as-you-go basis?

A
  • employer withholds taxes all year

* self-employed deduct and pay taxes

47
Q

taxes include

A
  • Federal, state, & local income taxes

* FICA and other withholding taxes

48
Q

its what income what matters?

A

taxable income

49
Q

what is taxable income?

A

the amount of income subject to taxes

50
Q

what are three kinds of income?

A
  • active income
  • portfolio
  • passive income
51
Q

what is active income?

A

wages, salaries, bonuses, pension

52
Q

what is portfolio?

A

interest, dividends, capital gains

53
Q

what is passive income?

A

income from real estate, limited partnerships

54
Q

what is gross income?

A

any and all income subject to federal tax

55
Q

examples of gross income

A
  • wages and salaries
  • bonuses, commissions and tips
  • interest and dividends
  • alimony received
  • prizes, lottery, and gambling
56
Q

what are the steps in the flow diagram?

A
  1. Step a. determine adjusted gross income
  2. Step b. calculate taxable income
  3. step c. calculate tax using tax tables or tax rate schedules
57
Q

what things can be subtracted from gross income?

A
  • higher education (limited)
  • IRA contributions(limited)
  • self-employment tax (limited 50/50%)
  • alimony paid
  • penalty on early withdrawal of savings
  • moving expenses (limited)
58
Q

what is capital gains?

A

when an asset is sold for more than its original cost

59
Q

capital gains when it comes to taxes

A
  • 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
60
Q

if taxable income is less than $100,000 use

A

tax rate table

61
Q

if taxable income is more than $100,000 use

A

tax schedule

62
Q

subtracted amount of taxes and credit include:

A
  • child and independent care expense
  • adoption tax credit
  • foreign tax credit
  • credit for qualified electric car
63
Q

characteristics of the form 1040EZ

A
  • under age 65

* taxable income under $100,000

64
Q

characteristic of the form 1040

A

taxable income over $100,000

65
Q

what are other filing considerations?

A
  • Quarterly payment of estimated taxes
  • April 15 filing deadline
  • filing extensions
  • amended returns(1040x)
  • audited returns
66
Q

what are some tax preparation services?

A
  • private tax preparers
  • tax services
  • CPA’s
  • enrolled agents
  • tax attorneys
  • computer based tax returns

Personal finance (2 decks)

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