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Questions and Answers
What is one reason why insurance costs may vary when selecting a car?
What is one reason why insurance costs may vary when selecting a car?
When negotiating the price of a car, what is a beneficial tactic regarding trade-ins?
When negotiating the price of a car, what is a beneficial tactic regarding trade-ins?
What financial consideration should one keep in mind when seeking a car loan?
What financial consideration should one keep in mind when seeking a car loan?
What effect does extending the loan period have on monthly payments?
What effect does extending the loan period have on monthly payments?
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What is an effective method for comparing financing rates when purchasing a car?
What is an effective method for comparing financing rates when purchasing a car?
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Why might it be advantageous to negotiate by phone when purchasing a car?
Why might it be advantageous to negotiate by phone when purchasing a car?
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How can a consumer best maintain liquidity while buying a car?
How can a consumer best maintain liquidity while buying a car?
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What factor can influence the resale value of a car?
What factor can influence the resale value of a car?
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What is the monthly payment amount for a $17,000 loan with a four-year term?
What is the monthly payment amount for a $17,000 loan with a four-year term?
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What is one advantage of leasing a car compared to purchasing it?
What is one advantage of leasing a car compared to purchasing it?
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Which of the following is a disadvantage of leasing a vehicle?
Which of the following is a disadvantage of leasing a vehicle?
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If Jiu Wa Ling purchases a car for $18,000 with a $1,000 down payment, how much will she need to finance?
If Jiu Wa Ling purchases a car for $18,000 with a $1,000 down payment, how much will she need to finance?
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If Jiu Wa Ling's car is expected to be worth $10,000 after four years, what is the potential equity value from purchasing?
If Jiu Wa Ling's car is expected to be worth $10,000 after four years, what is the potential equity value from purchasing?
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What is the total cost of leasing the car over a four-year period at $300 per month?
What is the total cost of leasing the car over a four-year period at $300 per month?
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What interest rate does Jiu Wa Ling expect to earn from the bank if she invests her $1,000 down payment?
What interest rate does Jiu Wa Ling expect to earn from the bank if she invests her $1,000 down payment?
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What is a consequence of purchasing a car rather than leasing in terms of investment?
What is a consequence of purchasing a car rather than leasing in terms of investment?
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What does a Home Equity Line of Credit (HELOC) primarily use as collateral?
What does a Home Equity Line of Credit (HELOC) primarily use as collateral?
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What percentage of the market value can typically be borrowed against through a HELOC?
What percentage of the market value can typically be borrowed against through a HELOC?
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What type of repayment structure is common with HELOCs?
What type of repayment structure is common with HELOCs?
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In the provided example, what is the maximum amount of credit that can be provided based on the calculations?
In the provided example, what is the maximum amount of credit that can be provided based on the calculations?
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Why is it important to shop around when considering a HELOC?
Why is it important to shop around when considering a HELOC?
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What is typically a major difference between personal loans and HELOCs?
What is typically a major difference between personal loans and HELOCs?
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What may cause potential problems for borrowers using HELOCs?
What may cause potential problems for borrowers using HELOCs?
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Which of the following is NOT a common source of personal loans?
Which of the following is NOT a common source of personal loans?
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Study Notes
Personal Finance Chapter 6: Assessing, Managing, and Securing Your Credit
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Chapter Objectives:
- Provide a background on credit
- Describe the role of credit bureaus
- Explain the key characteristics of consumer credit products
- Explain how to manage debt
- Provide a background on identity theft
- Describe identity theft tactics
- Explain how to avoid identity theft
- Discuss how to respond to identity theft
Background on Credit
- Credit is funds provided by a creditor to a borrower, expecting repayment with interest or fees.
- Repayment is divided into principal and interest.
Types of Credit
- Installment Loan: A loan for specific purchases, repaid regularly with interest.
- Revolving Open-End Credit: Credit up to a maximum amount, based on income, debt level, and credit history. Interest is charged monthly on the outstanding balance, with a minimum amount due each month. Can be repaid in full any time.
Advantages of Using Credit
- Establishes and builds a good credit history and credit score.
- Provides access to credit for large purchases in the future.
- Eliminates the need to carry cash.
- Useful in situations where cash is not readily available.
- Many credit cards offer additional benefits (e.g., air miles).
- Maintains a record of past transactions.
Disadvantages of Using Credit
- Difficulty making payments.
- Temptation to make impulse purchases.
- Damage to credit rating if minimum payments are not made.
- Large credit payments can hinder saving.
- May need to withdraw from savings to cover cash flow deficiencies.
Impact of Credit Payments on Savings
- Using credit shifts funds initially available for savings into spending.
Credit History
- Represents a borrower's history with various credit instruments (credit cards, retail credit, lines of credit, loans, leases).
- A good credit history is established by consistently paying bills on time.
The Credit Application Process
- Involves filling out application forms and negotiating interest rates and loan contracts.
- Key documents needed include a personal balance sheet, personal cash flow statement, and proof of income.
- Credit check is typically part of the process.
Credit Insurance
- Represents a commitment by some consumers to cover credit card repayments under specific circumstances (accident, illness, unemployment).
- The coverage period is usually short-term (e.g., three months).
Credit Bureaus
- Credit bureaus provide credit reports documenting a borrower's payment history.
- Equifax Canada and TransUnion Canada are primary credit bureaus.
Credit Reports Information
- Include personal details, a consumer statement, summary of accounts, account history, information on closed accounts, public information (bankruptcies, judgments), creditor contact information, and inquiries.
Focus on Ethics: Guarding Your Financial Information
- Written permission is needed to allow access to your credit report.
- Financial institutions must detail in their privacy policies how information is collected and shared.
Credit Score
- Rating indicating a person's creditworthiness.
- Used by creditors to determine loan eligibility and interest rates.
- Affected by several factors, including payment history, credit utilization, length of credit history, types of credit, and recent inquiries.
Credit Score Criteria
- Payment history, amount of credit owing, length of credit history, type of credit used, searching for and acquiring new credit.
Credit Bureau Info
- Credit bureaus may not have access to the same information.
- Credit scores range from 300-900 with 600 or higher generally considered good. Each financial institution sets own criteria for lending.
- Acceptable scores may vary by loan type.
- See Exhibit 6.4: National Distribution of BEACON Scores
Credit Scores
- Low credit scores are commonly caused by missed payments or excessive debt.
- Negative credit history remains on your report for 3 to 10 years.
- Bankruptcies remain on your report for 6 to 7 years.
- Improve credit by catching up on late payments, paying minimums on time, and reducing debt.
Reviewing Your Credit Report
- Review your credit reports from each major credit bureau annually to ensure accuracy.
- Identify areas of concern that might affect credit and provide opportunities for remediation.
Credit Cards
- Ways to use credit cards benefit your financial well-being (establish credit, eliminate the need for cash, earn additional benefits).
- Credit cards can be used to maintain liquidity
- Stay aware of the total spending
- Credit card financing should be avoided or used as a last resort.
Types of Credit Cards
- MasterCard, Visa, and American Express are most popular.
- Credit card companies receive a percentage of payments to merchants (typically 2-4 percent).
- Many financial institutions issue credit cards.
Prestige and Specialized Credit Cards
- Cards (e.g., gold, platinum) offered to individuals with excellent credit.
- Often come with extra benefits (travel insurance, rental car insurance, special warranties).
- Typically carry an annual fee. Special cards, like retail credit cards, are accepted only at specific retail locations with higher interest rates than standard and prestige cards.
Credit Card Features
- Credit Limit: Maximum amount of credit available
- Overdraft Protection: Allows exceeding the credit limit, for a fee.
- Annual Fee: A yearly charge for particular credit card types
- Incentives to Use the Card: (e.g., points)
- Grace Period: Time between purchase and payment due.
Credit Card Example One
- Illustration of billing cycle, payment due dates, and grace periods.
Cash Advances/Convenience Cheques
- Usually charge very high interest rate plus transaction fees.
- Generally a very costly method of financing, advisable to avoid or use as a last resort.
Credit Card Financing
- Paying only a portion of the credit card bill monthly is an expensive habit.
- Interest rates are generally between 20-30 percent and may fluctuate frequently.
- Methods for calculating finance charges include previous balance, average daily balance and adjusted balance.
Credit Card Example Two
- Demonstrates how different methods for calculating finance charges might produce different results.
Credit Card Example Four
- Illustrates how paying the full balance affects finance.
Credit Card Payments
- Strive to pay the full balance to avoid paying excess interest costs.
- Credit card statements offer a record of transactions.
Comparing Credit Cards
- Key criteria for comparisons include acceptability, annual fee, interest rate, maximum limits and the existence of cash advances and late payment fees.
Credit Card Example Five
- Compares expenses of two credit cards (X and Y) highlighting annual interest rates and expenses
Home Equity Line of Credit (HELOC)
- A loan using the equity in a home as collateral.
- Homeowners can borrow up to the credit limit (usually up to 80%).
- Monthly interest-only payments, but principal is due at a specified date or sooner.
- Default can impact the home.
- Considered a second mortgage.
- Shop around for the best rate and terms.
HELOC Example
- Illustrates how a creditor might calculate the maximum HELOC amount.
HELOC Interest Rate
- Typically variable, tied to a specific interest rate index.
- Often based on Prime rate.
- Interest-only payments and variable rates can create challenges for borrowers.
- Plan for repayment.
Personal Loans
- Financing for large purchases.
- Typically has a specific repayment schedule.
- Loan sources include chartered banks, finance companies, credit unions, and some automobile manufacturers or private individuals.
Loan Contract and Terms
- Specifies loan parameters (loan amount, interest rate, repayment schedule).
- Loan Repayment Schedule: Equally-distributed payments encompassing principal and interest.
- Maturity/Term: Length of the loan. Longer maturities often translate into lower monthly payments.
- Consider paying more than the minimum.
Loan Terms
- Security: May include a promise to repay or collateral. Collateral are assets that guarantee a loan if the borrower defaults.
- Secured Loan: A loan backed by collateral.
- Unsecured Loan: A loan not backed by collateral and has less favorable terms than a secured loan.
- Financial conditions influence the loan terms.
Effect of Loan Maturity on Total Interest Paid
- Longer loan terms result in paying more interest.
Loan Terms
- Co-signing: May be required for loans if the borrower's credit is weak.
- Payday Loans: Short-term loans for advances on future paychecks. High-interest rates.
Focus on Ethics: Predatory Lending
- Be wary of high loan fees and practices that emphasize high-risk defaults.
- Carefully evaluate loans and any related attachments.
- Seek better terms elsewhere.
The Real Cost of Borrowing on Personal Loans
- APR must be converted to an effective interest rate (e.g., Effective Yield).
- Real cost of borrowing includes additional fees (e.g., service charges, appraisal fees).
Debt Management
- Improve your credit score: Catch up on late payments, pay minimums on time, and reduce debt.
- Review your personal financial statements: Analyze your budget, balance sheet, and cash flow for identifying immediate solutions to reduce your debt.
Avoiding Credit Repair Services
- Credit repair services can be misleading.
- It's often best to address credit problems independently.
Identity Theft
- Theft of personal information (name, SIN, etc.).
- Criminals misuse this information for financial gain or to create fake identities.
Identity Theft Tactics
- Shoulder surfing: Viewing PINs or other information from a distance.
- Dumpster diving: Searching through trash for documents.
- Skimming: Copying credit/debit card information from card readers.
- Abusing legitimate access to records: Accessing information from a business or public records.
- Crime rings: Groups working together to commit identity theft.
- Violating your mailbox: Obtaining personal information from incoming and outgoing mail.
Pretexting, Phishing, and Pharming
- Pretexting: Obtaining information via deception.
- Phishing: Online pretexting.
- Pharming: Redirecting users to bogus websites.
Protecting Against Identity Theft
- Secure personally identifiable information.
- Be cautious in handling private information; keep a minimum amount of personal identification paperwork.
- Shred sensitive documents .
- Pay attention to billing statements.
- Monitor bank accounts closely.
- Be suspicious of e-mails asking for personal info.
- Use strong passwords.
Response to Identity Theft
- Take immediate action to clean up your credit report.
- Report the crime to law enforcement and Anti-fraud Centre.
- Take steps to limit financial damage.
- Document your corrective actions.
- Seek new credit and notify credit bureaux.
- Contact pertinent financial institutions and update banking, phone, and utility details.
- Obtain new licenses.
Contacts For Identity Theft
- Provides contact information for credit reporting bureaus and government agencies to report and receive support relevant to identity theft.
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