FHCE 3200 EXAM TWO Notes PDF

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Grogen's test were open book and open notes. If he still uses TopHat for attendance, make sure to take note of those answers as they will show up on tests again. Tests are multiple choice, but can be tricky since they are open book and open notes. Tests were on elc....

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Exam 2FHCE 3200 Fall 2016 1 Module FOUR: 4A: CHECKING ACCOUNTS  1400 – Checks introduced into the banking system in Europe  Check – a written order to your bank to pay a third party  Federal Reserve Act of 1913 – the creation of a national system where a check written in one city at one bank could be cashed in another city at another bank – made possible by: 1. Bank routing numbers – 9-digit code on the lower left of a check – in combination with an account number, which act as a payment trail for transferred funds  8% of Americans conduct business daily without a checking account 1. Must have a checking account in order to continue your financial literacy journey 2. 3 reasons why: 1. You need an account that can accept your wages and salary income in the form of a direct deposit 2. A checking account offers you protection as long as the bank where you hold your account offers FDIC Deposit Insurance Coverage – the value of all deposits in the institution are insured up to at least US $250,000 in case the bank was to go out of business 3. The only way to obtain a debit card is to have a checking account  Shop around before opening a checking account. The New York City Office of Financial Empowerment says you should look for the following in a checking account: 1. Reasonable monthly fee – never paying more than $5 per month, and never paying a fee at all if you are a full-time student 2. No monthly fees for the use of a debit card tied to your checking account 3. Free use of in-network automatic teller machines with you debit card 4. Low minimum balance requirements 5. Accounts that allow unlimited withdrawals and checks on a monthly basis  Potential pitfalls with checking accounts: 1. Nearly all banks belong to ChexSystems – before opening an account, banks and credit unions will evaluate your previous bank account history 2. Common red flags with ChexSystems 1. Allowing an account balance to go to zero and bouncing a check – writing a check for an amount greater than your account balance, known as overdraf  In case of an overdraft, the person trying to cash the check will be denied access to the promised payment  Sometimes your bank will pay the check but will also charge and overdraf fee  The number one reason people bounce checks is because they fail to track cash coming in and going out from their account on a monthly basis Steps to balance an account: 1. Find the checkbook balance from the register 2. Subtract the monthly service charge and add the interest earned a. These amounts are not on the register. Only seen when the statement arrives 3. Find what the bank thinks is the account balance a. you must reconcile your account statement against your check register monthly 1B: DEBIT AND PREPAID CARDS AND ELECTRONIC TRANSFERS  The basic checking account is one of the most important spending tools in your financial plan  Debit cards – are marketed as a substitute for traditional paper checks 1. Key difference – with a check money is transferred from your account to the merchant only after the seller deposits the check. With a debit card, the transaction occurs instantly  Electronic payments now exceed the value of payments made through check writing Payments made in the US can be classified into 3 groups: 1. Traditional methods: a. paying with cash – currency and coins

Exam 2FHCE 3200 Fall 2016 2

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b. checks – paper authorization by account holder to the bank to transfer funds to payee Electronic payments: a. Debit card with PIN – payment made directly from the cardholder’s checking account using a PIN to verify the transaction b. Debit card with signature – payment using the cardholder’s signature to verify transaction c. Prepaid card – payment made from money loaded onto card in advance used to make payments in the future d. Direct debit – payment made without a debit card with payment made electronically e. Electronic bill paying service – payments made by direct debit through a non-card payment network Hybrid between traditional and electronic payments: a. Check to electronic conversion – payment made at point of sale with paper check that is immediately converted to an electronic form of payment b. Automated Clearing House (ACH) – payments made directly through electronic fund transfers; similar to electronic bill paying services but broader in transacting both debit and credit transactions i. Essentially a nationwide network of banks, credit unions, and other depository institutions that send each other credit (wages, salaries, SS benefits, and tax refunds) and debit (payments for mortgages, utility bills, and credit card payments) transfers electronically ii. Increasing by nearly 5% annually

4C: THE COST OF BORROWING (WHO ARE YOU REALLY BORROWING FROM?)  Principal – the initial amount borrowed  Interest – the financial cost of a loan; addition to repaying loan 1. How financial institutions make money 2. How much it costs to borrow money is determined by the interest rate charges on the loan referred to as APR  Finance charge – the total amount of interest and fees that a borrower is expected to pay 1. Interest that will be paid 2. Fees associated with borrowing the money 3. Any fees paid as the loan is paid – late fees 4. Generally stated in absolute dollars which lenders are required to disclose Who Are You Really Borrowing From?  In the short-run, the lender is providing the money to you  Long-run the money is coming from you 1. The lender is providing you with a critical service – allow you to borrow money from your future income, you repay the loan plus interest to the lender Installment loans – designed to be repaid over a fixed period of time through regular (usually monthly) payments  2 types: 1. Fixed loans – lending contracts where the lender agrees to lend the borrower a certain amount of money at a set interest rate for a set period, the borrower agrees to repay the money through fixed monthly payments that will not change during the lifetime of the loan 1. Lender loans all the money at once. The borrower repays over time 2. Most consumer installment loans are fixed 2. Variable loans – structured so that the loan will be paid off within a certain time period, but the payments may fluctuate during repayment period 1. The interest rate can change – sometimes monthly, but most often once or twice a year 2. If the interest rate changes then the payment due each month will also change Loan term – the length of time to repay the loan  Interest rates are negotiable

Annual Percentage Rate 12 months

Loan Balance

Interest charged on loan for one month

4D: CREDIT REPORTS

Exam 2FHCE 3200 Fall 2016 3 Credit report – a summarized accounting of your credit history You are likely to have a credit report if: 1. You borrowed money from a company and used the purchased asset as collateral (buying a car, motorcycle, boat, furniture) 2. Applied for, been accepted, and used a credit card 3. Taken out a college student loan 4. Declared bankruptcy 5. Lost a home to foreclosure 6. Been sued and lost a court battle 7. Been arrested an found guilty (if related to credit record) 3 Primary National Credit Bureaus in US: 1. Equifax 2. Transunion 3. Experian  Credit Bureau – a company that maintains income, housing, and credit payment files on consumers  Creditors – firms that you borrow money from  Identity thef – when someone else uses your personal information to obtain credit 1. This is why it’s important to obtain a free credit score

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4E: CREDIT SCORES  Credit score – a tally that summarizes a person’s credit risk 1. Used as a way to predict who is likely to manage their debt wisely in the future  FICO Score – can range from a low of 300 to a high of 850 1. Created by Fair Isaac Corporation 2. Higher the score, lower the credit risk  Unsecured debt – money borrowed to purchased goods and services that are generally consumed quickly. Items purchased with unsecured debt typically cannot be repossessed 1. in 99% of all cases, you should pay off all of these 2. One exception – when you are attempting to develop a credit score 3. This compares to secured debt that is used to buy things like cars and homes. These secured assets can be taken back by a lender if the debt is not repaid.  Nearly every lender and merchant that extends credit uses a credit score to determine: 1. If they will issue you credit 2. If they do give you credit, how much will be granted 3. At what level of interest you will pay on any amount borrowed  Credit line – the maximum amount that can be borrowed 1. A higher credit score will result in a larger credit line and a lower interest rate 4 Categories of Information in A Credit Report 1. Personal Information a. Name b. Birth date c. Social Security number d. Address 2. Summary of Accounts a. Lists all open lines of credit and outstanding debt 3. Inquiries a. Show a list of lenders who have looked at your credit report over the past two years 4. Negative Items a. Summarizes things likes missed payments, overdue notices, and any public record information – bankruptcies, foreclosures, tax liens, garnishments, and legal judgements Credit Score is Based on 5 Factors

Exam 2FHCE 3200 Fall 2016 4 1. 2. 3. 4. 5.

payment history – the largest factor in shaping your credit score: try to never miss a payment amounts owed length of credit history new credit types of credit

4F: CREDIT CARDS 

Credit card – a financial tool associated with a line of credit issued by a financial institution

4G: PAYDAY AND CAR TITLE LOANS 4H: PERSONAL LOAN 4I: FINANCIAL AID AND STUDENT LOANS 4J: AUTO LOANS 4K: HOUSING THE BASICS OF RENTING 4L: HOMEOWNERSHIP...