Personal Finance Chapter 4 Test Flashcards

Personal Finance Terms

• Annual Fee: Yearly charge by credit card companies for the convenience of card usage.
• Annual Percentage Rate (APR): Represents the annual cost of borrowing, incorporating interest rates and other fees.
• Credit Card: A bank-issued card enabling users to finance purchases and manage payments.
• Credit Report: Comprehensive document detailing an individual's credit history, including debts and payment patterns.
• Credit Score: Numeric representation of a person’s creditworthiness, derived from their credit report using a standardized formula.

Debt Management Strategies

• Debt Snowball: A strategy for debt repayment that prioritizes the smallest debts first while making minimum payments on others.
• Borrower: A term referring to an individual or entity that receives funds from a lender and is obliged to repay it.

Financial Concepts and Figures

• Depreciation: Represents the reduction in value of an asset over time.
• Introductory Rate: The initial interest rate on a loan that typically increases after a promotional period.
• Loan Term: Duration during which a loan agreement is effective, requiring repayment or renegotiation by the end.

Deductions and Spending

• Tax Deduction: Expense, like charitable donations, that reduces taxable income.
• Personal Debt: Total amount of money that an individual owes to creditors.

Spending Patterns and Statistics

• Individuals without a high school diploma spend around $173 annually on lottery tickets.
• College graduates spend an average of $49 on lottery tickets.
• A car can lose approximately 70% of its value in the first four years.
• Cash users tend to spend 12-18% less compared to credit card users due to the psychological impact of handling cash.

Credit and Debt Management Steps

• Five steps to become debt-free include: stop additional borrowing, save funds, sell assets, seek additional income, and apply the debt snowball method.
• FICO stands for Fair Isaac Corporation, and the FICO score reflects an individual’s debt management behaviors.

Credit Score Components

• Five critical components of a FICO score include: debt history, new debt, levels of debt, duration of debt, and types of debt.

Identity Theft and Prevention

• Identity theft is currently the fastest-growing crime in North America.
• Key credit bureaus include Experian, TransUnion, and Equifax.
• In case of identity fraud, essential actions include obtaining a credit report, alerting credit bureaus, canceling affected cards, filing a police report, and disputing suspicious charges.

Misconceptions and Best Practices

• Establishing credit is not a prerequisite for homebuying.
• Victims of identity theft are held responsible for the entire debt incurred.
• Paying cash does not impact FICO scores, while borrowing money from family for debt relief is often ill-advised.

Loan Details and Associated Risks

• An adjustable-rate mortgage (ARM) poses risks due to potential increases in interest rates.
• Financing a car is discouraged due to rapid depreciation of its value.
• Taking on debt can enslave an individual financially and hinder investment opportunities.

Personal Information Security

• Strategies for protecting personal information include using shredders, checking credit reports yearly, securing debit cards with photo ID, creating robust passwords, and considering identity theft protection services.

Additional Financial Concepts

• The average car loan spans approximately 65 months.
• Radio-Frequency Identification (RFID) is utilized for tracking objects through electromagnetic data transfer.
• Foreclosure is the legal process by which a lender sells property from a borrower failing to meet mortgage payment requirements.
• Repossession occurs when a lender retrieves assets, such as a car, due to non-payment.
• Bankruptcy is a legal avenue for managing debt when one cannot repay what is owed.
• Garnishment involves a court order for lenders to withdraw owed money directly from a borrower’s paycheck.
• Delinquency refers to any situation where a borrower fails to meet payment obligations.