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Questions and Answers
What type of institution is a credit union typically classified as?
What type of institution is a credit union typically classified as?
Savings accounts generally offer high liquidity and high interest rates.
Savings accounts generally offer high liquidity and high interest rates.
False
What is FDIC insurance and what does it protect against?
What is FDIC insurance and what does it protect against?
FDIC insurance protects deposits in banks up to $250,000 per depositor.
A ___ is commonly used to withdraw cash from an ATM.
A ___ is commonly used to withdraw cash from an ATM.
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Match the following banking products with their characteristics:
Match the following banking products with their characteristics:
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When opening a bank account, which of the following is typically required?
When opening a bank account, which of the following is typically required?
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Interest earned on savings accounts is not subject to federal income tax.
Interest earned on savings accounts is not subject to federal income tax.
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What is one advantage of starting to save early?
What is one advantage of starting to save early?
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What is the liability for lost or stolen cards if reported within two business days?
What is the liability for lost or stolen cards if reported within two business days?
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Prepaid cards are linked to a bank account.
Prepaid cards are linked to a bank account.
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List one type of endorsement for checks.
List one type of endorsement for checks.
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A __________ is a guaranteed check issued by a bank, often used for large transactions.
A __________ is a guaranteed check issued by a bank, often used for large transactions.
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Match the following loan types with their descriptions:
Match the following loan types with their descriptions:
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Which type of account usually offers higher interest rates but has penalties for early withdrawal?
Which type of account usually offers higher interest rates but has penalties for early withdrawal?
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Check cashing is available for free for anyone cashing a check.
Check cashing is available for free for anyone cashing a check.
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Identity theft includes credit fraud, account takeover, and __________ theft.
Identity theft includes credit fraud, account takeover, and __________ theft.
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What is the primary purpose of establishing a credit history?
What is the primary purpose of establishing a credit history?
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A credit card uses existing funds while a debit card borrows funds.
A credit card uses existing funds while a debit card borrows funds.
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Name one benefit of using credit.
Name one benefit of using credit.
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The _____ represents the annual cost of credit, including interest and fees.
The _____ represents the annual cost of credit, including interest and fees.
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Match the following types of credit with their primary characteristics:
Match the following types of credit with their primary characteristics:
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Which of the following is NOT a type of financial institution that provides credit?
Which of the following is NOT a type of financial institution that provides credit?
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Improving your credit score can be done by avoiding payments and accumulating debt.
Improving your credit score can be done by avoiding payments and accumulating debt.
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What are the Five C's of Credit?
What are the Five C's of Credit?
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Study Notes
Banking Institutions
- Banks and Credit Unions: Banks operate for profit, offering a wide spectrum of financial services. Credit unions are non-profit, member-owned cooperatives, often providing lower fees and better interest rates.
- Comparison Shopping: When choosing a financial institution, consumers should evaluate fees, interest rates, customer service, product offerings, and accessibility.
Savings Accounts
- Opening an Account: Requirements typically include a valid photo ID, age verification (like a driver's license, state ID, or utility bill), and Social Security Number for tax reporting. Some institutions accept alternative IDs for non-citizens.
- Depositing Funds: Direct deposit, ATM deposits, mobile check deposit, and in-person deposits are common methods for adding funds.
- Early Saving Advantages: Starting early maximizes the power of compound interest, resulting in larger savings in the future.
- Earning Interest: Savings accounts earn interest, enabling money to grow over time.
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Liquidity Considerations:
- Savings Accounts: Offer high liquidity with lower interest rates.
- Money Market Accounts: Moderate liquidity with slightly higher interest rates and limited transaction frequency.
- Certificates of Deposit (CDs): Provide lower liquidity but higher interest rates due to fixed terms.
- Taxation on Interest Earned: Interest earned is subject to federal income tax, potentially impacting tax liabilities.
- Minimum Balance Requirements: Some banks require a minimum balance, which can affect account eligibility and incur potential fees.
Safety in Banking
- Federal Insurance: FDIC insures banks, while NCUA insures credit unions, both up to $250,000 per depositor per institution.
Banking Products and Services
- ATM Cards: Used for cash withdrawals, balance checks, and deposits. Protected by a PIN, which should be kept secure. Out-of-network ATM usage may incur fees.
- Debit Cards: Directly withdraw funds from a checking or money market account. Cannot be linked solely to savings accounts due to monthly withdrawal limitations. Lost or stolen cards have a liability limit of $50 if reported within two business days.
- Prepaid Cards: Not linked to a bank account, can be purchased in stores or banks. Types include prepaid debit cards and store gift cards, often with activation fees.
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Cash Equivalent Instruments:
- Bank/Cashier Checks: Guaranteed by the bank, often used for large transactions.
- Money Orders: Purchased at banks or post offices, considered cash.
Checking Accounts
- Types of Checking Accounts: Regular, free, and minimum balance accounts with differing fees and requirements.
- Writing and Managing Checks: Essential components include: check number, account number, date, amount (numerical and written). Check registers help track spending and reconcile accounts.
- Endorsement Types: Blank endorsements allow anyone to cash the check, while restrictive endorsements specify how the check should be handled.
- Stop Payment Orders: Prevent payment on a lost or stolen check, incurring a fee.
- Check Cashing: Typically free for account holders or when the check is drawn on the bank.
- Electronic Funds Transfer (EFT): Facilitates transfers, online payments, direct deposits, mobile deposit options, and person-to-person payments through apps.
- Online Account Monitoring: Allows account tracking, transaction alerts, and fraud detection.
Income-Producing Products
- CDs vs. Savings Accounts: CDs offer higher interest rates with predictable income but have penalties for early withdrawal and lower liquidity.
Loans and Credit
- Loan Types and Purposes: Including student loans, personal loans, auto loans, and mortgages.
- Secured vs. Unsecured Loans: Secured loans (e.g., car loans) use collateral, while unsecured loans (e.g., personal loans) do not.
Bank Shopping Considerations
- Interest Rates, Fees, and Services: Evaluate interest rates, fees, minimum balances, ATM access, and online banking capabilities.
Disadvantages of Alternative Lenders
- Pawnshops and Check Cashing Centers: Offer high fees and interest rates, lacking regulatory protection.
Fraud Prevention
- Identity Theft: Types include credit fraud, account takeover, and tax ID theft. Prevention tips: shred personal documents, use strong passwords, and avoid sharing personal information.
Credit
- Definition and Use: Credit allows borrowing money to make purchases now, and repayment later with interest.
- Credit Sources: Banks, credit unions, finance companies, mortgage brokers, credit card companies, payday lenders, pawnshops, and tax preparers provide access to credit.
- Comparison Shopping: Compare interest rates, fees, and terms before borrowing.
Cost of Credit
- APR (Annual Percentage Rate): Represents the annual cost of credit, including interest and fees.
- Finance Charges and Fees: Include annual fees, late payment fees, and fees for rewards programs.
Benefits of Credit
- Access to Funds, Large Purchases, Rewards: Enables buying large items like homes or cars, and offers rewards programs.
Types of Credit/Loans
- Credit Cards, Student Loans, Mortgages, Car Loans, Installment/Personal Loans: Each has different terms, interest rates, and requirements.
Qualifying for Loans
- Establishing Credit History: Important for renting, obtaining loans, and qualifying for better interest rates.
- Five C's of Credit: Character, Capacity, Collateral, Capital, Conditions.
Credit Scores
- FICO Score: Key factors include payment history, amounts owed, length of credit history, new credit, and types of credit used. Scores range from 300 to 850, impacting interest rates and loan eligibility.
- Improving Credit Scores: Paying bills on time, reducing debt, and avoiding multiple loan applications simultaneously.
Credit Card Use
- Credit vs. Debit Cards: Credit cards borrow funds; debit cards use existing funds.
- Credit Limits and Cash Advances: The credit limit sets the maximum borrowing amount, while cash advances come with higher fees and interest rates.
- Billing Statements: Understand grace periods, finance charges, and minimum payments.
Credit Reports and Problems
- Credit Reporting Agencies: Equifax, TransUnion, and Experian provide credit reports. Consumers can request one free report annually from each agency.
- Errors and Disputes: Individuals can challenge inaccurate information in their credit reports.
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Debt Collection
- Debt Collection Agencies: Contact consumers about unpaid debts.
- Fair Debt Collection Practices Act: Provides protections from unfair collection tactics.
- Consumer Rights: Consumers have the right to dispute debts, request verification of debt, and limit contact with collectors.
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Managing Debt
- Debt Consolidation: Combining multiple debts into a new loan with potentially lower interest rates.
- Debt Management Plans: Working with a credit counseling agency to create a debt repayment plan.
- Bankruptcy: A legal process to discharge debts, but it significantly impacts credit history.
- Protection from Predatory Lending Practices: Consumers should be aware of high-interest loans and fees associated with payday loans and rent-to-own agreements.
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Description
This quiz covers essential topics on banking institutions, including banks and credit unions, and the requirements for opening a savings account. It also discusses the importance of comparison shopping for financial services and the advantages of early saving. Enhance your understanding of personal finance with this informative quiz.
