Topic 7 - Dealing with Unforeseen Events Flashcards
How might someones life cycle might differ from what they had expected? 3
Planned events may:
- happen but not at the expected time
- happen but not in the way expected
- not. happen at all
how can someone prepare for unexpected events?2
- flexibility in budgeting
- be prepared to alter priorities
What is a what if calculation?
A function on a spreadsheet whereby the user can set out a table of calculations and then change one of the variables to see ‘what’ the effect will be on the final results ‘if’ certain changes happen
What could be accounted for in ‘what if’ calculations?4
- interest rates
- the rate of inflation
- exchange rates
- benefits
Why should interest rates be accounted for when completing ‘what if’ calculations?
interest rates across financial services are determined by the Bank’s changing of the Bank rate
- this can cause borrowing to become more expensive
- can cause savings to become more beneficial
Why should the rate of inflation be accounted for when completing ‘what if’ calculations?
rate of inflation measures the speed at which prices increase
- if peoples income rise more slowly than price they will suffer a fall in the real standard of living thus unable to purchase goods and services
Who does inflation effect more so?
those on fixed incomes, such as retired people as they receive a nominal amount each month
Why should exchange rates be accounted for when completing ‘what if’ calculations?
- the cost of foreign holidays will be effected, and in turn the budget for holidays
What is the exchange rate?
exchange rate of a currency is the price in terms of other currencies
Why should benefits be accounted for when completing ‘what if’ calculations?
many people rely on state benefits as their primary source of income.
- people don’t know what’s going to happen to benefit rates or entitlements in the future
- a change of government means a change In social security policy
How are benefits determined?
the amount they are entitled to receive depends on the policy of the government that happens to be in power.
What is the disability living allowance (DLA)?
money available for people with disabilities who have difficulty walking or getting around or who need help to look after themselves.
What does DLA stand for?
disability living allowance
What does PIP stand for?
personal independence payment
What is the PIP?4
same as DLA but for claimants aged between 16 and state pension age
- requires people to be assessed to see how much financial support they require
- designed to help people with long term ill-health or disability to pay for extra costs that their condition incurs.
-subject to tax and effected by employment status
What are the different types of debt that the british public experience? 3
- credit card debt
- secured debt
- other consumer-credit debt
What is the average debt per household in the UK in 2021?
£63,122
What is the average debt per household in the UK in 2020?
£60,720
What is the average debt per household in the UK in 2019?
£60,213
What is the average debt per household in the UK in 2018?
£59,288
What is an equity withdrawal? (4)
- interest rates on mortgages are lower as it Is over a longer period of time
- when house prices were higher, people took out second mortgages on their homes based on the increased value of their house
- spending the extra money on consumer items
The additional borrowing based on the difference between the value of a house and the outstanding mortgage is an equity withdrawals - As house prices decreased, the trend reversed and people paid of their mortgages in order to free themselves of debt
Equity withdrawal definition
the additional borrowing based on the difference between the value of a house and the outstanding mortgage.
What is the average debt long students finishing their courses?
£45,000
What is the current government set maximum university tuition fee
£9,250
What is the biggest contributing factor to student debt?
student loans
What is a student loan?
a loan provided under a government scheme that allows students to borrow at a low rate of interest and begin to pay back the loan only if and when their income reaches a certain level
What does it mean to be over-indebted?
when one owes more they can afford to repay and may never repay it.
How does a debt spiral occur?
failure to pay a debt in any one month carries it over to the next
- this means income is reduced before it Is earned, making it more difficult to repay and reducing discretionary spending thus reducing standard of livign
What can poor debt management lead too? (3)
- personal problems due to lack of ability to fund necessities such as food
- difficult in finding/keeping a home due to being excluded from financial products
- difficulties in finding credit from mainstream providers with a relatively feasible interest rate
What companies help to relieve people of debt?(3)
- MoneyHelper
- Citizens Advice
- StepChange Debt Charity
What criteria may you have to meet to receive debt consolidation loans?4
- held a current account with the provider for at least 12 months
- pay at least £1,000 into their account every month
- have managed their account well and have good credit history
- they haven’t defaulted on previous lending commitments
What determines whether the provider charges an interest? (3)
- personal circumstances
- amount of the loan
- repayment term
What are the different ways in which people can improve their credit rating(8)
- keep up to date with payments
- set up direct debits for bills so they’re paid on time
- make loan applications one at a time
- obtain a copy of their credit report from credit reference agencies
- dispute inaccuracies on the credit report
- use credit from time to time to show they can use it responsibly
- show they’re on electoral roll to prove their address
- pay off any outstanding debt
Why might someone make loan applications one at a time? 2
- each application appears on a person’s credit record as a search, and multiple applications could indicate the a person is in financial distress and taking out one loan in order to repay another
- people refused credit should wait a few month before applying again
What are the main credit reference agencies in the UK? 3
- Experian
- TransUnion
- Equifax
What advice might provider give on debt management? 6
- should find out; how much they owe, who they owe to, when each debt is due to be paid
- draw up budget to monitor outgoings and prevent further debts
- debts can be put into order of priority
- find out how much interest they are paying on loans; paying off the most expensive first and close the account, keeping up the minimum repayments on the cheaper debts if possible
- transfer most expensive debt to another product with a lower interest rate
- consider debt consolidation loans to put all debts into one place
What order might a provider recommend putting debt repayments into? 3+2
- rent or mortgage arrears
- council tax
- gas electric
- deducting food or ay other necessities then seeing how much is left to pay the debt arrears
- work out a realistic debt management plan/ budget
What is a financial footprint?
- providers communicate with each other and exchange information about a persons financial history
What can prospective lenders see on a financial footprint?5
- how much the person has borrowed in the past and how often
- whether their borrowing has increased overtime and by how much
- how many loan applications they have made and what results of these were
- how, to what extent, and when they paid off there debts
- whether they have missed any payments
- whether they have ever defaulted on a debt
Why do providers use credit scores? 2
- to decide whether they should lend or not to them
- to determine the rate of interest they will charge
What are the effects of a financial footprint? 2
- whether they are able to borrow money
- the price they pay to be able for credit
Why is being made redundant a negative effect?2
- it can impact any budgeting or financial plans made regarding the stable income
- borrowing terms are made regarding income levels, if the income goes the borrower may no longer be able to make repayments effecting loans/repayments
What is Universal credit set to replace? 5
- income based JSA
- income based employment and support allowance
- income support
- working tax credit
- child tax credit
- housing benefit
