Banking & Credit Test PDF

**I. BANKING** **A. Types of Institutions** 1. **Banks (for-profit) vs. Credit Unions (nonprofit)** - Banks are for-profit entities offering a wide range of financial services. - Credit unions are nonprofit, member-owned cooperatives often offering lower fees and bet...

**I. BANKING** **A. Types of Institutions** 1. **Banks (for-profit) vs. Credit Unions (nonprofit)** - Banks are for-profit entities offering a wide range of financial services. - Credit unions are nonprofit, member-owned cooperatives often offering lower fees and better interest rates. 2. **Comparison Shopping for Accounts and Loans** - Consumers should evaluate fees, interest rates, customer service, product offerings, and accessibility when choosing a bank or credit union. **B. Savings** 1. **Opening an Account** - Requirements include valid photo ID, proof of age/identity (e.g., driver's license, state ID, military ID, utility bill, lease). - Social Security Number (FICA) generally required for tax reporting. - Some banks accept alternative IDs for non-citizens. 2. **Depositing Funds** - Methods include direct deposit, ATM deposits, mobile check deposit, and in-person deposits. 3. **Early Saving Advantages** - Starting to save early allows more time for compound interest to grow, maximizing the future value of savings. 4. **Earning Interest (Time Value of Money)** - Savings accounts earn interest, creating an opportunity for money to grow over time. 5. **Liquidity Considerations** - **Savings Accounts:** High liquidity, lower interest. - **Money Market Accounts:** Moderate liquidity, slightly higher interest, limited transactions. - **Certificates of Deposit (CDs):** Lower liquidity, higher interest, fixed terms. 6. **Taxation on Interest Earned** - Interest earned is subject to federal income tax and may affect tax liabilities. 7. **Minimum Balance Requirements** - Some banks require a minimum balance, affecting account eligibility and potential fees. **C. Safety in Banking** 1. **Federal Insurance** - FDIC insures banks, while NCUA insures credit unions, both up to \$250,000 per depositor per institution. **D. Banking Products/Services** 1. **ATM Cards** - Used to withdraw cash, check balances, or make deposits. - Protected by a PIN, which should be kept secure. - Fees may be charged for out-of-network ATM usage. 2. **Debit Cards** - Directly withdraw funds from a checking or money market account. - Cannot be linked solely to savings accounts due to monthly withdrawal limits. - Liability for lost/stolen cards is up to \$50 if reported within two business days. 3. **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. 4. **Cash Equivalent Instruments** - **Bank/Cashier Checks:** Guaranteed by the bank, often used for large transactions. - **Money Orders:** Purchased at banks or post offices, treated as cash. **E. Checking Accounts** 1. **Types of Checking Accounts** - Regular, free, and minimum balance accounts with varying fees and requirements. 2. **Writing and Managing Checks** - Checks have specific components: check number, account number, date, amount (numerical and written). - Check registers help track spending and reconcile accounts. 3. **Endorsement Types** - Blank, restrictive endorsements are used to specify handling of the check. 4. **Stop Payment Orders** - Issued to prevent payment on a lost or stolen check; incurs a fee. 5. **Check Cashing** - Available free for depositors or when the check is drawn on the bank. 6. **Electronic Funds Transfer (EFT)** - Allows transfers, online payments, and direct deposits. - Includes mobile deposit options and person-to-person payments via apps. 7. **Online Account Monitoring** - Enables account tracking, transaction alerts, and fraud detection. **F. Income-Producing Products** 1. **CDs vs. Savings Accounts** - CDs offer higher interest rates with predictable income but have penalties for early withdrawal and lower liquidity. **G. Loans/Credit** 1. **Loan Types and Purposes** - Include student loans, personal loans, auto loans, and mortgages. 2. **Secured vs. Unsecured Loans** - Secured loans (e.g., car loans) use collateral; unsecured loans (e.g., personal loans) do not. **H. Bank Shopping Considerations** 1. **Interest Rates, Fees, and Services** - Evaluate interest rates, fees, account minimums, ATM access, and online banking capabilities. **I. Disadvantages of Alternative Lenders** 1. **Pawnshops and Check Cashing Centers** - High fees and interest rates; lack of regulatory protection. **J. Fraud Prevention** 1. **Identity Theft** - Types include credit fraud, account takeover, and tax ID theft. - Prevention tips: shred personal documents, use strong passwords, avoid sharing personal information. **II. CREDIT** **A. Credit Definition and Use** 1. **Using Borrowed Money for a Price** - Credit allows borrowing money to buy now and pay later, with interest. **B. Types of Financial Institutions** 1. **Credit Sources** - Banks, credit unions, finance companies, mortgage brokers, credit card companies, payday lenders, pawnshops, and tax preparers. 2. **Comparison Shopping** - Evaluate interest rates, fees, and terms of credit before borrowing. **C. Cost of Credit** 1. **APR (Annual Percentage Rate)** - Represents the cost of credit on an annual basis, including interest and fees. 2. **Finance Charges and Fees** - Include annual fees, late payment fees, and fees for rewards programs. **D. Benefits of Credit** 1. **Access to Funds, Large Purchases, Rewards** - Enables purchasing large items like homes or cars and offers rewards programs. **E. Types of Credit/Loans** 1. **Credit Cards, Student Loans, Mortgages, Car Loans, Installment/Personal Loans** - Each has different terms, interest rates, and requirements. **F. Qualifying for Loans** 1. **Establishing Credit History** - Important for renting, obtaining loans, and qualifying for better interest rates. 2. **Five C's of Credit** - Character, Capacity, Collateral, Capital, Conditions. **G. Credit Scores** 1. **FICO Score** - Key factors: payment history, amounts owed, length of credit history, new credit, types of credit used. - Scores range from 300 to 850, impacting interest rates and loan eligibility. 2. **Improving Credit Scores** - Pay bills on time, reduce debt, avoid applying for multiple loans simultaneously. **H. Credit Card Use** 1. **Credit vs. Debit Cards** - Credit cards borrow funds; debit cards use existing funds. 2. **Credit Limits and Cash Advances** - Credit limit is the maximum amount that can be borrowed; cash advances have higher fees and interest rates. 3. **Billing Statements** - Understand grace periods, finance charges, and minimum payments. **I. Credit Reports and Problems** 1. **Credit Reporting Agencies** - Equifax, TransUnion, Experian; consumers can request one free report per year from each agency. 2. **Credit Issues** - Include debt addiction, overspending, payment delays, default, and bankruptcy. **J. Loan Management** 1. **Application, Down Payment, Interest Rates, Collateral** - Consider loan terms, affordability, interest rates, and need for collateral. **K. Abuses, Prevention, and Rights** 1. **Predatory Lending and Phishing Scams** - Be aware of unethical lending practices and online scams. **L. Consumer Responsibilities** 1. **Monitoring Statements, Evaluating Agreements** - Understand financial contracts, keep track of transactions, and verify billing accuracy.