Week 3 - Credit

Question 1

What are swipe (interchange) fees?

Answer 1

Charges that banks and card networks impose on retailers when a customer uses their credit card to make a purchase

Question 2

How do swipe fees impact the price of goods and what socioeconomic implication does this have?

Answer 2

Merchants raise prices to cover swipe fees. This leads to poorer people using cash/debit paying higher prices. Wealthier people with credit card perks get reimbursed with cash or airline miles.

Question 3

Why do we care about credit?

Answer 3

• mortgage rates / auto loans
• employment
• student loan refinancing rates
• apartment shopping

Question 4

What is a credit score?

Answer 4

A way for a creditor to assess ability and likeliness to repay on time. Like a GPA

Question 5

What is a credit bureau?

Answer 5

Collect and provide information, they don’t make lending decisions

Question 6

What are examples of popular credit bureaus?

Answer 6

Transunion, Equifax, Experian

Question 7

What is the difference between a credit report and a credit score

Answer 7

A credit report is like a transcript and a score is like a GPA. A credit report doesn’t include income or credit score.

Question 8

If a customer always pays off their credit cards on time, how do banks make money?

Answer 8

• interchange fees
• annual fees
• interest

Question 9

What is the percentage breakdown of your credit score?

Answer 9

1) On-time payments - 35%
2) Utilization - 30%
3) Age of accounts - 15%
4) Mix - 10%
5) Recent Inquiries - 10%

Question 10

How are missed payments quantified and what is the consequence of one?

Answer 10

1 missed payment / 50 total payments = 98% on time
A missed payment hurts you for 7 years

Question 11

How does utilization work?

Answer 11

No memory, resets every month. Should only be 10% of your credit limit.

Question 12

How can you alleviate your utilization?

Answer 12

Mid-period payments or by requesting a higher credit line

Question 13

What is a hard pull?

Answer 13

When a lender checks credit, typically give out SSN

Question 14

What is a soft pull?

Answer 14

When you check your own report, pre-approval offers, existing lenders check

Question 15

(T/F) Checking your own credit hurts your score

Answer 15

False!

Question 16

What is a secured credit card?

Answer 16

You put a deposit down and that is your limit. Pay your balance each month, if you don’t, they deduct from your deposit. Reports to the credit bureau every month. After 12-18 months you can apply for a normal credit card if you managed well.

Question 17

What are 4 ways you can you improve your credit score?

Answer 17

• keep balances low on credit cards
• pay off debt, rather than moving it between credit cards
• only apply for new credit accounts when you need them
• get current and stay current

Question 18

When should you check your credit report?

Answer 18

1) When applying for a loan, like a mortgage
2) Separating from a spouse and want his or her new transactions off your personal record
3) If you’ve paid off a court judgement against you for money owed
4) If you’ve had a dispute with a store and refused to pay a bill
5) if you’ve been turned down for a job, rental insurance, or credit bc of info on credit report
6) if you’ve had a dispute with a lender over whether a bill has been paid and dispute is resolved

Question 19

What is asset allocation?

Answer 19

Dividing investments into different assets

Question 20

What are the 3 main asset classes?

Answer 20

1) Equities (stocks)
2) Fixed Income (gov’t bonds, municipal bonds, & corporate bonds)
3) Cash (money in bank accounts, CD’s, and money market funds)

Question 21

What are target date funds?

Answer 21

Life cycle funds, age-based retirement investment. Target date is the date you plan to retire.

Question 22

How are investments in social security similar to investments in government bonds?

Answer 22

Pays predetermined income, indexed to inflation and guaranteed by federal government.

Question 23

Why not always play safe?

Answer 23

Inflation; Protected U.S. bonds are safe as investment. But if all investments are in bonds then the portfolio will grow too slowly so you may not have enough to retire

Question 24

(T/F) You should keep more in stocks than in bonds

Answer 24

True

Question 25

What percent should you invest in bonds?

Answer 25

Roughly equal to your age

Question 26

What percent should you keep in stocks?

Answer 26

100 - age (or 110 - age)

Question 27

What is one benefit of target date funds?

Answer 27

Fees are lower

Question 28

(T/F) Investing in international stocks increases volatility

Answer 28

False; reduces volatility

Question 29

What is deferred income annuity?

Answer 29

longevity insurance, insurance co pays you for the rest of your life.

Question 30

Which factor has the largest direct impact on your credit score?

Answer 30

Payment history

Question 31

(T/F) Lenders use credit reports to help them decide whether to loan you money and what interest rate to charge.

Answer 31

True

Question 32

Zvi Bodie invests in…

Answer 32

Inflation protected US bonds.

Question 33

(T/F) Asset allocation refers to deciding which individual stocks to buy.

Answer 33

False; asset allocation refers to deciding what kinds of investments you hold

Question 34

(T/F) In most cases, as people approach retirement age, it is recommended that they increase the percentage of their financial investments held in stocks and decrease the percentage held in bonds.

Answer 34

False; the opposite is true

Question 35

(T/F) Most target date funds decrease their allocation to stocks over time.

Answer 35

True

Question 36

Benjamin Graham recommended holding no more than 75% of one’s portfolio in stocks and no less than 25% in gold.

Answer 36

False; 25% in bonds