FIN 101: week 4
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This 4 page Class Notes was uploaded by Rachel Rusnak on Tuesday May 10, 2016. The Class Notes belongs to FIN 101 at Ball State University taught by Professor Boylan in Summer 2015. Since its upload, it has received 16 views. For similar materials see Personal Finance for Fiscal Wellness in Finance at Ball State University.
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Date Created: 05/10/16
Personal Finance 101 Professor Boylan 1 Chapter 4: Credit and Debt. ***on the test*** 1. What is Debt? a. Debt is money owed to someone else. b. It is considered a claim on your financial earnings and generally considered negatively. c. Debt is also known as liability. 2. America Debt at a Glance. a. 1% of American children save their allowance ($780 a year). b. “If you know you are going to get hit…duck.” 3. Why Do We Use Credit? a. Avid paying cash for large outlays. b. Meet financial emergencies. c. Convenience. d. Investment purposes. 4. Rule of Thumb. a. Product should outlive the payment schedule. b. Convenience items should be avoided. 5. Minimum Payments Means Maximum Years. a. Save nearly $4,000 by paying more than the minimum balance. 6. Debt Management. a. Good debt. i. These items appreciate the value. ii. These items provide for “quality of life”. 1. These items build equity. b. Bad debt. i. These items depreciate in value. ii. These items are short lived. iii. These items are often “consumable”. 1. These items are obligations. c. Trends in housing. i. 30 year mortgage. ii. 15 year mortgage. iii. 5 year mortgage. d. Upside down loans. 7. 30-40-30 Diet. a. Past: designate 30% of your refund to paying off debt and catching up on outstanding bills. b. Present: embark 40% on current use. c. Future: use 30% to jump start an emergency fund or longer term savings. 8. Benchmark for Debt. a. Debt to equity (net worth). i. Total debt/ total equity. 1. 150,000/ 75,000= 2 b. Debt to income. i. Total debt/ total annual income. 1. 150,000/ 50,000= 3 2. Get a spouse: 150,000/100,000= 1.5 9. Credit Cards. a. You spend more on items that you pay for with plastic. b. The average American family has about $15,000 in credit card debt (on 5 different cards). i. Interest costs alone is about $3,625 a year (or $271.87 a month). Personal Finance 101 Professor Boylan 2 10. Saying Yes…Saying No. a. Every time you are saying Yes to something you are saying NO to something else. b. Saying YES to restaurants may be saying NO to clothes. c. Saying YES to the movies may be saying NO to textbooks. i. What are your priorities? 11. How Much Credit Card Debt do You Have (students)? a. NO credit card- 10%. b. NO debt- 43%. c. Less than $1,000- 14%. d. $1,001 to $4,999- 17%. e. $5,000 or higher- 16%. 12. Don’t show me the money. a. Payday Loans. i. Given the name as they are intended to “tide” you over until your next “payday”. ii. Targeted towards the poor. iii. $1 a day for $100 (2 week period) turns out to be a 36% interest. 13. Credit Ratings. a. Important to manage. i. You need some debt (to build history). ii. May be part of hiring process. iii. Be careful of “free money”. iv. Called a FICO score. 14. Fair Isaac & Co. Score (FICO Score). a. Use only credit information for calculations. i. Payment history- 35%. ii. Amounts owed- 30%. iii. Length of credit history- 15%. iv. New credit- 10%. v. Types of credit used- 10%. 15. What’s in Your Credit Report? a. All your identification information. b. Place of employment. c. Credit history. d. Public record information. e. Unpaid taxes, linens, judgements. f. Inquiries. g. Applications for credit. h. Basic credit information. i. Dates accounts opened or closed. j. Other account activity. k. Amount you currently own. l. Credit score. 16. Credit Scores. a. The higher the score the better. i. 850-721: A+ Outstanding. ii. 720-700: A Excellent. iii. 699-680: A- Good. iv. 679-620: B+ Fair. v. 619-600: B Credit with blemishes. vi. 599-580: C Credit history with outstanding collections/ judgements. vii. 579-550: D Credit history with severe collections, judgements and/or bankruptcy. Personal Finance 101 Professor Boylan 3 viii. 549-300: F Same as above. 17. Reducing Debt-% and $ a. Mortgage: $90,000 5% 6 b. Motorcycle loan: $10,000 7% 5 c. Home Equity: $20,000 9% 4 d. Credit Card #1: $500 14.00% 3 e. Credit Card #2: $2,000 21.75% 2 f. Credit card #3: $3,000 21.75% 1 18. Improving Your Credit. a. Get a credit card. b. Use an old credit card. c. Utilities. d. Prepaid. e. Ask for goodwill. f. Dispute old negatives. 19. Repairing Your Credit. a. List all debt. b. Pay on all credit cards (don’t skip any). c. Pay extra when available. d. Stop taking on new debt. e. Get help (debt counselling) when needed ($). 20. Debt Settlement. a. Debts that are 6 months past due. b. Potential for you to be taxes on relief (money you don’t have to pay back- it is income). c. Best people have about $30,000 in debt. d. Sometimes companies will sue you when they know you are trying to get out of paying bills. e. Companies normally don’t like talking to individuals or “debt settlers” they will deal with an attorney (cost you money). f. Expect a 1099 in the mail on pay off. 21. Protection of Debtors. a. Laws are made to protect debtors from dishonest or fraudulent acts of creditors. b. Sometimes these lenders are classed predatory lenders- only lending to put you in collections. i. They protect the bank. 22. Protection of Creditors. a. Laws are made to protect creditors from dishonest or fraudulent acts of debtors. b. They can force a person into bankruptcy. 23. Remedy of Bankruptcy. a. When debtors existing debt reached an excessive level and can no longer be paid back. b. The act of being legally made free and clean of your debts. Sometimes debt is too much. i. 60% are medical. ii. 10% are job loss. 1. Voluntary bankruptcy. 2. Involuntary bankruptcy. 3. It is not an “easy solution”. 4. Stays on your credit report for 10 years. 5. Re-establishing credit can be difficult. a. Co-signer. b. Collateral. Personal Finance 101 Professor Boylan 4 c. Higher fees and interest. 6. Can impact employment. 7. Can impact ability to rent an apartment or purchase a home. 8. Can make it harder to get insurance. 9. Counselling requirement. a. Only trained and certified legal professionals should advise you in legal matters regarding bankruptcy. c. Some things cannot be discharged through bankruptcy. i. Child support. ii. Federal student loans. iii. Taxes. iv. Anything else determined by the trustee. d. When considering bankruptcy… i. Seek professional credit counseling from a non-profit agency approved by department of Justice. ii. Seek advice from a qualified legal professional. iii. Fully consider the short-term and long-term impact. 24. What do You do? a. 4 C’s of credit. i. Character. ii. Capacity. iii. Capital. iv. Collateral. 25. Danger Zone. a. 43% of people who lent money to their family or friends weren’t paid back in full. b. 27% of people received a dime.
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