Personal Finance: Chapter 16, 17, 18 – Flashcards
Unlock all answers in this set
Unlock answersquestion
Definition of Service Credit
answer
- an agreement to have a service performed now and pay for it later
question
Definition of Credit
answer
- money borrowed to buy something now with the agreement to pay for it later
question
Definition of Line of Credit
answer
- a pre-established amount that can be borrowed on demand with no collateral
question
Definition of Open-ended Credit
answer
- an agreement to lend the borrower an amount up to a stated limit and to allow borrowing up to that limit again whenever the balance falls below the limit
question
Definition of Truth-in-Lending Law
answer
- requires lenders to fully inform consumers about all costs of a credit purchase before an agreement is signed
question
Definition of Closed-end Credit
answer
- a loan for a specific amount that must be repaid, in full, including all finance charges, by a stated due date
question
Definition of Retail Stores
answer
- stores that sell directly to consumers, such as department stores, restaurants, and most service businesses
question
Definition of Pawnbroker
answer
- a legal business that makes high-interest loans based on the value of personal possessions pledged as collateral
question
Definition of Usury Law
answer
- set maximum interest rates that may be charged for loans
question
Definition of Sales Finance Companies
answer
- makes loans through authorized representatives
question
Definition of Credit Bureau
answer
- a company that gathers, stores, and sells credit information to business subscribers
question
Definition of Loan Sharks
answer
- unlicensed lenders who charge illegally high interest rates
question
Definition of Finance Charge
answer
- the total dollar amount of all interest and fees you pay for the use of credit
question
Definition of Deferred Billing
answer
- a service available to charge customers whereby purchases are not billed to the customer until later
question
Definition of Creditor
answer
- the person or company who loans money or extends credit to you
question
Definition of Collateral
answer
- property pledged to assure repayment of a loan
question
Definition of Grace Period
answer
- a free period that allows you to avoid the interest charge by paying your current balance in full before the due date shown on your billing address
question
Definition of Cash Advance
answer
- money borrowed against the credit card limit
question
Definition of Fair Credit Rating
answer
- earned by a customer who usually pays all bills within the grace period, but occasionally takes longer
question
Definition of Conditions
answer
- state of the economy -> affects your ability to pay
question
Definition of Debt Collector
answer
- a person or company hired by a creditor to collect the overdue balance on an account
question
Definition of Excellent Credit Rating
answer
- a customer must pay bills before the due date
question
Definition of Credit Report
answer
- a written statement (issued by credit bureau) which itemizes accumulated information about a person through subscribers and public records
question
Definition of Good Credit Rating
answer
- a customer must pay bills on the due date or within a ten-day grace period
question
Definition of Capacity
answer
- the financial ability to repay a loan with present income
question
Definition of Discrimination
answer
- treating people differently based on prejudice rather than individual merit
question
Definition of Character
answer
- a responsible attitude toward living up to agreements often judged on evidence in the person's credit history
question
Definition of Poor Credit Rating
answer
- usually denied credit because their payments are not regular
question
Definition of Subscriber
answer
- member of the credit bureau who gather information from businesses and pay a monthly fee to the credit bureau
question
Definition of Credit History
answer
- the complete record of your borrowing and repayment performance
question
Definition of Point System
answer
- the bureau assigns points based on the factors such as amount of current debt, number of late payments, number and types of open accounts, current employment, amount of income, and etc.
question
Definition of Simple Interest
answer
- interest computed on the amount borrowed (or saved) only without compounding
question
Definition of Prime Rate
answer
- the interest rate that banks offer to their best business customers such as large corporations
question
Definition of Rebate
answer
- a partial refund of an amount spent
question
Definition of Previous Balance Method
answer
- first computes the finance charge and adds it to the balance and then subtracts the payment to get the new balance
question
Definition of Adjusted Balance Method
answer
- first subtracts the monthly payment and then adds the finance charge to get the new balance
question
Definition of Annual Percentage Rate (APR)
answer
- the cost of credit expressed as a yearly percentage
question
Definition of Down Payment
answer
- part of the purchase price paid in cash up front reducing the amount of the loan
question
Definition of Principal
answer
- the amount borrowed or the unpaid portion of the amount borrowed on which the borrower pays interest
question
Definition of Unused Credit
answer
- the remaining credit available to you -- that is your credit limit minus the amount you have already spent
question
Definition of Average Daily Balance Method
answer
- based on the average of credit balances from each day during the month
question
When credit first began in this country, did loans have high interest rates? Why, why not?
answer
- No - trust in citizens -; paid off as soon as they could
question
How has credit affected the American economy?
answer
- overspending -; prosperity - credit debt/bankruptcy tho
question
How does collateral help assure repayment of a loan?
answer
- taking away the property until the owner pays off loan -; owners want it back
question
List FOUR advantages of credit.
answer
1) emergency funds 2) convenient 3) safer then carrying large amounts of money 4) expand purchasing potential/raise standard of living
question
List FOUR disadvantages of credit.
answer
1) credit purchases more than cash purchases 2) finance charges 3) overspending 4) bankruptcy
question
What are TWO kinds of open-ended credit?
answer
1) open 30-day credit 2) revolving credit
question
How is open-ended credit different from installment (closed-end) credit?
answer
- open-ended -; allows continuous borrowing (only if limit not exceeded) - closed-ended -; no continuous borrowing until all loans are paid
question
Identify THREE credit card terms and explain how each affects borrowing costs.
answer
1) free period -; avoid interest charge by paying loans in full 2) Annual fees -; $15-$35 3) Transaction/Late Fees - fee if you go over limit or payment is late
question
Why does the law require lenders to include all loan costs in the APR?
answer
- allows you to compare different lenders for best deal
question
List SEVEN major sources of credit for consumers.
answer
1) Retail Stores 2) Credit Card Companies 3) Banks ; Credit Unions 4) Pawnbrokers 5) Private Lenders 6) Finance Companies 7) other consumer credit -; like insurance
question
Give THREE examples of service credit.
answer
1) hospitals 2) dry cleaners 3) repair shops
question
Why do credit unions offer lower interest rates on loans than do commercial banks?
answer
- credit unions are non-profit/organized to benefit members
question
How are consumer finance companies different from sales finance companies?
answer
- consumer -; loans to consumers buying consumer durables - sales -; loans through authorized representative
question
Why do finance companies charge high interest rates on their loans?
answer
- form of protection
question
Explain how pawnbrokers work.
answer
- give out loans for personal possessions less than the original value
question
What are the 5 C's of credit worthiness? Name and Describe.
answer
1) Character - a responsible attitude toward living up to agreements often judged on evidence in the person's credit history 2) Capacity - the financial ability to repay a loan with present income 3) Capital - property you own that is worth more than your debts 4) Conditions - state of the economy -; affects you ability to pay 5) Collateral - property pledged to assure repayment of loan
question
Name the 3 credit reporting companies.
answer
1) Transunion 2) Experian 3) Equifax
question
Name 5 items that appear on a credit report.
answer
1) Summary of information 2) Public Record information 3) Credit information 4) Account detail 5) Personal information
question
What is the FICO credit score range? What represents a good score?
answer
- FICO credit range = 300-850 - Good Score = 661-780
question
Describe the 20-10 rule.
answer
- avoid borrowing more than 20% of annual net income - loan payments shouldn't exceed 10% of monthly net income
question
What is the formula for calculating simple interest?
answer
- I = P x R x T - Interest = principal of loan x rate of interest x time - % needs to be in decimal
question
Do you have a right to see your own credit file? Explain.
answer
- You you do -> check for inaccurate information - only one credit file from each credit company each year
question
Credit
answer
- money borrowed to buy something w/ agreement to pay for it later - most commonly used method of purchases in U.S. - 80% purchases made w/ credit
question
Past
answer
- bartering/trading -> currency exchange - 1800's -; items first manufactured for sale - earliest form of credit -; general store - buy an account - no interest
question
Credit Expansion
answer
- individual purchasing power grew - buy more good/service -; American economy grew at healthy pace (caused recessions, people overspending (bankruptcy)) - bought luxuries/necessities
question
American Way of Life
answer
- between 1920 ; 1990 - credit no longer used for emergencies - different forms of credit developed
question
The 90's
answer
- record # of bankruptcies (can't pay loans (bills) - overspending and overuse of credit cards brought enormous credit debt
question
Credit Today
answer
- way of life - merchants encourage credit card use -; kohls -; 20% off, discounts by using credit card - forms of credit -; cards, loans, lines of credit, short ; long term financing - difficult to make some transactions w/o a credit card -; buying online
question
Advantages of Credit
answer
1) expand purchasing potential/raise standard of living 2) establish good credit - pay bills on time 3) provide emergency funds -; line of credit - pre-established amount that you can borrow on demand w/ no collateral 4) convenient 5) good service ; deferred billing 6) safer than carrying cash
question
Disadvantages of Credit
answer
1) credit purchased cost more than cash purchases (interest rates, finance charges) 2) 18% APR - 1.5% per month ($1,000 balance, monthly payment $15) 3) tie up future income
question
Simple Interest : I = P x R x T - Interest = principal x rate (APR - annual percentage rate) x time
answer
- store credit card has higher interest rate than master card /visa - bank vs. finance company -; finance company has higher interest rate - higher interest rate = higher risk
question
Kinds of Credit
answer
1. Open- Ended Credit - Open 30-day accounts - Revolving Credit 2. Closed-End Credit - AKA Installment loans 3. Service Credit
question
What are some Open-Ended Credits and what are examples of them?
answer
1. Open 30-day accounts - pay full balance every month ex. American Express 2. Revolving Credit - credit renewed as debt is payed off ex. mastercard, visa, store card
question
What are examples of Closed-End Credit?
answer
- mortgage - car loan
question
What are examples of Service Credit?
answer
- cellphone - utilities - doctor office
question
What is the norm of APR?
answer
12% - 35%
question
What are sources of credit?
answer
1. Retail stores 2. Credit card companies 3. Banks and Credit Unions 4. Finance companies - consumer, sales 5. Pawn Brokers 6. Private Lenders
question
Examples of Retail Stores. Interest rate is...?
answer
- Charge cards -- Walmart, Sears, Mobile - 25 %- 30%
question
Examples of Credit Card Companies. Interest rate is...?
answer
- Visa - Mastercard - Discover - American Express - 12% - 21%
question
Examples of Finance Companies
answer
- consumer - furniture, appliances - sales - Ford, GMAC, car loan
question
Interest Rate of Pawn Brokers.
answer
- 25% - 40%
question
Who are Private Lenders?
answer
- parents - family - friend - 401K
