Finance: Chapter 7 Notes
Finance: Chapter 7 Notes FIN 100
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This 4 page Class Notes was uploaded by Lindsay Fialli on Saturday October 8, 2016. The Class Notes belongs to FIN 100 at Salem State University taught by Terrance Doyle in Fall 2016. Since its upload, it has received 4 views. For similar materials see Personal Finance in Finance at Salem State University.
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Date Created: 10/08/16
Chapter 7: Assessing and Securing Your Credit Credit: funds provided by a creditor to a borrower that will be repaid by the borrower in the future with interest o Noninstallment Credit: credit provided for a short period, such as retail store credit o Installment Credit: credit provided for specific purchases, with interest charged on the amount borrowed Takes a few years to pay of Monthly payments can be structured o Revolving Open-End Credit: credit provided up to a specified maximum amount based on income and credit history; interest is charged each month on the remaining balance Credit limit is determined by the borrower's income level, debt level, and credit payment history Typically, a minimum payment must be payed each month Advantages of Using Credit Helps you build a good credit history Using credit creates the capacity to access credit in the future o Allows people to avoid deferring payments Eliminates the need for carrying cash or writing checks Disadvantages of Using Credit Excessive spending o Some consumers have no control over their spending Accumulation of debt o High interest rates mean you owe more Credit CARD Act 2009: college students under 21 must show proof of income or have a parent cosign in order to obtain a credit card If your spending and credit card payments exceed your net cash flows, you will need to withdraw savings to cover the deficiency Credit Rights Equal Credit Opportunity Act: prohibits creditors from denying credit sue to discrimination o If a creditor denies someone credit, they must explain the reason for the denial Financial Reform Act of 2010: established the Consumer Financial Protection Bureau (CFPB) to regulate specific financial services for consumers, including online checking accounts, credit cards, and student loans o CFPB can set rules to ensure that information regarding endorsements of specific financial products is accurate Prevent deceptive practices Regulate the credit rating bureaus Credit History Your credit history is a record of how you have used credit, including whether your payments have ever been late You receive credit when you use utilities Indicates to potential creditors whether or not you may repay other credit in a timely manner Credit Insurance Some consumers purchase credit insurance to make sure they will be able to keep making credit payments under adverse conditions o An insurance company will cover their monthly credit payments Credit Bureaus Credit Reports: reports provided by credit bureaus to document a person's credit payment history o Can determine whether you are able to obtain credit o May also influence the interest rate that you pay when you borrow money Main credit bureaus: Equifax, Experian, TransUnion Credit Report includes: Identifying information Potentially negative information from public records collections for any unpaid accounts All opened and closed accounts and their details o Any late payments Inquiries of companies who have requested your credit report Credit Score A credit score is a rating that indicates a person's creditworthiness Lenders access it when deciding whether to extend a personal loan Credit bureaus rely on a model created by the Fair Isaac Corporation (FICO) for credit scoring 1. Credit Payment History: most important factor; makes up 35% of your score If you paid in a timely manner Amounts past due on delinquent accounts, how long they were delinquent, and their status (whether or not they have been paid of) 2. Credit Utilization: the amount of your available credit that you use each month; makes up 30% of your score Whether or not you have discipline for using it 3. Credit History: 15% of your score Time since accounts were opened and the length of your relationship with creditors Value long-term relationships with creditors 4. New Credit: 10% of your score The number of new accounts opened recently, the proportion of your new accounts relative to older accounts, the number of recent inquiries of your score, and the time since the new accounts were opened The fewer the new accounts, the better 5. Different Types of Credit: makes up 10% of your score Credit card loans, retail accounts, installment loans, mortgages, and finance company loans VantageScore is an alternative scoring system created in 2006 Diferent bureaus give diferent scores because they might not all have the same info on you FICO score ranges from 300-800 1. Less than 580 will probably get you rejected for a loan or credit o If you find inaccurate information in your credit report, send a letter to the credit bureau that issued the report 1. A credit bureau is required to investigate your claim in 30 days Improving your Credit Score Cut back on all necessary expenditures Don't add to your debt but keep your accounts open o Reduce the amount of credit you use Contact creditors if you can't make a payment Might take a few years to accomplish Identity Theft Identity Theft: theft that occurs when an individual, without permission, uses your identifying information for his or her personal gain o Social Security number, driver's license number, credit card account numbers, bank account numbers, name or date of birth Criminals empty your bank accounts and/or charge purchases to your accounts o May open accounts in your name o Sometimes try to obtain government documents to establish a new identity About 15 million people in the US are subjected to identity theft each year As a result of identity theft: o Victims can feel violated and insecure o Can be turned down for jobs o Can be hounded for back taxes on non-existing income o Can be refused loans Average individual loss due to identity theft is $1,500 Most commonly happens because of lost or stolen wallets Shoulder Surfing: tactic used when an identity thief stands close to you in a public place and reads the number of your credit card as you conduct business Dumpster Diving: tactic used when an identity thief goes through your trash for discarded items that reveal personal information that can be used for fraudulent purposes Skimming: tactic used when a store employee steals your credit card number by copying the information obtained in the magnetic strip on the card o By October 2015, cards will use an embedded chip instead Pretexting: tactic used when an identity thief poses as an employee of a company with which you conduct business, to solicit your personal information o Will ask you to verify your information Phishing: tactic used when pretexting occurs online o Claiming to update your account information o Directs recipient to a fake website Pharming: similar to phishing, but targeted to larger audiences; tactic that directs users to bogus Websites to collect their personal information o Manipulate email viruses and host files Some identity thieves might be part of a crime ring Your mailbox could contain mail with your personal information on it Protecting Against Identity Theft Remove anything with your Social Security number from your wallet o Also account passwords or PINs Document your accounts Use a shredder on documents you don’t keep Be suspicious of phone callers looking to verify information Be careful of shopping online Be careful of the personal information you post on social media Install a firewall and virus protection for your computer Be careful of tax refund identity fraud Response to Identity Theft Contact the police Contact your credit card companies Contact the FTC Contact your creditors
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