Week 3 - Credit Flashcards
What are swipe (interchange) fees?
Charges that banks and card networks impose on retailers when a customer uses their credit card to make a purchase
How do swipe fees impact the price of goods and what socioeconomic implication does this have?
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.
Why do we care about credit?
- mortgage rates / auto loans
- employment
- student loan refinancing rates
- apartment shopping
What is a credit score?
A way for a creditor to assess ability and likeliness to repay on time. Like a GPA
What is a credit bureau?
Collect and provide information, they don’t make lending decisions
What are examples of popular credit bureaus?
Transunion, Equifax, Experian
What is the difference between a credit report and a credit score
A credit report is like a transcript and a score is like a GPA. A credit report doesn’t include income or credit score.
If a customer always pays off their credit cards on time, how do banks make money?
- interchange fees
- annual fees
- interest
What is the percentage breakdown of your credit score?
1) On-time payments - 35%
2) Utilization - 30%
3) Age of accounts - 15%
4) Mix - 10%
5) Recent Inquiries - 10%
How are missed payments quantified and what is the consequence of one?
1 missed payment / 50 total payments = 98% on time
A missed payment hurts you for 7 years
How does utilization work?
No memory, resets every month. Should only be 10% of your credit limit.
How can you alleviate your utilization?
Mid-period payments or by requesting a higher credit line
What is a hard pull?
When a lender checks credit, typically give out SSN
What is a soft pull?
When you check your own report, pre-approval offers, existing lenders check
(T/F) Checking your own credit hurts your score
False!
What is a secured credit card?
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.
What are 4 ways you can you improve your credit score?
- 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
When should you check your credit report?
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
What is asset allocation?
Dividing investments into different assets
What are the 3 main asset classes?
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)
What are target date funds?
Life cycle funds, age-based retirement investment. Target date is the date you plan to retire.
How are investments in social security similar to investments in government bonds?
Pays predetermined income, indexed to inflation and guaranteed by federal government.
Why not always play safe?
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
(T/F) You should keep more in stocks than in bonds
True
What percent should you invest in bonds?
Roughly equal to your age
What percent should you keep in stocks?
100 - age (or 110 - age)
What is one benefit of target date funds?
Fees are lower
(T/F) Investing in international stocks increases volatility
False; reduces volatility
What is deferred income annuity?
longevity insurance, insurance co pays you for the rest of your life.
Which factor has the largest direct impact on your credit score?
Payment history
(T/F) Lenders use credit reports to help them decide whether to loan you money and what interest rate to charge.
True
Zvi Bodie invests in…
Inflation protected US bonds.
(T/F) Asset allocation refers to deciding which individual stocks to buy.
False; asset allocation refers to deciding what kinds of investments you hold
(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.
False; the opposite is true
(T/F) Most target date funds decrease their allocation to stocks over time.
True
Benjamin Graham recommended holding no more than 75% of one’s portfolio in stocks and no less than 25% in gold.
False; 25% in bonds
