Financial Literacy Unit Review

What is the formula for calculating interest? Interest = Principal X Rate X Time (I = P x R x T)

Carl buys a car and gets a loan for it. He borrows $15,000 at a rate of 5%. He has 4 years to pay off his loan What is the principal of the loan? $15,000 What is the rate of the loan? 5% What is the time period of the loan? 4 years

How much interest will Carl pay? I = 15,000 x.05 x 4 I = 3,000 How much will Carl have to pay the bank in total over the course of this loan? Principal + Interest = total loan amount 15, ,000 = 18,000 Carl buys a car and gets a loan for it. He borrows $15,000 at a rate of 5%. He has 4 years to pay off his loan

Where does the money come from when a debit card is used? From the cardholder’s bank account

Where does the money come from when a credit card is used? It is a short term loan from the credit card company to the card holder This is money that the card holder doesn’t currently possess

What does APR stand for? Annual Percentage Rate

What is a default APR? A penalty rate that credit card companies use for customers who are late or miss payments The penalty rate is significantly higher than a regular APR, and can last indefinitely

What term is used to describe the situation in which a person has a balance for longer than 1 month A Revolving Balance

What is a balance transfer and what type of person needs one? A balance transfer occurs when a person uses one credit card to pay the balance on another card…effectively transferring the balance from one card to another People with multiple credit card balances can use this to take advantage of a lower rate and to consolidate their debts

According to the Fair Credit Reporting Act, what are you entitled to? To see a copy of your credit report if you request to see it

What are the three consumer credit reporting agencies? Experian TransUnion Equifax

What are the 3 C’s of credit, and what does each one mean? Capacity: how much does the consumer earn and would be able to afford Collateral: what assets does the consumer have that could be taken by the creditor if the loan is not paid Character: what patterns of payment does the consumer have

What are the benefits of having a good credit score? Get lower APRs on credit cards and loans Easier to get loans or mortgages Reflects well on you if potential employers or landlords check your credit score

How can you improve your credit score? Effort: making payments on time Time: having a history of making payments on time

What are the consequences of declaring bankruptcy It stays on your credit history for 7-10 years It makes it difficult for you to get loans or credit cards You will receive higher APRs on credit cards and loans (if you do manage to get one) Potential employers and landlords may decide against you because of this negative information

What is an asset? It is something of value that the consumer possesses. Examples include – House – Car – Money in bank accounts – Jewelry

What is a debt? It is an amount of money that is owed to a creditor

What is a foreclosure? It is the legal action by a creditor/bank to take over a house that the owners have stopped paying the mortgage on

How can you recognize a loan scam? They charge you an up-front fee They guarantee you money before reviewing your application

What is the difference between a fixed rate mortgage and an ARM? The rate for a fixed rate mortgage remains the same for the entire term of loan while the rate for an ARM can change during the loan

What is the most common length for a mortgage? 30 years

What is PMI? Private Mortgage Insurance People who have a down payment that is less than 20% of the purchase price are required to pay PMI

How are most property taxes paid? Mortgage companies include property tax payments in the mortgage payment and put that money into a special account called an escrow account The mortgage company will make payments for the homeowner

How much are the closing costs of a house? Usually 3-6% of the purchase price

What is equity? The amount of money that belongs to the homeowners after they sell their property and pay off the mortgage and real estate agents

Angelina and Brad bought a house seven years ago for $385,000. They put down 20% as a down payment, and have paid off an additional $12,000 over the past 7 years. They recently sold the house for $375,000, and had to pay the real estate agent a 5% commission What was the amount of the down payment they made? – $385,000 x.2 = $77,000 (purchase price x down payment %) What was the amount of the original mortgage loan? – $385,000 - $77,000 = $308,000 (purchase price – down payment amount) What was the real estate agent commission? – 375,000 x.05 = $18,750 (sales price x commission percentage) What was the net sales price for the house? – 375,000 - $18,750 = $356,250 (sales price – commission amount) How much equity did Angelina and Brad have after selling their house? – Net Sales Price of house: $356,250 – Amount remaining on mortgage: $308,000 – $12,000 = $296,000 – Equity = Net Sales Price – Remaining Mortgage $356,250 - $296,000 =$60,250

What is insurance? A policy that people buy to help protect them from being responsible for the entire cost of replacing/repairing items

Why do people need insurance Insurance means that risk is shared between the policy holder and an insurance company The policy holder only has to pay for part of the costs for the situation that triggers the policy

What is a premium? The amount of the policy that the holder pays to be insured

What is a deductible? It is the amount of money that the policy holder must pay towards the repairs/costs. This amount is pre-determined and stated in the policy Higher deductibles usually result in lower premiums, while lower deductibles usually result in higher premiums