FIN3140 Exam One Comprehensive Study Guide Credit vs Debit credit provides a financial history report debit no history no lending Credit Score FICO a numerical representation of the likelihood of repaying borrowed money debt indicates level of financial responsibility tells about past with NO guarantees for future actions high score 850 low score 300 Credit Report data gathered by the three credit bureaus which is used to compute credit scores you have 3 credit scores one from each bureau that collects data on you Credit bureaus make mistakes as information Is inputted by imperfect humans 25 of reports have mistakes when mistake is made only the party which delved out the credit can provide evidence to correct your report salary income is not listed on your credit reports interest you pay does not show up on the report and does not affect your score FICO credit score used by the loan industry banks government etc business that gets raw data from bureaus and provides a poor fair good excellent credit rating which changes between banks economic conditions etc they charge money for viewing your rating however by law you are entitled to 1 report from each bureau for free each year if you sign up for a monthly credit check plan Things that determine a credit score 35 Payment history displays only that you have have not kept up with your contractual agreement of monthly credit payments you never pay interest on a credit payment if you have never missed a payment The fact that you have or have not paid interest is irrelevant to your credit score What is relevant is a timely payment 30 ratio of amount owed to available credit COSTS YOU THE MOST if you mess it up you want a small credit ratio below 20 or 2 15 length of credit history how long you ve had credit and the average time your accounts have stayed open 10 Types of credit used open lines of credit lines of credit that you do not need to use unless necessary you can spend on them or not spend them installment loans do not revolve you pay them off and they disappear revolving accounts credit cards you pay off money and it comes back opening new lines of credit drops your score around 5 points every time if you open a lot at once it gives the appearance that you are financially unstable 10 new credit Credit Cards VS Debit Cards Debit Cards You use your own money thief can access your whole account Liability of reporting theft is great 50 if w I 2 days 500 if w I 60 days unlimited if 60 days Blocking hold on your card can remain for up to 15 days No product purchase protection No credit history No grace period Credit Cards You borrow banks money Thief can only access lenders money Liability is not great 50 liability limit Blocking is usually lifted very quickly Has product purchase protection Has credit history obviously Has grace period and benefit and rewards programs Has over limit protection Has over the limit protection Debit Cards thief has easier access to your total account liability of reporting theft is great blocking hold on card can remain up to 15 days no product purchase protection over the limit protection Credit cards a convenient short term loan unsecured by anything other than a promise to pay NO COLLATERAL ex on a loan for a house house is collateral disadvantages temptation w high costs 1 credit cards do not increase income 2 credit card payments obligate future pay checks if you owe more on your credit card you are obligated to pay more to your credit payment money to pay comes out of future pay checks less liability 50 limit blocking is lifted quickly comes with product purchase protection benefits and rewards program over limit protection grace period time between time of purchase and time you pay it off w o interest Time Value of Money money is worth more today than it is tomorrow as you can earn interest on your money Interest cost of borrowing money borrowers pay lenders interest for being able to use their money rates depend on riskiness of loan and borrower YOU WANT Compounding LOW interest rates when borrowing money HIGH interest rates when lending money interest earned on interest money compounds most right at the last bit of time TIME AFFECTS COMPOUNDING shorter compounding periods more frequently you compound higher yields ex daily periods have higher yields than annual periods because you have more money if it is compounding once daily than once yearly WANT Low interest rate when borrowing to bank High interest rate when lending to bank stated rate does not already include compounding added in the amount therein looks smaller you have to compound yourself effective yield the rate already includes compounding the amount looks bigger Ex APY annual percentage yield Equity ownership Credit Card Rules Ex 100 equity in a house means you own house 1 interest rates on new cards cannot change in first year unless you are informed otherwise your payment is late by 60 days or you have a VARIABLE rate as opposed to a FIXED rate 2 after 1 year interest rates can rise on NEW purchases you can dispute this but card will usually be cancelled or your minimum payment will increase 3 UNIVERSAL DEFAULT if you default on just one for your credit cards credit bureaus will find out and will raise your rate on all your loans not just the one you defaulted on 4 You can be charged for a maintenance fee if you are not using your card They cannot charge you for an inactive card 5 To receive a line of credit under 21 you need to a have a jointly responsible COSIGNER both parties take full responsibility never cosign unless you are willing to take full responsibility for the loan b have proof of ability to repay ie a job Credit Card Mistakes DO NOT 1 accept credit card mail offers at face value 2 spend on purpose to get rewards 3 go crazy with your credit card 4 transfer money onto card there is a fee 5 accept apply now and save 10 offers 6 pay for friends w credit cards and have friends pay you back in cash 7 8 engage in joint loans cosign 9 set up automatic bill paying if you don t plan keeping up with the amount of take out cash advances they have high interest rates money in your back account 10 close credit cards it reduces available credit and lowers your score 11 negotiate a reduced balance lowers credit score and says you have paid less then full 12 dispute info that is actually correct when you think it is wrong bureaus will keep track of people that over dispute and if you do this and something actually happens to you