Personal Credit

Conserving Your Wealth

Instructor’s Book

Copyright: Washington State Department of Financial Institutions.

DisclaimerThis course is developed for educational purposes and non-commercial use. It should not be construed as endorsement for any financial products or services. It in no way intends to convey legal, real estate, employee benefits, tax, insurance, or financial planning advice. It is a simple overview to educate those who are new to these subjects. Consultation with a professional is recommended for individual advice. These topics are complicated, dynamic, and constantly changing. Please check for current regulations, rules and laws.

Materials were adapted from Federal Reserve and Federal Trade Commission websites.

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Table of Contents

ABOUT THIS COURSE FOR INSTRUCTORS 5PERSONAL CREDIT LESSON PLAN 6PERSONAL CREDIT 90-MINUTE SESSION 8ABOUT THIS COURSE FOR STUDENTS 9INTRODUCTION 10

Setting Financial Goals 14Education 15First House 15Retirement 15Other goals 18

Create a spending plan 18

Protect Your Wealth 22

UNIT 1. BUYING 24

Buying Summary 24

UNIT 2. CREDIT CARDS 28

Credit Card Summary 28

Using Credit Cards 29Credit Card APRs 31Grace Periods 33Finance Charges 33Fees 34Cash Advances 34Credit Limit 34Different Kinds of Cards 35Other Features 35

Evaluating Credit Card Offers 35Credit Card Account Comparison Worksheet 36Liability Limits 37Billing Errors 38Lost or Stolen Credit Cards 38Unsolicited Cards 38Difference Between Credit and Debit Cards 38

UNIT 3. INSTALLMENT LOANS 43

Car Loans 44Summary on Car Loans 44

Student Loans 47Summary for Student Loans 47

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529 Qualified Tuition Programs (QTP) 49Coverdell Education Savings Account 50

Growth in Student Loans 50Federal Student Loans 50Stafford Loans 51Perkins Loans 52Parent PLUS Loans 52Private Loans 53Repayment 54

UNIT 4. MORTGAGES 57

Mortgage Summary 57

How mortgages work 58

How Much Can You Afford? 60

Information to Get When You Take Out a Mortgage 61Rates 62Points 64Fees 64Down Payments and Private Mortgage Insurance 64Subprime Mortgages 65Mortgage Shopping Worksheet 66Laws That Protect You 69Canceling a Mortgage 69

UNIT 5. HOME EQUITY LINE OF CREDIT 74

Home Equity Summary 74

Rates 75

Costs 76

Repayment 77

Disclosures From Lenders 77

UNIT 6. LEASE AGREEMENTS 78

Lease (Car) Summary 78

Rent-to-Buy 80UNIT 7. APPLYING FOR CREDIT 81

Credit Summary 81

What Creditors Look For 81Payment History 82Amounts Owed 82Length of Credit History 83

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New Credit 83Types of Credit Used 83

Information the Creditor Can’t Use 84

New to Credit 85

Maintaining Complete and Accurate Credit Records 86

Prompt Credit for Payments and Refunds for Credit Balances 87UNIT 8. DEALING WITH CREDIT PROBLEMS 89

Credit Problems Summary 89

How to Deal with Credit Problems 89

Debt Management Plans 92

UNIT 9. PROTECTING YOUR WEALTH 96

Protect Your Wealth Summary 96

Checking Credit Reports 98

What To Do If You Are A Victim of Identity Theft 98

Your rights 99

Take action against fraud 100Activity: Protect Yourself --Take Quizzes on Identity Theft, Spyware, Phishing, Spam Scam Slam, Online Shopping 101

GLOSSARY 101

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About This Course for Instructors

Personal Credit is a one-credit college-level class that has been designed to be personally relevant to the learner, behavior-based, and flexible in its distribution. This course focuses on the evaluation of the credit industry which lends money to people in various ways and its consumer products and services. The topics covered in this course include:

Credit and loan products Consumer legal rights in assuming various forms of debt Comparative evaluation of credit instruments Credit ratings and their impact Debt management

The main goal of this course is to have the learner demonstrate their ability to personally evaluate and select the right debt instrument for their personal circumstances. Here are outcomes that will be included:

Evaluate “buy” messages analytically and critically Differentiate between rational (cognitive) and emotional (affective) buying motives Differentiate between ethical and unethical marketing practices Compare cash price to installment price in order to make a purchasing decision Determine periodic payment, interest and total amount required to pay to amortize a loan Calculate finance charges on credit card balances and cash advances Identify consumer assistance services provided by the public and private organizations

(e.g. government, the Better Business Bureau and manufacturers) Research consumer advocacy groups that address consumer right and responsibilities

and describe how an individual can participate Analyze various sources and types of credit and related costs Select an appropriate form of credit for a particular buying decision Compare and contrast the various aspects of credit cards (e.g. APR, grace period,

incentive buying, methods of calculating interest and fees) Explain credit ratings and credit reports and describe their importance to consumers Describe the relationship between credit rating and cost of credit Recognize the signals of a credit problem Compare and contrast the legal aspects of different forms of credit (e.g. title transfer,

responsibility limits, collateral requirements and co-signing) Describe legal and illegal types of credit that carry high interest rates (e.g. payday loans,

rent-to-buy agreements and loan sharking) Identify the components listed on a credit report and explain how the information is used.

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Personal Credit Lesson Plan Topics/Learning

Objectives Class Activities/ Outline Assignments Must Cover If Time Permits

BuyingEvaluate buy messages analytically and critically.Develop actions to resist persuasive tactics.

Financial Behavior SurveyFrontline video: The Persuaders http://www.pbs.org/wgbh/pages/frontline/video/flv/generic.html?s=frol02p74&continuous=1

Needs vs. Wants assignment.Start auto purchase assignment.

IntroductionMaking the buy decisionBuying and resisting persuasive tactics

Home Shopping network activity.Video: The Persuaders

Credit CardsEvaluate credit card offers.Adopt good credit cards habits (limit use of credit, pay all outstanding balances, safeguard credit cards)

Shop and evaluate a credit card offer and present to class.Determine the cost of outstanding balances, late payments, and other behaviors.Secret History of the Credit Card http://www.pbs.org/wgbh/pages/frontline/shows/credit/view/

Complete credit card questions.

Credit Card APRs Grace PeriodsFinance ChargesFeesCash advancesCredit limitsOutstanding balancesCredit versus debit cards

Have each student bring in their own credit card information and analyze the fees.Review Lease agreement.Video: Maxed Out or In Debt We Trust

Installment LoansComparison shop installment loans.Evaluate finance charges based on down payment and term.

Shop for student loan.Use online calculators to calculate the monthly payments of various student loans.

Complete auto purchase assignment and present to class.

Installment LoansCar loansStudent loansEffect of the size of loan, interest rates, and term on monthly payments.

Compare tax-advantaged saving for education to student loan.

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MortgagesComparison shop mortgages.Evaluate finance charges based on rates, down payment and term.Articulate rights.

Do rent versus buy analysis.Do affordability analysis.Effect of down payment and Evaluating adjustable rate mortgages.Money Track video on mortgages.

Complete mortgage shopping worksheet and present to class.

Fixed ratesAdjustable ratesPointsFeesDown paymentsSubprime mortgages

Home equity loans.

Applying for CreditAnalyze the credit report.Correct the credit report.Articulate credit rights.

Activity: Finding your FICO scoreReading a credit report(complete handouts).

Questions on rights.Correct errors on credit report.

The Credit Report.Rights.Applying for credit

Download personal credit report, identify ways of improving credit and determine life-long credit strategy.

Dealing with credit problems/FraudHow to deal with credit problems.Create a debt management plan. Adopt actions against fraud.

Create a debt management plan.Guest speaker on Fraud.Post Course Financial Behavior Survey

Action plan for conserving wealth: Use of credit cards, applying for loans.

Dealing with credit problems and debt managementFraud

Video – Stolen FuturesCase study of debt.

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Personal Credit 90-minute Session

Topics/Learning Objectives Class Activities/ Outline Must Cover If Time Permits

Resisting persuasive tactics. Home shopping network activityIntroductionMaking the buy decisionResisting persuasive tactics

Credit cards Overview of evaluating a credit card offer.

Credit card APRs and fees.Outstanding balance.

Credit card features.

Installment loans (Choose car or student)

Determine monthly payment.Saving versus borrowing.

Fixed versus variable.Rate, down payment and term.

Mortgages Affordability ratios.Determine monthly payment.

Fixed versus variable.APR.

Credit reports and dealing with credit problems

Case study of debt. Credit reports.Debt management.

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About This Course for Students

Just about everyone needs to borrow money at one point in their financial lives. It can be used as a way to improving your financial situation by paying for your education or buying your family home. But, if used without a complete understanding on how it works, it can hurt you as well. Some surveys find that people spend a day or less on evaluating loans. That’s not enough given the complexity and range of loans there are. It is not enough given that some debt follows you for decades. You can easily get into a sticky debt situation that will stop you from getting all you want out of life. It is important that you know how to evaluate credit and loan features and choose the best one for you. If you do get into a sticky debt situation, it’s important that you know how to work your way out of it.

You’ll practice making a major purchase and securing the financing for it in this course. We will do this for a car and a house. You’ll also evaluate a credit card offer; know how to handle credit problems and how to file a complaint to exercise your rights and protect your wealth.

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Introduction

How does a typical person look---financially? Not as prosperous as most of us believe. The typical family income in Washington State is $63,000 in 2006 dollars. Household income tends to go down during recessions and recover afterwards. Although it’s increased throughout most of the last century, it’s been flattening in recent years and still hasn’t recovered from the last recession to its 2000 peak. This means that income might not grow as quickly in the future. Some evidence suggests that people coming out in the workforce now may be the first generation to make less than their parents, mainly because the US economy is not growing as quickly as it used to. According to the Economic Mobility study, the economy grew 17% in the last generation as compared to 52% in previous generations.

Washington 2006 Median Income

Total: 63,7052-person families 58,5843-person families 66,2524-person families 75,1405-person families 68,5626-person families 62,4847-or-more-person families

61,212

Source: US Census

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Your income changes depending on the economy, tending to go up during good times and down during bad. It also changes depending on where you are in your life. You start your life as a financial drain on your parents, costing most middle-income families about $10,000 a year. Your income rises as you get more established in life, peaks about the time you are 50 years old and then declines as you move towards retirement and retire. But this chart doesn’t tell the whole story.

What can you do to improve your financial status? Education has an impact. Here is a chart that describes the impact of education on your salary. There is a big jump in earnings when you get your college degree and even a bigger jump if you get a professional degree such as engineer, accountant, lawyer or doctor. Keep in mind that even with the same education, women make 60% to 70% of what men make. Some speculate that this is because women are still the main caregivers for both parents and children and may take time off to give this care.

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Of course, your financial life doesn’t proceed as smoothly as even these charts show. Right now the average time that someone stays in a job is about 5 years. So that there’s a pretty good chance that you’ll be unemployed, underemployed, or self-employed for periods in your working life. On average folks have 4.5 spells of unemployment during their working life and they last on average about 3 months. This suggests that having an emergency fund or 3 to 6 months of income to tide you over such periods is a very good idea.

Other life events such as marriage (70% of people get married) can have an effect on your financial life. Marriage increases a person’s wealth by about 77% because two can live as cheaply as one and half. Divorce (40% to 50% of first marriages end in divorce) can have a significant impact on your financial life. Divorce can decrease your wealth by 77%. Marriage becomes the most significant financial decision you will make in your lifetime.

You already know that children can have an impact as well. Just as you cost your parents so your kids will cost you $10,000 a year for a total of $184,000. When they go to college, the average cost of a college education at a Washington state public university is $20,000 per year or about $80,000 for a bachelor’s degree. Other colleges can be priced at http://apps.collegeboard.com/search/index.jsp. At the same time as you pay for your kid’s education, you may have to bear some financial responsibility for your parents ($5500 per year).

It follows that net worth or the amount of wealth you have also increases as you age. Your net worth---what you own (home, retirement accounts, investments, etc.) less what you owe (mortgage, car loans, etc.)--grows over your lifetime and declines as you retire and no longer earn money.

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Debt is a big part of your net worth formula. The goal is to keep your financing payments (credit card payments, car loans, student loans and mortgage payments) well below 40% of your income while you are working and to pay down all debt by the time you retire.

For most folks, as can be seen by the graph above, their home is the largest part of their net worth. People tend to buy their first house when they are 32 (typically 1812 square feet for $236,500 in Washington state) and upgrade when they are older ($300,000). That house can also be a financial drain with replacing the roof, appliances, the furnace, or even a major renovation. However, as a financial asset, don’t depend on your home. Most folks view their homes very emotionally and will not sell it even when they retire. About 70% of people who retire don’t sell or even take money out of their homes to fund their retirement.

Location 2006 Median Price

Kennewick-Richland-Pasco $156,100

Portland-Vancouver-Beaverton 280,800

Seattle-Tacoma-Bellevue 361,200

Spokane 184,100

Yakima 136,500

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Source: National Association of Realtors

As you head into retirement, you have to deal with making sure that your financial resources last you for the rest of your life and that you have taken precautions to protect your assets. Senior citizens are targets of all the scam artists because they have assets and they are trusting or often lonely. As you navigate your way through your financial life, it’s important to learn crucial skills to help you deal with all the twists and turns that can be thrown at you. It’s important that you get smart about your money no matter where you are in this journey.

Now that you have a good idea of what your financial life looks like, you need to acquire the investing skills and habits that will serve you through your life. In this first section, you will learn about setting goals and creating a spending plan. These two items are of vital importance in keeping your investing program on track.

Setting Financial Goals

The first important step in your strategy to a secure financial future is to have goals. When we don’t have goals we drift and at the end of our work lives, we wonder why we didn’t do what we wanted (whatever that was). When we have goals, we achieve them, especially if they are written down.

Now you will have short-term and long term goals. The short-term ones can include a car or a vacation. Long term goals are the house, your children’s education and your retirement. Lay out your lifetime financial goals. That’s right—for your whole life. It is tough because we tend to have short-term horizons. But, you need to think about all your goals now because some of them will take a long time to achieve.

According to The Facts about Saving and Investing (1999) put out by the SEC, two out of three of all US families fail to reach one major financial goal. Identify financial or saving goals that excite you, such as saving to buy a car; staying home with the kids; leaving an awful job; paying off your mortgage; starting your own business; traveling with your family or friends, helping others, and more.

Set realistic goals using the SMART approach:

Specific. Smart goals are specific enough to suggest action. “Save money for a used car.”

Measurable. Goals need to be measurable when you’ve reached your goal. “This used car will cost $8000 so I need to save $1,000 for a down payment.

Attainable. Goals need to be reasonable. “$8000 for a used car (versus $20,000 for a new car) is reasonable for my circumstances.”

Realistic. The goals need to make sense. “I make $30,000 a year so a used car so saving $84 a month for $1000 makes sense.”

Time-related. Set a definite target date. “I can save $84 per month and reach $1000 within 12 months.”

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Education

Education seems to be a necessity in this new global age where higher skill sets are necessary. But, education is also a big ticket item with students paying on average $10,000 a year in tuition plus $10,000 in living expenses to go to Washington state’s public four-year universities. For four years, this can add up to $80,000. If you go on to pursue a professional degree such as a law or medical degree, the cost goes over $100,000. Even community college costs $4000 a year. With this large cost, often grandparents must chip in along with parents to ensure that the kids in the family have a chance to get the college education.

Activity

What is the difference in cost between a public and private university? Check out colleges in Washington State such as Seattle University and Whitman and compare them to the University of Washington and Washington State. http://cgi.money.cnn.com/tools/collegecost/collegecost.html

First House

The first major financial goal for most folks starting out is the house. If you’re living in a typical Washington state city a house might cost you $200,000, or $40,000 down payment (keep in mind that these prices vary greatly depending on where you live).

Activity

Although these sites are not totally accurate, check out www.zillow.com as to the price of a house in a neighborhood that you want to live in. How much will you have to pay for the house?

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Retirement

Most of you are going to live longer than the current life expectancy (about 78 years) because of developments that are prolonging life. This means that you will have to ensure that you have enough money for a longer period of time. If you think Social Security will take care of your lengthening requirements, you might want to reconsider. Social Security currently gives you a minimum wage (the average payment as of 2006 is $955 a month and the maximum is $1500). It covers about 42% of retired people’s needs if they made $15,000 before they retired. If they made $60,000, Social Security covers 25% of their needs. Right now workers are putting more into the social security than retirees are taking out. But that is expected to change in about 25 years. At that time, according to the Social Security Administration, people who retire will receive only 75% of the current entitlement. Reviewing you Social Security report gives you an amount that you can consider as a “floor” of your retirement income. If you don’t want to live at that income level (about 25%) you will need to start saving. We will address Social Security again in Unit 6.

Although folks think that they will reduce spending when they retire, most keep their level of spending up. Many people keep their homes (and all the expenses that come with them) when they retire. When you get older, some expenses get bigger. Your medical costs increase. Medicare takes care of 54% of your needs, but you must pay extra for doctor’s visits. If you need long-term care such as a nursing home, you have to pay the bill yourself.

Nowadays, most people are resigned to the fact that employers will no longer take care of you when you retire. Most people don’t work long enough at any company to even qualify for the traditional pension plans. It’s true that employers are slowly phasing out traditional pension plans and phasing in retirement savings plans (401k) that require you to save and invest for yourself. Employers believe that these types of plans match what workers do. Most workers don’t stay the 5 years necessary to get any benefits, let alone the 30 years it takes to get adequate benefits from the traditional plans. With the 401k plans, when these workers leave they can take their retirement accounts with them.

Although many people know that these retirement savings plans will be their main source of retirement income, about 18% don’t contribute at all. When people leave their companies, many cash out and spend their retirement money instead of “rolling it over” into other retirement plans. This means at their next job, they start out with nothing in retirement. Younger folks tend to do this most and they are the most hurt by cashing out. Even small amounts set aside early in your working life can work hard for you over time. If you’re cashing out, most of the benefits of compounding are lost.

The experts don’t always agree on the amount you need for retirement because there’s so much uncertainty involved in the amount of social security and your longevity not to mention inflation rates and rates of return. It’s estimated that baby boomers (who are starting to retire now) have about one third of what they need to retire.

As a rule of thumb, you can estimate the amount of money that you expect to live on a year and divide by 4% to come up with what you might need in your retirement fund if you have no other sources of retirement income.

Question

When you retire, Medicare takes care of what portion of your medical expenses when you retire?a) One quarter

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b) One halfc) Three quarters

Answer

When you retire, Medicare takes care of what portion of your medical expenses when you retire?

a) One quarterb) One halfc) Three quarters

Correct answer b. Medicare only covers hospital and prescription drugs. Doctor visits and long-term care is not covered.

Question

When you retire, Social Security benefits can cover what portion of your living expenses?

a) One quarterb) One halfc) Three quarters

Answer

When you retire, Social Security benefits can cover what portion of your living expenses?

a) One quarterb) One halfc) Three quarters

It depends on how much you made before. If you made $15,000, social security may cover three quarters or more of your income. If you made more income, social security will cover less. In the future, social security is expected to cover only 25% to 33% of your income.

Question

Your life expectancy when you reach age 65 is:

a) 13 yearsb) 18 yearsc) 23 years

Answer

Your life expectancy when you reach age 65 is:

a) 13 yearsb) 18 yearsc) 23 years

If you are 65 now, your life expectancy is 18 years. That is older than the average life expectancy because if you reach 65, you increase the odds of living longer.

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Other goals

Maybe you’ve got other goals, like starting your own business (Jeff Bezos used $60,000 of his own money to start Amazon.com). Lay them all out and put a price on them. You won't get there from here unless you do. According to the 2004 Consumer Finance Survey, here are the top reasons people save:

Retirement 34.7%

Liquidity 30

Purchases 7.7

Buying own home 5

For the family 4.7

Investment 1.5

Education 11.60

Once you've got your list of goals, post them where you will see them every day, re-evaluate every year. Your needs may change. Tax time is a good time since you’re looking at your finances any way. Your tax return will tell you how much you earned and you should figure out how much you spent. Did you save enough for the year? Check out your goals. Do you have additional goals now? (A life event—marriage, having kids, etc. — tends to change your financial goals.)

Activity

Estimate how much you will need when you retire. Use a simple rule of thumb. Most people will take out 4% of their retirement fund for annual living expenses. Decide what level of lifestyle you want when you retire (e.g. $40,000, $60,000, etc.) and divide by 4%.

Create a spending plan

A spending plan is a planning tool to help you manage your money. It is the core of your financial strategy and if implemented and made a habit all your life, you will achieve financial security. A spending plan helps you identify your personal financial goals, analyze what income you have available, know what you are spending money on, and develop steps to achieve your personal financial goals. A spending plan will help you:

Achieve financial goals and dreams.

Keep a positive attitude about personal finances.

Save for those important things such as a new car, college education, wedding, new house, comfortable retirement, or travel.

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Lower stress level and reduce conflicts in your family.

Control spending so that you conserve your wealth.

Eliminate unnecessary debt.

This is how Americans spend their money according to the Bureau of Labor Table of 2004 Expenses by Family Size.

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One person Two person Three person

Four person

Five or more

Expenditures Total (In dollars)

$23,507 $40,359 $45,508 $54,395 $53,805

Food at home 1,533 2,954 3,696 4,404 5,151

Food away from home 1,302 2,336 2,512 3,043 3,042

Alcoholic beverages 314 400 315 368 309

Housing 8,371 12,944 14,744 17,914 17,317

Apparel 862 1,650 2,013 2,643 2,893

Transportation 4,012 7,692 9,348 10,775 11,123

Healthcare 1,441 2,827 2,265 2,253 2,150

Entertainment 1,097 2,051 2,137 2,787 2,718

Personal 297 512 555 614 658

Reading 111 168 139 155 131

Education 423 476 830 1,059 984

Tobacco 203 312 397 349 416

Miscellaneous 518 744 843 1,156 743

Cash contributions 1,063 1,429 1,167 1,287 1,399

Personal insurance and pensions 1,960 3,864 4,547 5,589 4,770

Personal Taxes 1,829 3,599 3,066 3,900 2,652

Source: 2004 Consumer Expenditure Survey, Bureau of Labor Statistics

Start by collecting your pay stubs, household and other bills, expense receipts, checkbook or online checking data, checking and credit card statements. Sort the receipts by categories and sections listed on the Spending Plan Worksheet (see appendix). The sections are: Income, Fixed Expenses, Variable Expenses Discretionary Expenses and Adjustments to Spending Plan. Total the dollar amounts in each of these categories for one month. Don't forget to record your cash expenditures and online transactions. Look to see where your cash goes, especially if you make frequent ATM withdrawals from your bank accounts.

To make it easier to create a spending plan that will work for you, a 4-step process will be used to develop each section of the Spending Plan Worksheet.

1. Calculate your monthly income2. Calculate fixed, variable and discretionary expenses3. Calculate Net Income (Monthly Income minus Total Expenses)4. Analyze expenses starting with your discretionary expenses and make spending plan

adjustments such that you can achieve your saving goals. If necessary, identify your debts to pay down and create a debt reduction plan

For more details on how to create a spending plan, you can refer to the first module of this series on Money Management. It is important that you have a spending plan each year and that you track all expenses to your spending plan. This could include a good manual record-keeping system. Here are some suggestions on the financial records you should keep.

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What financial records to keep and for how long?

Type of record Length of Time

Reason to Keep

Bills One-year to permanently

Review your bill statements once a year. For most cases, when the canceled

check from a paid bill was shown on your checking statement (or the canceled check has been returned with your statement), you can shred or burn the bill.

However, bills for large purchases, such as appliances, furniture, cars, jewelry, computers, rugs, collectibles, antiques, etc., should be kept in an insurance file for proof of their value in the event of loss, damage, flood, or fire.

Credit card receipts and statements

45 days to seven years

Keep your original receipts until you get your monthly statement.

Shred or burn the receipts if the receipts match the monthly statement

If a large purchase listed above, keep the receipt.

Bank records One-year to permanently

Go through your checks each year and keep those related to your taxes, business expenses, mortgage payments and home improvements.

Shred or burn those that have no long-term importance.

Paycheck stubs One year Keep all your paycheck stubs until you receive your annual W-2 form from your employer; make sure the information matches the stubs and W-2.

If it does match, shred or burn the stubs. If it does not match, request a corrected

form, known as a W-2c. Taxes

Tax returns (forms) filed with IRS

Receipts/canceled checks (charitable contributions, mortgage interest, alimony and retirement plan contributions)

Records for tax deductions you took on your tax forms

Seven yearsThe IRS has three years from your tax filing date to audit your tax returns, if it finds questionable good faith errors.

The three-year deadline also applies if you discover a mistake in your return and decide to file an amended tax return to claim a refund.

The IRS has six years to challenge your return if it thinks you under-reported your gross income by 25% or more.

There is no time limit if you failed to file your return or filed a fraudulent tax return.

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IRA contributions Permanently If you made a non-deductible contribution to your IRA, keep your records indefinitely to prove that you paid tax on this money when it comes time for you to withdraw from your IRA account(s).

Retirement/Savings plan statements

One year to permanently

Keep the quarterly statements from your 401(k) or other plans until you receive the annual summary statement. If it matches up, then shred or burn the quarterly statements.

Keep the annual summary statements until you retire or close the account.

Brokerage statements Until you sell the securities

Keep the purchase confirmations or sales slips from your brokerage or mutual fund to prove whether you have capital gains or losses at tax time.

House/condominium records Six years to permanently

Maintain deeds, mortgage documents, title, cost of improvements, and closing statements in a safe place permanently.

Keep tax, rental agreements, rental receipts and repairs for 7 years.

Keep records of the expenses incurred in selling and buying the house/property, such as legal fees and your real estate agent’s commission, for six years after you sell your house.

Keeping these records is important because any improvements you make on your house, as well as expenses in selling it, are added to the original purchase price or cost basis. This adds up to a greater profit (also called capital gains) when you sell your house. Therefore, you lower your capital gains tax from the sale of your house.

Loan agreements When outstanding

Keep copies of all outstanding loan agreements and most recent statements indicating how much you have repaid

Insurance policies Long term care and life insurance – permanently

Others one year after expiration

Keep your insurance cards in your cars as required by law.

Keep copies of your most recent homeowners, auto, and umbrella insurance policies so that claims can be made easily and efficiently.

Keep both long-term care and life insurance in a safe place and let a responsible person know how to find them.

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Create and update an annual inventory of all personal property. Include appraisals or receipts. Keep a copy of this in a safe place outside of your home.

Health care expenses One year to seven years

Keep your original receipts to file health insurance and flexible spending account claims

Keep medical receipts for deductions that you claimed on your tax return

Protect Your Wealth

The Federal Trade Commission received over 674,354 Consumer Sentinel complaints in 2006, 64% represented fraud and 36% were identity theft complaints. Identity theft occurs when a thief uses another person’s personal identification to open new credit card accounts, take over existing accounts, and obtains loans in the victim’s name, of otherwise steal funds from the victim. Victims go through a difficult and time-consuming ordeal to clear their names. They must first try to convince the lenders and the credit-reporting agencies that they are victims of identity theft. They also must deal with calls from collection agencies and endless paperwork in trying to remove erroneous information and fraudulent accounts from a credit record.

Credit card fraud (28%) was the most common form of reported identity theft followed by phone or utilities fraud (19%), bank fraud (18%), and employment fraud (13%). Other significant categories of identity theft reported by victims were government documents/benefits fraud and loan fraud. The percentage of complaints about “Electronic Fund Transfer” related identity theft doubled between 2002 and 2004.

Thieves get information from Garbage – pre-approved credit cards, bank and credit card statements, and utility bills Mailboxes – both incoming and outgoing mail Loan applications – banks, car dealerships, mortgage companies Rental applications – cars or apartments Schools – classroom attendance sheets that list the student’s Social Security number Desk drawers in the workplace Certifications/licenses placed on walls (in the workplace) Job applications Health club applications Internet – information resulting from the sale of personal banking and investment details, chat

rooms, and false merchants Telephone companies Information freely given by the public – from warranty cards, for contests, to department

stores, and “Win a Free Membership…” forms

Advice to avoid identity theft Don’t disclose any personal information that isn’t integral to a transaction. Be careful of any personal information that you give on yourself in social networking sites and

safeguard financial information on your computer or other file storage centers. Carry only one or two credit cards that you use regularly.

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Keep your Social Security number as private as possible. If a salesperson requests it, don’t give it. If your health plan prints it on your membership card, ask for one without it. Don’t write it on your class attendance sheet (your school already has your number on official records). Divulge this number only for legitimate purposes, such as paying taxes, requesting credit, or obtaining a driver’s license. Check to see if your social security number is on the internet at StolenIDSearch.com.

Shred or burn mail containing personal information – from account numbers to travel itineraries.

Prevent mail theft. Have a locked mailbox. Don’t leave mail in your mailbox for the mail carrier. Don’t have new checkbooks delivered to your home.

Lock up your personal papers and canceled checks in your home, in case of a break-in. Be cautious on the telephone. Never give out your name, address, Social Security number, or

other personal information unless you initiate the call and you check to see that the number of legitimate.

Secure all your financial files on your computer and don’t store your personal information on the web storage files that can be hacked into. Don’t disclose personal information on social networking sites.

Demand secure information handling. If you’re filling out a credit application at a department store or auto dealership, find out what the establishment does with old applications. If it doesn’t lock them in file cabinets or shred them, take your business elsewhere.

Pay attention to your bills. If you suddenly stop receiving your mail, particularly bills, that could be a sign that someone has taken over your account.

Fraud examiners recommend that people review their credit reports once a year; all three bureaus will need to be contacted.

Equifax – To order a credit report: 800-685-1111. To report fraud: 800-525-6285 Experian – To order a credit report and report fraud: 888-EXPERIAN (888-397-3742) Trans Union – To order a credit report: 800-888-4213. To report fraud: 800-680-7289

It’s also wise to opt out of pre-approved credit offers by calling 888-5-OPT-OUT (888-567-8688). A scam artist can retrieve a discarded credit card offer and send it to the company, saying, “Yes, I’m interested – and here’s my new mailing address!” Sign up on the National “Do Not Call” Registry (www.donotcall.gov or 1-888-382-1222) to eliminate telephone calls.

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Future Financial Behavior Evaluation

The goal of all financial education is to get you to adopt important behaviors that will ensure your financial security. Check all the financial behaviors that you engage in. Do this inventory every year.

Check if you will adopt in the next year.

Pay all my bills and loan payments on time.

Have a recordkeeping system for my financial affairs.

Balance my checkbook and monitor all my financial transactions monthly.

Track all my expenses.

Use a spending plan or budget.

Have an emergency savings fund.If yes, how many months of expenses: 1-3 months ____4-6 months ____

Save or invest money from every paycheck. If yes, percent paycheck saved __%

Save for long-term goals. If yes, which goals: (Check any that apply.)Education____ Car ____ Home ____ Home upgrade ____ Vacation _____

Plan and set goals for financial future.

Have money in more than one type of investment. If yes, check any that apply:Individual stocks ____ Mutual Funds ____ Bonds ____ Real Estate ____Treasury bills or CDs ____ International ____ Commodities ____

Calculated net worth in the past two years.

Participate in employer’s retirement plan. 401(k) ___ 403 (b) __ Other: ____

Have insurance to protect my loved ones. If yes, check any that apply:Health ___ Life___ Property___ Auto___ Disability ___ Umbrella _____

Put money into other retirement plan: Roth IRA ___ Traditional IRA __ SEP or SIMPLE IRA __Review my credit report annually.

Pay credit card balances in full each month.

Research and compare offers before applying for a credit card or loan.

Do my own taxes.

Read about personal money management to improve how I’m doing.

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Unit 1. Buying

Buying Summary 1. Look at your purchases and determine if your purchases are based on needs or wants.

Eliminate purchases that are wants.2. Identify the influence tactics and learn how to resist them. Influence tactics include

phantom fixation, commitment, authority, social proof, scarcity, comparison, profiling, friendship, reciprocity, and landscaping tactics.

3. Don’t allow your mental state to influence your purchases. Avoid impulse shopping that might make you “feel better” temporarily.

4. Do your research and determine what you want down to the features you need with a product. Don’t be lured by flashy advertising that sells a dream and not the product.

5. Investigate your options for financing a big purchase. What fits your budget? What interest rate options or down payment options affect the purchase?

This module is to help you conserve your wealth. It’s about borrowing and how to do it smart. But is conserving your wealth really about borrowing money? To tell you the truth, conserving your wealth begins with buying. Most borrowing happens because you don’t have enough money to pay for something you want. So to conserve your wealth, the first question you have to ask is: Do I really need this? In some cases, as with the purchase of a house, it makes sense to buy. By buying a house, you are making an investment in something that could increase or appreciate in price. Additionally it serves a very important purpose: it provides you with shelter.

The picture is not as clear with something like a car. For some, it may be that they need a car to get to work or to do their work. For others who have access to public transit, a car is not so much of a necessity as it is a luxury. Except in rare cases, a car is not an investment. The value of a car depreciates or decreases in value to the tune of 20% a year. The first question you need to ask is do I really need the car? This is a question that most families in the US face at one time or another. A car is probably the first major purchase that will require credit and an installment loan.

So, before you buy anything, really determine whether you need the item. For large purchases, wait 24 hours. Think about how many hours you worked to pay for the item. Do your homework on everything you buy. If you are getting work done, check out the contractor and the business. Get references and call them. Look at the work done by the firm. Check for complaints at the Better Business Bureau www.bbb.org and state Washington State Attorney General’s office http://www.atg.wa.gov/. Google the company to see if it appears in any complaint lists. Much of credit issues revolve around paying for defective products and services.

Salespeople are trained to use a variety of tactics to “close the deal.” These tactics are also used by scam artists to get at your money. It’s important you learn to resist these influence tactics so you can evaluate the purchase objectively. Identify the pattern and know that you are a target. Here are some of the tactics:

• Phantom Fixation – The objective is to put something that is completely unavailable before you that appeals to health issues, wealth, popularity or avoiding death. Basically this tactic preys on your insecurities and promises to fulfill your wildest dreams. It falls into the category of too-good-to-be-true and most often is.

• Commitment – The salesperson tries to get you to commit by saying that your earnest money or deposit will be lost. Often there are laws that say you have 3 days to reconsider and get your funds back in full. Know your rights before you go in to buy.

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• Authority – The salesperson will say that they’ve been in the business for years and know that this is the best deal that they’ve seen. They might cite specific features. If you don’t know the product well, you might believe the pitch.

• Social Proof – This tactic tries to get you to believe that everyone is getting one so you should, too.

• Scarcity – This includes product scarcity (only three left), time scarcity (offer good only today), and threats to take the offer away which often makes the consumer feel pressure to buy now.

• Comparison – It is very common for sales pitches to show inflated regular prices to a hugely discounted “sales price.” You need to comparison shop to see what kind of deal it really is.

• Profiling – In cases where the salesperson wants to make a large sale, they will probe for personal information and then customizes pitch.

• Friendship – The salesperson changes the relationship from con to victim into a friendship transaction.

• Reciprocity – The sales pitch gives you a free gift or lunch. With this your response rate doubles.

• Landscaping – The salesperson changes social interaction so it leads to where he or she wants to go by setting the agenda, limiting choices or controlling information.

People are more prone to be susceptible to influence tactics when they’ve had some negative event in their lives. These can be as major as losing a job, divorce or a death in the family. It can be because you’ve been chewed out by your boss. Try to be aware of your mental state and don’t engage in any major buying. Watch those around you to alert them.

In general, don’t use buying as a form of therapy. Buying things may give you a fleeting sense of pleasure but it can lead to a major headache in the long term. If you buy things to reward yourself for accomplishing something, plan it well in advance and buy something that enriches you and doesn’t cost much.

Once you’ve decided to make the purchase, then it’s important to determine what features you need and what price you will pay. This takes a tremendous amount of research. Sadly, most folks don’t take the time to do the thorough research that a large purchase requires so they pay too much. To conserve your wealth you don’t want to pay too much. You want to understand everything that is needed to negotiate the best price. This means that you will comparison shop. Get the best price and then negotiate for an even lower price.

Once you’ve gotten the best price, then you look at the various options you have to borrow money to finance your purchase. Financial companies are pleased to give you a huge menu of products and services to finance your purchases. Again, you have to do the research and evaluation to choose the best option for you. The data in the introduction shows us that we are pretty tapped out as a nation and we should get smart about borrowing. Only borrow if you absolutely have to and be smart when you borrow. Borrow to buy a house because a house increases in value. Borrow to finance an education because it will return more income in the future. For all other purchases, think very carefully before you borrow. Are you creating wealth or are you destroying wealth? That is a crucial question for your future.

Activity - Needs and wants – Do I really need to buy?

Find your last credit card and bank statement. Keep all your receipts for cash purchases in an envelope. Once you’ve done this, list your last ten expenditures. Classify them as “n” for needs and “w” for wants. Needs would be expenses for anything that was necessary for living. Wants would be the nice-to-have items. Look through each item and ask the following questions:

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Did you spend too much for any item? Are there any needs that should be wants? Check with folks in your group. Look at the wants. What can you do to reduce the wants?

Here is an example:

Doctor's visit copay 10 N

Lightbulb for car 5.22 N

Fast food restaurant 6.44 N

Drink and snack 6.64 W

Restaurant 22.93 W

Groceries 31.92 N

Sports equipment 211.04 W

Restaurant 119.08 W

Groceries 36.07 N

Groceries 35.59 N

Medical 23.04 N

Emergency Room Visit (Canada) 409.94 N

Groceries 53.89 N

Finance Charge 9.54

Foreign Transaction Charge 12.29

The important next step is to reflect on the list. One third of the expenses in this example were “wants” and could be eliminated. If you really wanted to, you could even reduce necessities such as groceries. Families waste on average $590 in food every year. There are finance charges that could have been eliminated if the previous balance was paid on time. These finance charges were levied because the person went on a trip and forgot. Typical of people who have financial problems, this person had a medical emergency that came up suddenly and broke the bank. This also happened on a trip to Canada. When you purchase things outside of the country (even Canada) you are charged a foreign transaction fee – in this case a hefty 3% for the emergency room charge.

There are many lessons from this very simple exercise:

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1. Think all expenses through carefully and devise ways of reducing spending on wants. That doesn’t mean that you give up on everything. For example, if you want to eat out every now and again, instead of just going to a restaurant, allocate a certain amount of money for restaurants a week. Savings from eliminating wants? $148.75 or about 15% of the total.

2. Plan for emergencies. Check to see what medical coverage is when you leave the country.

3. When you leave the country, convert some cash to the foreign currency so you don’t have to pay the 3% foreign transaction charge with your credit company or with the charge for exchanging funds in that country. Elimination of this charge would result in 1% saving.

4. Pay off your entire credit card balance on time. Make a resolution to pay your bills as they come in the mail instead of waiting. Another 1% could have been saved by paying on time.

Activity – Needs and Wants

Organization experts say that we wear 20% of our clothes 80% of the time. This suggests that we can easily cut our spending on clothing by 50%. Try the clothes hanger trick. At the beginning of a season, reverse the way your clothes hang in your closet. After wearing that item, put it on the hanger and replace it properly when you return it to the closet. By the end of the season, you should be able to see what clothes you haven't worn, and most likely can live without.

Activity – Need and Wants

Last Ten Purchases Need or Want?

Activity - Resisting Influence Tactics

Tape several segments of the Home Shopping Network or find segments on the web. View a 15-minute segment.Identify the influence tactics such as authority, scarcity, and comparison.Summarize how many were used.Reflect on which were most effective on you.Reflect on how you can resist these tactics.

Activity - In preparation for car purchase exercise

Go to www.bankrate.com and determine what current rates are for car loans. What would your monthly payment be if your car loan was for $15,000 at 6.97% for 3 years? What are your total finance charges? Try a longer period of time. What happened to the monthly payment? Finance charges?Try a higher interest rate. What happened to the monthly payment? Finance charges?

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Assignment - Buying a Car

This assignment covers Unit 1: Buying and Unit 3: Installment loans. The best way to understand how to be smart about your money is to work on a specific life activity. Just about every family in the US purchases a car. Let’s look at the purchase of a car to learn about managing money.

Let’s say that you are starting a new job at $40,000 a year and want to get a new car. What process will you go through to determine what type of car to buy? At the end of this exercise, you will be asked to reflect on what you felt and learned. First, if you’ve already bought a car, reflect in writing on how you chose the car and how you financed it.

1. Evaluating the buy message for carsThe zoom-zoom ad (or find another ad if this one is unavailable on the web)http://www.mazdausa.com/MusaWeb/displayPage.action?pageParameter=zoomMainWhat is the buy message in this ad? Are these the reasons you should buy a car? What purpose does a car serve? What appeal does this ad make? Should you respond to this buy message?

2. Researching and evaluating carsList all the features that are important to have in a car. Lay out what factors might affect the price of the car. Determine which models satisfy your requirements. Research on the internet and find a price you are willing to pay. Create a table to compare models, features, and prices and to determine the best choice for you. Here are some sources of information but add more of your own.http://www.consumeraction.gov/caw_automobiles_buying_new.shtmlhttp://www.edmunds.com/advice/buying/articles/78 386/article.html

3. Determine what type of financing you will get on the car. How much can you afford? Use http://www.bankrate.com/brm/rate/calc_home.asp and the $40,000 salary to determine what you can pay. How much should you put down? Do a sensitivity analysis of different down payments. How will different down payments affect your monthly payments? Check the internet to see what interest rates can you get? What was the lowest rate you found? How do different interest rates affect your monthly payments? Create a table to show your different options. How will financing affect your personal finances?

4. Reflect. Write a reflection paper on your experience listing your advice to someone else who is embarking on the same mission.

5. Present your findings to the class in a power point presentation.

Activity – Buying a Wireless Phone

Go through the same four steps in evaluating the purchase of a cell phone. Here is a website with information:http://www.consumerjungle.org/index.php?option=com_content&task=view&id=56&Itemid=108

Unit 2. Credit Cards

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Credit Card Summary 1. Credit cards encourage you to spend. So if you have problems with spending too much, use

cash.2. Credit cards are a very expensive way to borrow money. Pay all credit cards on time and in

full. If at all possible, do not maintain outstanding balances. Do not use features such as cash advance.

3. Do not spend up to your credit limit.4. Opt out of credit card offers by calling Opt out 888-567-8688 or going to the website

www.optoutprescreen.com.5. Before you sign on to a credit card, use the credit card evaluation form to evaluate all fees

and charges.6. Keep only two credit cards on you to minimize loss.7. Keep a record of your account numbers, their expiration dates, and the phone number and

address of each company in a secure place. Some fraud experts recommend that you photocopy the cards you carry with you.

8. Protect your card and your account number. Sign your credit card when it arrives. Don’t lend your card to anyone. Don’t give out your account number unless you know you are calling a company that is reputable. Destroy incorrect receipts and copies.

9. Save receipts to compare with billing statements. Open bills promptly and reconcile accounts monthly, just as you would your checking account.

10. Report any questionable charges promptly and in writing to the card issuer. Do not pay for purchases where product was not delivered or defective.

11. Correct any billing errors by contacting your credit card company as soon as possible.12. If you use your credit card to shop online, consider extra precautions with your personal

computer. Experts advise installing and periodically updating virus and spyware protection and a "personal firewall" to stop thieves from secretly installing malicious software on your personal computer remotely that can be used to spy on your computer use and obtain account information.

13. If you lose your credit or charge cards or if you realize they've been lost or stolen, immediately call the issuers. Many companies have toll-free numbers and 24-hour service to deal with such emergencies. By law, once you report the loss or theft, you have no further responsibility for unauthorized charges. In any event, your maximum liability under federal law is $50 per card.

Using Credit Cards

According to the US Government of Accountability Office (GAO) 2006 study of credit cards, the number of credit cards issued exceeds 691 million or more than twice the population (adults and children) of the US. Use of credit cards has contributed to an expansion in household debt, which grew from $59 billion in 1980 to roughly $830 billion by the end of 2005. Over three-quarters of families have credit cards. One third of teenagers have credit cards cosigned with their parents. College students are responding to the many credit card offers they get in the mail and have multiple credit cards.

Between 1980 and 2005, the amount that U.S. consumers charged to their cards grew from $69 billion per year to more than $1.8 trillion. According to the 2004 Consumer Finance Survey, 44.4% of families had outstanding credit card balances with a median value of $2200 or an average of $5100. The average value for Washington State is $5100 in 2006.

The best habit to develop with credit cards is to pay off your balance every month. When you do, you avoid the many fees and finance charges that can make borrowing money with credit cards

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very expensive. But young people are learning early to do the opposite. In a 2005 Nellie Mae study of college students, almost half had outstanding balances and a third had outstanding balances over $2000. Additionally, when students were asked how much outstanding balance they had, most of them underestimated the amount. Keeping the books wrong can get you into a lot of trouble in any circumstance.

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Are students spending on necessary things? Quite a few are spending on school supplies. But, they are also spending on food and other discretionary items. What kind of impact does this have? This same study showed that students with higher outstanding balances worked longer hours and have higher anxiety. Now, that doesn’t make sense. If you work more, you should have more money to pay off your outstanding balances. It’s not the case. These students are in a rat race to support their spending. Working long hours can hurt grades, delay graduation, and getting that higher-paying full-time job. The combination of big debt, low grades and high anxiety is enough to cause students to drop out and many do.

WorkPercent of

StudentsAverage Balance Anxiety*

Do not work during school year but work during vacations 19% $ 942.00 3.3Work 1-10 hours per week 12% $ 782.00 3Work 10-20 hours per week 34% $ 926.00 3.4Work more than 20 hours per week 31% $ 1,661.00 2.4Do not work at all 5% $ 714.00 2.8

Lower score means higher anxiety

Source: Nellie Mae 2005 Study of undergraduate students and credit cards

Credit Card APRsThe annual percentage rate (APR) is the percentage cost of credit on a yearly basis. It is your key to comparing costs regardless of the amount of credit or how long you have to repay it. Suppose you borrow $100 for one year and pay a finance charge of $10. If you can keep the entire $100

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for the whole year and then repay $110 at year’s end, you are paying an APR of 10 percent. But if you repay the $100 and finance charge (a total of $110) in twelve monthly installments, you don’t really get to use $100 for the whole year. In fact, you get to use less and less of that $100 each month. In this case, the $10 finance charge amounts to an APR of 18 percent.

APR 10% APR 18%Month Principal Interest Principal Interest1     $7.96 $1.50 2     $8.02 $1.38 3     $8.09 $1.27 4     $8.16 $1.15 5     $8.23 $1.03 6     $8.30 $0.91 7     $8.36 $0.78 8     $8.43 $0.66 9     $8.50 $0.53 10     $8.58 $0.40 11     $8.65 $0.27 12 $ 100.00 $ 10.00 $8.72 $0.14

$ 100.00 $ 10.00 $100.00 $10.02

All creditors—banks, stores, car dealers, credit card companies, finance companies—must state the cost of their credit in terms of the finance charge and the APR. Federal law does not set interest rates or other credit charges. But it does require their disclosure so that you can compare credit costs. The law says these two pieces of information must be shown to you before you use a credit card.

Unlike the mortgage, fees such as annual membership fees, transaction charges, and points, for example, are listed separately; they are not included in the APR of open-credit instruments. Keep these fees in mind and compare all the costs involved in the plans, not just the APR.

Some credit cards are “fixed rate” meaning the APR doesn’t change often. Even if the APR is a “fixed rate” it can change over time. However, the credit card company must tell you before increasing the fixed APR. Other credit cards are variable rate where the interest rates will change according to some benchmark such as the prime rate (the rate businesses borrow at) or the Treasury bill rate (short-term government borrowing rates). Look for information on the credit card application and in the credit card agreement to see how often your card’s APR may change.

A single credit card may have several APRs:

One APR for purchases, another for cash advances, and yet another for balance transfers. The APRs for cash advances and balance transfers often are higher than the APR for purchases (for example, 14% for purchases, 18% for cash advances, and 19% for balance transfers).

Tiered APRs. Different rates are applied to different levels of the outstanding balance with the higher the balance, the higher the interest rate (for example, 16% on balances of $1–$500 and 17% on balances above $500).

A penalty APR. The APR may increase if you are late in making payments.

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An introductory APR. A different rate will apply after the introductory rate expires. The introductory APR may be a low or teaser rate to get you to sign up. It is important to check out what the APR will be after the teaser expires.

A delayed APR. A different rate will apply in the future. For example, a card may advertise that there is “no interest until next March.” Again, it is important to check what your delayed APR will be.

Grace PeriodsThe grace period is the number of days you have to pay your bill in full without triggering a finance charge. For example, the credit card company may say that you have “25 days from the statement date, provided you paid your previous balance in full by the due date.” The statement date is given on the bill. Other credit card companies may note the due date on the statement. Keep in mind that the date is the day the payment must be received. If you sent it in the mail on the due date or even paid it with your online bill payment service, it will most likely be late.

The grace period usually applies only to new purchases. Most credit cards do not give a grace period for cash advances and balance transfers. Instead, interest charges start right away. If you carried over any part of your balance from the preceding month, you may not have a grace period for new purchases. Instead, you may be charged interest as soon as you make a purchase (in addition to being charged interest on the earlier balance you have not paid off). Look on the credit card application for information about the “method of computing the balance for purchases” to see if new purchases are included or excluded. Information on methods of computing the balance is in the section “How is the finance charge calculated?”

Finance ChargesKnow that the best way to use a credit card is to pay all balances in full every month. Finance charges are the main way that credit card issuers make money. The amount depends in part on your outstanding balance and the APR. Credit card companies use one of several methods to calculate the outstanding balance.

Under one of the most common methods, the average daily balance method, creditors add your balances for each day in the billing cycle and then divide that total by the number of days in the cycle. Payments made during the cycle are subtracted to get the daily amounts, and depending on the plan, new purchases in the month may or may not be included. In the two-cycle average daily balance method, creditors use the average daily balances for two billing cycles to compute your finance charge which can net you large finance charges even though you paid off the balance as can be seen in the figure below. In 2006, two of the six largest credit card issuers use the two-cycle method.

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Source: GAO Credit Card Study September 2006

Be aware, as shown by the figure above, that the amount of the finance charge will vary considerably depending on the method used, even for the same pattern of purchases and payments.

Some credit cards have a minimum finance charge. You’ll be charged that minimum even if the calculated amount of your finance charge is less. For example, your finance charge may be calculated to be 35¢--but if the company’s minimum finance charge is $1.00, you’ll pay $1.00.

FeesMost credit cards charge annual fees for using the card, a cash advance fee (typically, $5 minimum or 3%), a fee when you transfer a balance from another credit card ($5 minimum or 3%), late payment fee ($35), over-the-credit-limit fee ($30), credit-limit-increase fee, set-up fee (for new account), a fee if your payment check is returned ($25), and other fees for services (telephone payment, reporting to credit bureaus, reviewing your account, etc.)

Cash AdvancesSome credit cards let you borrow cash in addition to making purchases on credit. If you plan to use your card for cash advances, look for information about use of ATMs (there may be charges for using other banks’ ATMs, different APRs for cash advances, fees, limits (may be lower than your credit card limit), and how payments are credited.

Credit LimitThe credit limit is the maximum total amount--for purchases, cash advances, balance transfers, fees, and finance charges--you may charge on your credit card. If you go over this limit, you may have to pay an “over-the-credit-limit fee.”

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Different Kinds of CardsSecured cards require a security deposit. The larger the security deposit, the higher the credit limit. Secured cards are usually offered to people who have limited credit records--people who are just starting out or who have had trouble with credit in the past. Premium cards (gold, platinum, titanium), have higher fees but offer higher credit limits and usually have extra features--for example, product warranties, travel insurance, or emergency services.

Other FeaturesMany credit card companies offer incentives for you to buy and use their cards. These include rebates on the purchases you make, frequent flier miles, additional warranties on products you buy using the card, car rental insurance when you use the card to rent a car, travel accident insurance when you use the card to buy an airline ticket, credit card registration if your card is lost or stolen and more. At a charge they may offer many other services such as insurance to cover your balance. It’s fine to take advantage of these features as long as you carefully evaluate what they cost (nothing is free) and if you do not buy more than you need to because of the incentives.

Evaluating Credit Card OffersFinancial experts recommend that you limit the number of credit cards to two. But credit card companies are often happy to get your business and send you offers. If you don’t want to receive these offers, you can call Opt out 888-567-8688 or go to www.optoutprescreen.com.

Some folks like to review these offers and may take advantage of low teaser offers like 0% finance charge for 6 months to finance credit balances. Make sure that you understand all the APRs and fees that you are likely to incur before you sign on. Here is all the information a credit card company must provide to you:

Annual percentage rate APR

2.9% until 11/1/06after that, 14.9%

The annual percentage rate you’ll be charged if you carry over a balance from month to month. If the card has an introductory rate, you’ll see both that rate and the rate that will apply after the introductory rate expires.

Other APRs Cash-advance APR: 15.9%Balance-Transfer APR: 15.9%Penalty rate: 23.9%

The APRs you’ll be charged if you get a cash advance on your card, transfer a balance from another card, or are late in making a payment. More information about the penalty rate may be stated outside the disclosure box--for instance, in a footnote. In this case, if your payment arrives more than ten days late two times within a six-month period, the penalty rate will apply. If you make two payments that are more than ten days late within six months, the APR will increase to 23.9%.

Variable-rate information

Your APR for purchase transactions may vary.The rate is determined

Information about how the variable rate will be determined (if relevant). More information may be stated outside the disclosure box--for instance, in a footnote.The credit card company will designate where the prime rate information can be gotten such as in the Wall

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monthly by adding5.9% to the Prime Rate.

Street Journal.

Grace period for repayment of balances for purchases.

25 days on average

The number of days you’ll have to pay your bill for purchases in full without triggering finance charge.

Method of computing the balance for purchases.

Average daily balance (excluding newpurchases)

The method that will be used to calculate your outstanding balance if you carry over a balance and will pay a finance charge.

Annual fees. None The amount you’ll be charged each twelve-month period for simply having the card. In 2006, 75% of all credit cards charged no annual fee. Of those that charged, the fees ranged from $30 to $90.

Minimum finance charge.

$.50 The minimum, or fixed, finance charge that will be imposed during a billing cycle. A minimum finance charge usually applies only when a finance charge is imposed, that is, when you carry over a balance.

Transaction fee for cash advances: 3% of the amount advancedBalance-transfer fee: 3% of the amount transferredLate-payment fee: $25Over-the-credit-limit fee: $25

Transaction fee for cash advances. The charge that will be imposed each time you use the card for a cash advance.Balance-transfer fee. The fee that will be imposed each time you transfer a balance from another card.Late-payment fee. The fee that will be imposed when your payment is late. In 2006, about 35% of credit card holders paid late fees for an average of $35 each time.Over-the-credit-limit fee. The fee that will be imposed if your charges exceed the credit limit set for your card.

Credit Card Account Comparison Worksheet

Use this Credit Card Account Comparison Worksheet to compare the fine print on credit cards you’re considering as well as keeping track of the terms you agree to with the credit card company.

Credit Card Account Comparison WorksheetFeatures Card: Card: Card:

Issuer:Credit limit:Interest rate for:

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PurchasesPenalty for late payment Cash advancesBalance transfers

Fees:AnnualLate paymentOver-credit limitAccount Set UpCash advanceRewards program

Finance charges:One-cycle or two-cycle billingMinimum finance chargeNew purchases included

Interest calculated:Fixed, variable or tiered basis

Grace period (# of days):If you carry a balanceIf you pay off the balance monthlyFor cash advances

Type of card:Secured, regular, student, rewards

Perks and rewards:RebatesPointsFrequent flier milesCash backInsuranceOther

Liability LimitsIf your credit card is lost or stolen--and then is used by someone without your permission--you do not have to pay more than $50 of those charges. This protection is provided by the federal Truth in Lending Act. You do not need to buy “credit card insurance” to cover amounts over $50.

If you discover that your card is lost or stolen, report it immediately to your credit card company. Call the toll-free number listed on your monthly statement. The company will cancel the card so that new purchases cannot be made with it. The company will also send you a new card.

Make a list of your account numbers and the companies’ phone numbers. Keep the list in a safe place. If your wallet or purse is lost or stolen, you’ll have all the numbers in one place. Take the list of phone numbers--not the account numbers--with you when you travel, just in case a card is lost or stolen.

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Billing ErrorsIt is important that you check your credit card statement every month. Billing errors can happen and checking your credit card statement is your best defense against fraud, identify theft or other criminal activity.

If you are charged or overcharged for something you did not buy, did not take delivery of, or was not delivered, you need to call your credit card company and get it corrected. If payments are not credited to your account or a charge was made by someone who did not have permission to use your card, get it corrected. If you think your credit card bill has an error, do the following:

1. Write to the credit card company within 60 days after the statement date on the bill with the error. Use the address for “billing inquiries” listed on the bill.

2. Pay all the other parts of the bill. You do not have to pay the “disputed amount” or any minimum payments or finance charges that apply to it. If there is an error, you will not have to pay any finance charges on the disputed amount. Your account must be corrected.

3. If there is no error, the credit card company must send you an explanation and a statement of the amount you owe. The amount will include any finance charges or other charges that accumulated while you were questioning the bill.

The federal Fair Credit Billing Act allows you to withhold payment on any damaged or poor-quality goods or services purchased with a credit card--even if you have accepted the goods or services--as long as you have made an attempt to solve the problem with the merchant. The sale must have been for more than $50 and must have taken place in your home state or within 100 miles of your home address. You should notify the credit card company in writing and explain why you are withholding your payment. You may withhold the payment while the credit card company investigates your claim. If you pay the charges for the goods on your credit card bill before the dispute is resolved, you will lose your right to make a claim.

Lost or Stolen Credit Cards

Under the Truth in Lending Act you do not have to pay for any unauthorized charges made after you notify the card company of loss or theft of your card. Have a list of your credit card telephone numbers handy and notify card issuers immediately if your card is lost or stolen. The most you will have to pay for unauthorized charges is $50 on each card even if someone runs up several hundred dollars worth of charges before you report a card missing.

Unsolicited Cards

It is illegal for card issuers to send you a credit card unless you ask for or agree to receive one. However, a card issuer may send, without your request, a new card to replace an expiring one.

Difference Between Credit and Debit CardsYou typically use a debit card (sometimes called a check card) or online banking service to make a transfer of funds you have in a bank account. The payments are electronic and are deducted from accounts more quickly. Often, a debit card purchase is posted within 24 hours instead of days with a paper check or weeks with a credit card transaction. That means there would be little time to make a deposit to cover the purchase. Merchants may take steps as protection against fraud, errors or other losses by putting a hold on a certain amount in your bank account when you use a debit card to say reserve a room in a hotel for some time in the future. This might cause your bank account to be overdrawn.

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Unlike the Truth in Lending Act protections for credit cards, which caps a consumer's liability for unauthorized transactions at $50, the Electronic Funds Transfer Act limits liability to $50 only if the debit cardholder notifies the bank within two business days after discovering the theft. If you don't notify your bank within two days, you could lose up to $500 or more. Don’t forget a thief can draw your bank account and tap into your line of credit. If you receive a bank statement that includes an unauthorized debit-card withdrawal and you wait more than 60 days to tell your bank you could be liable for any amounts from transactions made after that 60-day period.

Because funds are deducted from your account very quickly, don't expect to have the option to stop payment or obtain a refund. If you return an item to a merchant you may not be able to get a refund. You may have to ask for a store credit or a gift card. If you are concerned that the merchant may not deliver as promised, use a credit card. Consumer protections are stronger for returning merchandise under the Fair Credit Billing Act. It gives you the ability, under certain circumstances, to withhold payment on defective goods until the problem has been corrected.

Question

You are trying to pay down a credit card balance. Which of the following is best for you when computing a finance charge?

a) two-cycle daily balance with new purchasesb) one-cycle daily balance with adjusted balance

c) one-cycle daily balance with new purchases

d) two-cycle daily balance with previous balance

Answer

You are trying to pay down a credit card balance. Which of the following is best for you when computing a finance charge?

a) two-cycle daily balance with new purchasesb) one-cycle daily balance with adjusted balance

c) one-cycle daily balance with new purchases

d) two-cycle daily balance with previous balance

Correct answer: b Your previous cycle would be higher as you pay down and you don’t want new purchases in the balance.

Question

How are credit card or open-credit APRs different from mortgage APRs?

Answer

How are credit card or open-credit APRs different from mortgage APRs?

Credit card APRs do not include fees while mortgage APRs do include fees, points, and other costs.

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Question

Annual percentage rate APR 2.9% until 11/1/07after that, 14.9%

Other APRs Cash-advance APR: 15.9%Balance-Transfer APR: 15.9%Penalty rate: 23.9%

Variable-rate information Your APR for purchase transactions may vary.The rate is determined monthly by adding5.9% to the Prime Rate.

Grace period for repayment of balances for purchases.

25 days

Method of computing the balance for purchases. Average daily balance (excluding newpurchases)

Annual fees. None

Minimum finance charge. $.50

Transaction fee for cash advances: 3% of the amount advancedBalance-transfer fee: 3% of the amount transferredLate-payment fee: $25Over-the-credit-limit fee: $25

It’s September 2007. What will you be charged on your outstanding balance?

What will you be charged on your outstanding balance at Christmas of 2007?

It is 2008 and the prime rate is 11%, What is your rate?

Your payment reaches the credit card company in 27 days. What will happen?

You miss two payments by more than 10 days in a six month period. What is your rate?

How much will a cash advance of $1000 cost you?

Answer

It’s September 2007. What will you be charged on your outstanding balance? 2.9%

What will you be charged on your outstanding balance at Christmas of 2007? 14.9%

It is 2008 and the prime rate is 11%, What is your rate? 16.9%

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Your payment reaches the credit card company in 27 days. What will happen? Late fee $25

You miss two payments by more than 10 days in a six month period. What is your rate? 23.9%

How much will a cash advance of $1000 cost you? 3% or $30 plus 15.9% APR on $1000 for whatever period you had the advance.

Assignment - Evaluating a Credit Card Offer

You’ve received the following credit card solicitation in the mail. (Several credit card offers are attached at the end of this workbook but you may use one you got in the mail.)Read the solicitation disclosure, fill in the credit card account comparison worksheet, and answer the following questions:

– What interest rate are you charged on your purchases if you don’t pay your full outstanding balance at the end of the month?

– Is this interest rate fixed?– How is the interest computed?– What are you charged on cash advances?– Besides the interest rate, what other charges will you incur if you have an

outstanding balance? If your payment doesn’t clear?– Assume you had an average daily balance of $500 for the month, what interest

rate and other fees would you pay?– If you are using an offer you got in the mail, compare it to offers your classmates

have or the sample ones attached. How are they different?

Question

You were billed for a product that you ordered but that you did not receive on your latest credit card statement. What should you do?

Answer

You were billed for a product that you ordered but that you did not receive on your latest credit card statement. What should you do?

You should contact your credit card company (in writing or by phone) and let them know that the billing was made in error. Be prepared to give you name, address, account number, the date of the item, and the merchant. If you are talking by telephone, be sure to get the name of the individual you are talking to and note the time and what was promised. Tell them that you will not pay for the item until the dispute has been settled and exclude the item from your payment.

Assignment – Write a letter to correct an error on your credit card bill.

You purchased a flashlight from a store for $11.14. When your credit card bill arrived, the charge was $111.40. Write a letter to the credit card company to correct this error. In your letter state your name, billing address and account number. Give the date of the charge, the merchant (store), and note the disputed amount.

Question

True or False

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Your liability on a debit card is the same or less than a credit card ______ The bank has 10 days to investigate any errors you bring to their attention ___ If you don’t notify your bank you lost your debit card you could be liable for $500 or more

_____

Answer

True or False

Your liability on a debit card is the same or less than a credit card __F__ The bank has 10 days to investigate any errors you bring to their attention _T_ If you don’t notify your bank you lost your debit card, you could be liable for $500 or more

_T___

o If you do not report any unauthorized transactions by 60 days after your statement arrives, you can be liable for all unauthorized transactions after 60 days.

o There are exceptions for new accounts (20 days) and certain other transactions such as foreign transactions (90 days).

o The law limits liability to $50 if the debit cardholder notifies the bank within two business days after discovering the theft. If you don't notify your bank within those two days, you could lose up to $500, or perhaps more.

Question

You are buying a product from a merchant you haven’t dealt with before. Should you use a debit or credit card?

Answer

You are buying a product from a merchant you haven’t dealt with before. Should you use a debit or credit card?

When you use the debit card, the cash is taken out of your account immediately. If you are uncertain about the product or the merchant, it’s best to use a credit card because you can dispute the charge if the product is defective.

Question

On Monday, John’s debit card and PIN were stolen. On Tuesday, the thief withdrew $250, all the money John had in his checking account. Five days later, the thief withdrew another $500, triggering John’s overdraft line of credit. John did not realize his card was stolen until he received his bank statement, showing withdrawals of $750 he did not make. He called the bank right away. What is John’s liability?

Answer

On Monday, John’s debit card and PIN were stolen. On Tuesday, the thief withdrew $250, all the money John had in his checking account. Five days later, the thief withdrew another $500, triggering John’s overdraft line of credit. John did not realize his card was stolen until he received his bank statement, showing withdrawals of $750 he did not make. He called the bank right away. What is John’s liability?

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John’s liability is $50.

Question

Now suppose that when John got his bank statement he didn’t look at it and didn’t call the bank. Seventy days after the statement was mailed to John, the thief withdrew another $1,000, reaching the limit on John’s line of credit.

Answer

Now suppose that when John got his bank statement he didn’t look at it and didn’t call the bank. Seventy days after the statement was mailed to John, the thief withdrew another $1,000, reaching the limit on John’s line of credit.

In this case, John would be liable for $1,050 ($50 for transfers before the end of the 60 days; $1,000 for transfers made more than 60 days after the statement was mailed).    Question

You don't realize you have only $100 in your bank account and you want to use your debit card to buy a $200 item. What will happen to your account?

Answer

You don't realize you have only $100 in your bank account and you want to use your debit card to buy a $200 item. What will happen to your account?

Depending on the terms of your account or the rules of the card network, the bank might approve the $200 purchase as a convenience, but it also might assess an overdraft fee for that transaction and subsequent ones until you make a sufficient deposit.

Question

The typical person in Washington State has a credit card balance of $5500. Assuming the minimum payment on this is $200, how long will it take to pay this off? Go to the Bankrate.com calculator to determine this for 18% interest and 22% interest.

http://www.bankrate.com/brm/calc/creditcardpay.asp

Answer

It will take 36 months to pay off at 18% interest and 39 months to pay off at 22% interest.

Activity

Using your own credit card balance and credit card interest rate, calculate how long it will take you to pay off the balance.

http://www.bankrate.com/brm/calc/creditcardpay.asp

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Unit 3. Installment LoansInstallment loans are loans that are used to make major purchases. They typically involved borrowing a large amount of money for a set number of years which is repaid with the same monthly payment for the life of the loan. The most common installment loans are loans to purchase a car and student loans to pay for college education.

Before you borrow money, you should always determine whether the purchase is necessary. Smart money managers never borrow to spend; they borrow to invest—that is they would borrow money to purchase an investment that increases in value. Therefore, it you are borrowing money to buy something that depreciates or falls in value, you need to consider very carefully.

If you are a person who has ample savings, once you’ve decided to purchase the item, it’s important to determine whether or not you should finance it yourself. For example, if you decide to buy a car, should you finance or pay cash? Financial managers would look to see if you could earn more with your investments than you pay for the loan. As an example, let’s you decide to get an auto loan for $10,000 at 7%. You can get 8% by investing which might come to 6% after taxes. In this case, the loan costs you more than what would you could get investing, so a better use of your money is to pay cash. If you can get 11% by investing or 8% after taxes, then it makes sense to borrow the money. You would use the same analysis when you decide whether you should pay off a debt.

Here is what the analysis would look like:

7% Loan Scenario 1 Scenario 2Investment return 8% 11%Less taxes (tax rates are usually 25% to 40% of your return)

2% 3%

After-tax return 6% 8%Is my after-tax return more than my finance rate of 7%? NO. Pay cash. YES. Take out loan.

Of course, there are other considerations. Some folks find it psychologically difficult to take on more debt, so even if they don’t get a better return on investing, they would prefer to get rid of the debt. For others, if they have too much debt, it makes sense to ease the burden.

Additionally, there is no guarantee on the investment returns you will get in the future. If you are relying on the historical 11% return on the stock market, you might be hitting a patch where returns are much lower.

Car LoansSummary on Car Loans1. Shop around and do a lot of research before you buy a car. A car depreciates or loses value

so it’s not wise to spend a lot of money on a car.2. Pull your credit report and know how you rate.3. The type of car you buy can affect how much you pay for car insurance, maintenance and

gas. 4. Negotiate for the lowest price.5. Don’t take out a loan for longer than the time you will be using the car. The shorter the term,

the less finance charges you pay.

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6. Don’t let salespeople tell you how much you can borrow. Do your homework and work it out yourself.

7. Shop around for the lowest interest rates.8. Don’t spend more than 40% of your monthly income (gross? Or net?) on debt including your

mortgage.

The temptation for many young people as they start their career and start to earn more than they’ve ever earned is to splurge on a car that improves their image. As with any major purchase, it is important to do your homework before you purchase a car. Sporty and fancy cars will not only put you in major debt but they can also have an impact on other costs such as repairs, cost of gas or insurance. It’s best to consider the whole package before you buy. Most people need a car but it’s not wise to spend too much on this necessity. It loses value from the minute that you take it off the lot.

It’s important to comparison shop with autos and often dealers will meet special deals offered by their competitors. Many internet sites give information on the wholesale prices of cars so you can be informed when you go into negotiate. For more information about buying a car, visit the FTC's Web site at www.ftc.gov/autos.

Do all your homework before you walk into the dealership. This way you’ll be less swayed by sales tactics and more likely to get a good deal. Most people simply don’t spend enough time getting all the facts they need to buy smart. If you want motivation, think of the cost of a car and how many hours you have to work to pay it off. For example, let’s say you make $15 an hour and a car costs $17,000. You have to work 1133 hours to earn that car. That’s 28 weeks or about 7 months.

Research is not limited to the car. You also have to research loans. It’s important to understand how a car loan works. If you need to finance you car, you’ll probably do it with an installment loan. Installment loans all work the same way. There is a down payment, a time period in which the loan must be paid, and a monthly payment of principal and finance or interest charges. The amount you put down and the term or length of the loan can have an impact on your monthly payment and the finance charges you pay. The longer the term, the less your monthly payment will be. However, the longer the term, the more finance charges you will pay. Since most people keep a car for about 5 years, it is not wise to finance a car for longer than its life. If you do, you will be paying for the car when you are no longer using it.

Let’s say you buy a car for $17,000 and put $2,000 down. Your car loan for $15,000 is at the 2007 interest rate of 6.97%. If you take a car loan for 4 years, you will pay $359 each month for 48 months. The monthly payments are divided between principal and interest. As you can see your principal payment increases each month and as a result your interest decreases. At the end of 48 months, you will have paid back the $15,000 in principal and total finance charges of $2231. With financing, your car cost you $17,231.

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The loan issuer will look at your credit report to determine what interest rate you should be charged. The lower your credit score, the more you will pay. Get your credit report to see if there are any factors that might hurt you in the process. You may need to correct some information on your credit report. The following are the three major credit reporting agencies. You are allowed one free credit report from each every year. Take advantage of this.

Equifax – To order a credit report: 800-685-1111. To report fraud: 800-525-6285 Experian – To order a credit report and report fraud: 888-EXPERIAN (888-397-3742) Trans Union – To order a credit report: 800-888-4213. To report fraud: 800-680-7289

Check out a few banks to see what the going interest rate is for a car. The APR is the key factor in determining which car loan is the best deal for you. Be sure that you get a complete schedule showing exactly what you will be paying on a monthly basis in both principal and finance charges. You don’t want the total payments of all debt (including mortgage) to exceed 40% of your income.

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Go to a website like www.bankrate.com to try out a few loan amounts to see what the monthly payments you can afford to make.

Car salespeople have a reputation for using many persuasion tactics to get you to buy more. Review all the persuasion tactics at the beginning of this book so that you can defend yourself well. Remember, it’s your hard-earned money that will be taken away. Spend and borrow only what you absolutely have to.

Student LoansSummary for Student Loans

1. Save as much as you can using tax-advantaged educational savings plans before you go to college.

2. Make sure that you have a good chance of earning the income you need to pay off the debt.

3. Only borrow as much as you need.4. Fill out the Free Application for Federal Student Aid (FAFSA) for federal loans first.

They are the cheapest and have the most options.5. Comparison shop for private loans and evaluate APRs. Check out the maximum

monthly payment if you are considering a variable rate.6. Ask for loan features that will help you if you miss a payment or if you have a good on-

time record.7. Create a plan for repaying your loan when you take out the loan.

Student loans are taken out to finance your education. They are also installment loans, but different from other installment loans, the interest is tax deductible in addition to your standard deduction. Students are borrowing more nowadays as tuition increases. Educational inflation for Washington State is 7% which is higher than general inflation.

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The best way to pay for college is to start saving before you go to college. A little bit of planning can save you a lot of money. For example, let’s say you are trying to pay for $60,000 in college costs. If you saved using a qualified tuition plan, you would put $4343 in your plan every year at 7% for a total of $43.427 and you’ll have $60,000 for college.

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If you borrow to pay for the same $60,000 at 7% for ten years, you’ll pay a total of $60,000 in principal repayment and $25,427 in interest for a total of $85,427. Now a true comparison isn’t quite that simple but you get the point.

Here are two ways the government helps you save for education.

529 Qualified Tuition Programs (QTP)Many states have set up qualified tuition programs (also known as a 529 plan) that allow you to either prepay or contribute to an account for a student's qualified education expenses (tuition, fees, books, supplies, room and board) at an eligible educational institution (which is just about any accredited college). The student (designated beneficiary) can be changed and is not limited to any age.

The nice thing about 529s is the returns on your contribution are not taxable when you take them out for qualified expenses. Contributions to a 529 cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary. Unlike a Coverdell Education Savings Account, there are no income restrictions on the individuals who contribute. You can contribute to both a 529 and a Coverdell ESA in the same year for the same designated beneficiary.

Assets can be rolled over or transferred from one 529 to another. In addition, the designated beneficiary can be changed without transferring accounts. Any amount distributed from a 529 is not taxable if it is rolled over to another 529 for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse). For more information on 529s go to http://www.irs.gov/publications/p970/ch08.html. For more information on all education savings and credits see http://www.irs.gov/publications/p970/index.html.

Washington State’s Guaranteed Education Tuition Program works in a different way. If you buy one year of college tuition today (100 GET units), it will be worth one year of college tuition when your child is ready for college, no matter what the cost of college at the time. One hundred GET

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units are equal to one year of resident undergraduate tuition and state-mandated fees at the most expensive public university in Washington. This type of account takes out the uncertainty in the return on your QTP.

Although the value of GET units is tied to tuition at a Washington public university, you can use your units at nearly any qualified educational institution in the country. This program is open to residents of the state of Washington. For more information, go to http://www.get.wa.gov/index.shtml.

Coverdell Education Savings Account

A Coverdell ESA can also be used to save for qualified higher education expenses. There are more restrictions, though. The student must be under age 18 when the account is set up and the account must be used when the student reaches age 30 (unless the student has special needs). There is no limit to the number of Coverdell ESAs that can be established for one beneficiary but total contributions made to all Coverdell ESAs for any beneficiary in one tax year cannot be greater than $2,000. There are income restrictions for the contributors.

Growth in Student Loans

Students took $80 billion in loans out in 2006. Student loans outstanding (still to be paid back) are about $525 billion. Federal student loans are the largest source of education loans. In 2006, 12 million loans were made for a total of $55 billion. On average students coming out with a bachelor’s degree had $20,000 in debt, those with a graduate degree had $35,000 in debt, and those coming out of professional schools such as law school and medical school had $100,000 in debt. If you think that these debts are paid off quickly, an AOL survey showed 65% of those who took out student loans still had an outstanding balance at age 35.

You would assume that education is a good investment and it would be appropriate to borrow money to go to college. After all, your earnings will go up once you get that degree. Just as with any other purchase, look carefully at what you are buying. As an example, students borrowed money to attend the many private culinary institutes that have sprung up and racked up $30,000 in debt. When they graduated, they hit a market where there was an oversupply of chefs and some could only get jobs at $10 per hour. Their incomes did not go up and they could not support the debt that they had assumed. Think carefully about where you are going to school if you have to take out a loan. Could you get the same education at a public institution that you could at a private institution? As with any other kind of debt, only borrow what you absolutely need.

Federal Student LoansFederal student loans are considerably less expensive than private loans therefore you should always apply for federal student loans first. Federal student loans are different from private loans in that the government guarantees the loan. For subsidized Federal student loans that you have to qualify for, you don’t have to pay interest until you leave school.

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Stafford LoansIn order to be considered, you have to fill out a Free Application for Federal Student Aid (FAFSA). You must have financial need as determined by your college. You have to be a US citizen or national, a US permanent resident or eligible non-citizen. You must be enrolled or plan to enroll at least half time. The school you attend must participate in the Federal Family Education Loan Program. You must not be in default on any education loan or owe a refund on an education grant.

The nice thing about Stafford loans are that no payments are required while you are in school at least half time. There is no prepayment penalty if you pay off the loan early. No credit check is required. There is a six-month grace period when no payments are required immediately following your graduation or dropping to less-than-half-time status. The loan limits from July 2007 onwards are as follows:

Dependent Annual loan limitFreshman $3,500

Sophomore $4,500

Junior or senior $5,500

 Independent Annual loan limitFreshman $7,500

Sophomore $8,500

Junior or senior $10,500

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Graduate or professional $20,500

  Lifetime LimitUndergraduate dependent $23,000Undergraduate independent $46,000

Graduate or professional (some exceptions) $138,500

Source: www.salliemae.com

For Stafford loans beginning July 1, 2006, the interest rate is fixed at 6.8%. This rate is adjusted annually.  There are various ways to repay the loan. The standard way is to make both principal and interest payments each month for up to a 10-year repayment term. This plan has the lowest total interest cost. You can also make reduced payments in the early years of repayment and increased payments thereafter, while still paying off the loans within the maximum 10-year period. With this graduated repayment, you have a higher total loan cost than with fixed repayment plan.

Payments can be adjusted to a percentage of your gross income. You must reapply every year for this plan and payments are adjusted annually to reflect changes in income. With income-sensitive repayment, you have a higher total loan cost than with standard repayment. If you have high student loan debt, you may be eligible for up to a 25-year repayment term and the choice of standard or graduated payments to keep payments affordable. With extended repayment, you have a higher total loan cost than with standard repayment. You combine your eligible loans into a new loan with a single monthly payment and a fixed interest rate. While consolidation will lower your monthly payments, it will generally result in a higher finance charges.

To find out more about student loans, check out the Department of Education website: www.studentaid.ed.gov/students/publications/student_guide/2006-2007/english/index.htm.

Perkins LoansEligibility is very similar to the Stafford loan in that you must be enrolled in an eligible school at least half-time in a degree program; have U.S. citizenship, permanent residency, or eligible non-citizen status; satisfactory academic progress; no unresolved defaults or overpayments owed on Title IV education loans and grants and satisfaction of all selective service requirements.

Your school will have an allocation of Perkins loans and it determines which students have the greatest need. The school combines federal funds with some of its own funds for loans to qualifying students. Your school will pay you directly (usually by check) or apply your loan to your school charges. You'll receive the loan in at least two payments during the academic year. Perkins loans have no fees and a longer grace period than Stafford loans.

Parent PLUS LoansParents of a dependent child who is going to college may apply for a federal loan. They must have U.S. citizenship, permanent residency, or eligible non-citizen status just as with the other two loans. They must also undergo a credit check. The parents may borrow up to the full amount of the child’s college expenses. The interest rate for Parent PLUS loans after July 1, 2006 is fixed at 8.5%, which is adjusted annually. Repayment terms are very similar to the Stafford Loans.

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Parents may sometimes cosign on a child’s student loans. By doing so, the child can get the benefit of the parents’ longer and better credit rating with lower interest rates. A cosigner is guaranteeing the debt. That means the cosigner will have to repay the loan if the borrower does not. Cosigners must be able to repay the loan or suffer the consequences on their credit. The liability will be included in their debt-to-income ratio when applying for other loans. All copies of the loan documents must be given to the cosigner.

To limit their liability, people asked to cosign will instead provide funds to secure a loan. For example, they may put money in deposit as collateral for the loan. This limits the liability to the amount deposited and will not impact the person’s credit rating.

Private LoansPrivate loans have grown to 20% of all student loans. These can be more costly and risky than federal loans. Federal student loans are considerably less expensive than private loans therefore you should always apply for federal student loans first. Federal student loans are different from private loans in that the government guarantees the loan. For subsidized Federal student loans that you have to qualify for, you don’t have to pay interest until you leave school.

Private student loans can have variable rates. Variable rates can go up and down while fixed rates stay the same for the life of the loan. Variable rates for private student loans are pegged to an interest benchmark such as the prime rate. The interest rate you are charged may be anywhere from 1% to 3.75% over the prime rate depending on your credit rating. For example, if the prime rate is 8%, your rate could be 9% to 11.75%. With variable rate loans, it’s always good to check how high the rate can go.

There may be origination fees so you must factor these into your comparison shopping. Origination fees are typically a percent of the loan which you pay upfront to cover administrative costs. You can include those fees and do your own calculation with an APR calculator on the

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internet. The APR is the more effective way to compare different loans. Some students have found themselves paying 18% to 20% on their loans of over $50,000. Paying so much on student loans can hinder your ability to achieve your other goals such as buying a house or saving for retirement.

Also check to see if the interest rates will go up if you miss a payment. You might want to work out a waiver for the first missed payment. Conversely check to see if the interest rates will go down if you have a good on-time payment record.

Your college may have a list of “preferred” lenders. There have been some recent scandals where it was found out that the lenders paid the colleges to get on their preferred list and may not be the least expensive. Shop around for your private loans. Don’t restrict yourself to the “preferred list.” You should check with the bank that holds your family’s home mortgage or with state nonprofit agencies that offer student loans. Here is a link to their umbrella organization www.efc.org/cs/root/resources/resources.

Repayment

Each year of college will add more debt to your student loan. Keep vigilant of your spending the whole time. You’ll be running up a tab that will never let you go. Some student loans are dischargeable by death, though no longer by bankruptcy. It’s best to understand this by looking at those who have graduated from college and are working to pay back the student loan. Nellie Mae asked borrowers questions about their attitude towards their student loans in a 2002 National Student Loan Survey. The borrowers’ monthly loan payments averaged 16% of their starting salaries. As their salaries rose, payments fell to 8% of their income. About 55% of borrowers felt burdened by the loan and 54% would have borrowed less if they had to do it again.

If you have a few private loans, you might consider consolidating them. (They can’t be consolidated with federal loans.) But be very careful to do the same evaluation you would for any new loan.

Question

What is an installment loan?

Answer

What is an installment loan?

An installment loan is a loan that is used to make a major purchase or to pay for college. This type of loan requires multiple payments over an extended period of time.

Question

Name some types of installment loans.

Answer

Name some types of installment loans.

Installment loans include car loans, student loans, federal student loans, private loans and mortgages.

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Question

When obtaining a car loan, what are some other things to consider that may affect your budget and the type of loan you want to get?

Answer

When obtaining a car loan, what are some other things to consider that may affect your budget and the type of loan you want to get?

When obtaining a car loan you should also consider the cost of insurance, maintenance, and gas.

Question

What is the maximum amount of your income that you want to be spending on debt, including a mortgage, all installment loans, and credit cards?

Answer

What is the maximum amount of your income that you want to be spending on debt, including a mortgage, all installment loans, and credit cards?

The maximum amount of income that should be spent on debt is 40%.

Question

True or False

1. Any higher education degree is worth the investment required to earn it. _________2. The government pays your interest on student loans while you are in school so you

should take out as much as they will let you. __________3. When a company offers you a loan, you either have to take their offer or find another

company to deal with. __________4. If your parents sign up for a Parent PLUS Loan and you fail to make the payments after

you graduate, they have an equal responsibility to repay the loan or it will hurt their credit as well. __________

Answer

True or False

1. Any higher education degree is worth the investment required to earn it. __F_______Sometimes a degree may cost more to earn than it is worth. Consider the example of all the chefs that graduated at the same time flooding the market with their skills. They could not earn enough from their chosen profession to keep up with the cost of the loans that gave them the necessary skills to compete. Also, some colleges may be more reputable than others and open more doors. Research the career you are choosing carefully.

2. The government pays your interest on student loans while you are in school so you should take out as much as they will let you. __F________The government pays interest on some types of student loans while you are attending full-time school and maintain good academic standing. However, any time you are taking

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out a loan it is important to be sure that you only take as much as you need. Eventually you will have to pay it back.

3. When a company offers you a loan, you either have to take their offer or find another company to deal with. __F________Some companies will allow you, as the borrower, to negotiate certain terms of the loan. See if the lender is willing to reduce the interest rate for consistent on-time payments. Make sure there is no pre-payment penalty. If you know what features you want out of a loan, it makes it easier for a lender to tailor a loan to meet your needs.

4. If your parents sign up for a Parent PLUS Loan and you fail to make the payments after you graduate, they have an equal responsibility to repay the loan or it will hurt their credit as well. __T________Parents that sign up for a Parent PLUS Loan as co-borrowers and any payments affect their credit rating as well as the credit rating of the student.

Question – Will your degree be worth it?

Nellie Mae found the following average student loans and starting salaries for the college graduates in various professions. Many students going to professional schools have to take private loans.

Assume that graduates will have the standard ten-year repayment plan. What percent of their starting salaries will go to student loan payments if the interest rate for the loan is 8%? What if the interest rate is 11%?

Law/Medicine Business Education Other HealthMean total debt

$91,700 $39,500 $32,200 $55,300

Mean 2001 earnings

$68,000 $57,000 $32,900 $40,500

Would borrow less

65% 48% 60% 61%

Feel very burdened

75% 53% 65% 64%

Delayed buying home

49% 22% 25% 29%

Answer

  Law/Medicine Business Education Other Health

Mean total debt $91,700 $39,500 $32,200 $55,300

Mean 2001 earnings $68,000 $57,000 $32,900 $40,500

8% $1,112.57  $479.24  $390.67  $670.94 

 Annual Loan Payments

$13,350.89  $5,750.93  $4,688.10  $8,051.30 

 Percent of salary 20% 10% 14% 20%11% $1,263.17  $544.11  $443.56  $761.76 

 Annual Loan Payments

$15,158.01  $6,529.35  $5,322.66  $9,141.09 

 Percent of salary 22% 11% 16% 23%

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Unit 4. Mortgages

Mortgage Summary1. Make sure that buying a house is the right thing for you to do right now.2. Negotiate the best deal you can on the house.3. Check your credit report and figure out how much you can afford in a mortgage. Don’t let

your mortgage broker do this for you.4. Comparison shop for mortgages by filling out the mortgage evaluation sheet.5. Use the APR to compare offers. Make sure that you have included all costs.6. If you are getting a variable-rate mortgage, look at the highs and lows for the index that is

used for your mortgage. Figure out what your maximum payment might be and make sure that you can afford it.

7. Understand what and when you are paying back. Ask the lender to show you both principal repayment and interest charges for the term of the loan. Will you be required to make a balloon payment?

8. Obtain all disclosures 9. Read all documents. Once you sign the mortgage agreement, you cannot cancel.10. If you are denied credit, ask why.11. If you have a dispute about payment, the lender must respond to you.12. If you have problems that persist, report them to the FTC.

A big part of the American dream is getting a home. However, buying a home may not be right for you at this time. Here are some factors you need to consider when you are thinking of buying a home or refinancing your home: Do I expect to live in the house for over five years? It’s true that most people don’t live forever

in their homes but if you plan to move in a few years or you are uncertain, it’s best not to buy a house because you cannot recover the transaction costs of buying and selling in a short period of time.

Is my income stable? Although it’s tough to predict whether what your employer will do, any reduction in salary can affect your ability to pay your mortgage. Many folks are depending on two salaries to support a mortgage. What happens if one salary is gone?

Is this a good time to buy? Many factors play into the price of a house. Prices tend to rise when interest rates fall as seen by the figure below. Housing can go through times when prices are extremely high only to drop quickly. Assess whether this might be such a time. If it is, it might not be a good time to buy.

For refinances, it is important to ask if you really need the money. Some folks refinance to get money to remodel the house. They reason that this is an investment and will be returned when the house is sold. Not all renovations result in increased value. You need to evaluate this carefully.

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How mortgages workConsumer surveys show that about one-third of people who have mortgages don’t know what kind of mortgage they have. A mortgage is a loan that you take out to finance the purchase of your house. Typically mortgages go over a span of 30 years or 15 years, although they can go for other time periods as well. As with installment loans, the longer your term, the smaller the monthly payment but the more interest you pay. People can get a mortgage when they buy a house or they can also refinance by paying back the mortgage that they have and taking on a new mortgage.

Mortgages can be fixed-rate meaning that you pay the same interest through its life or they can be adjustable-rate meaning that they will change based on a stated benchmark. You can also have balloon mortgages where the principal will come due in a given year. According to the 2004 Consumer Finance Survey, 11.4% of families had adjustable-rate mortgages. 57.5% had 30-year, 32.9% had 15-year or less, and 4.1% had balloon mortgages.

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Typically more mortgages are taken out when interest rates are low. In 2003, when mortgage interest rates were low, there were $3.8 trillion in purchase and refinance mortgages taken out by people in the US.

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Easy-to-get mortgage debt has had an impact on the wealth of families. The home is the largest part of most folks’ net worth of wealth. Paying down the mortgage of a house is a form of savings. In the 1950s, families preferred to have less mortgage debt and the typical family had almost 80% equity in their homes (meaning their mortgage only accounted for 20%). Now the typical family has only 55% equity in their home.

How Much Can You Afford?The lending institution will check your employment and credit history to determine whether or not you are a good lending risk. They will also look at the amount of down payment and your assets and liabilities. In qualifying you for a mortgage, the lending institution will use ratios such as the debt to income ratio. For example, a lending institution may require a 28/36 debt to income ratio. The first number is 28% and it signifies the largest percent of monthly income that goes to housing. This includes mortgage, insurance, and taxes. Say if your monthly income is $3600, 28% of that would equal $1008. The lending institution would require that the monthly expenses from your house not exceed $1008. The second number in the ratio (36%) represents the total amount of debt payment as a percent of monthly income. This will include auto, student, credit card, and personal loans along with any alimony that has to be paid. Debt-to-income ratios can vary from 28/36 to 33/41, depending on the institution. Be aware that you should also consider how much of your monthly income is put to these costs. The higher the percent of your monthly income you put to payment for loans of any kind, the more financial risk you put yourself in.

Home loans are available from several types of lenders—thrift institutions such as saving banks, commercial banks, mortgage companies, and credit unions. Different lenders may quote you different prices, so you should contact several lenders to make sure you’re getting the best price. You can also get a home loan through a mortgage broker. Brokers arrange transactions rather than lending money directly; in other words, they find a lender for you. Brokers will generally contact several lenders regarding your application, but they are not obligated to find the best deal for you unless they have contracted with you to act as your agent. To get the best deal, you

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should consider contacting more than one broker, just as you would comparison shop with mortgage lenders.

Whether you are dealing with a lender or a broker may not always be clear. Therefore, be sure to ask whether a broker is involved. This information is important because brokers are usually paid a fee for their services that may be separate from and in addition to the lender’s origination or other fees. A broker’s compensation may be in the form of "points" paid at closing or as an add-on to your interest rate, or both. You should ask each broker you work with how he or she will be compensated so that you can compare the different fees. Be prepared to negotiate with the brokers as well as the lenders.

Information to Get When You Take Out a MortgageBe sure to get information about mortgages from several lenders or brokers. Know how much of a down payment you can afford, and find out all the costs involved in the loan. Knowing just the amount of the monthly payment or the interest rate is not enough. Ask for information about the same loan amount, loan term, and type of loan so that you can compare the information. Here is the average statistics for Washington state residents on conventional mortgages from 1978 to 2003.

Year Contract Initial Effective Term Purchase Loan- Adjustable-  Interest Fees Interest to Price to-Price Rate  Rate and Rate Maturity ($000) Ratio Loans  (%) Charges (%)     (%) (%)    (%)          

1978 9.67 1.80 9.97 28.1 55.4 77.3 NA1979 10.75 1.88 11.09 28.5 68.6 74.8 NA1980 12.41 2.30 12.85 28.9 78.1 75.1 NA1981 14.08 3.12 14.73 28.8 77.8 77.9 NA1982 14.17 3.35 14.89 26.6 83.1 74.5 NA1983 12.52 2.57 13.01 27.9 86.4 77.5 NA1984 11.71 2.59 12.18 29.5 89.7 79.6 NA1985 10.75 2.34 11.16 29.3 90.4 80.7 NA1986 9.87 2.22 10.24 28.3 109.8 77.2 221987 8.85 1.92 9.17 28.4 116.8 77.7 511988 8.88 1.80 9.17 28.6 119.0 76.1 591989 9.93 1.71 10.22 28.6 134.7 74.4 361990 10.06 1.80 10.37 28.4 144.5 73.6 231991 9.20 1.61 9.47 27.3 160.7 72.3 191992 7.92 1.69 8.22 24.9 147.1 75.1 171993 6.84 1.29 7.05 25.7 148.6 72.5 181994 6.82 1.03 6.98 28.5 150.8 79.2 551995 7.50 1.07 7.66 28.2 162.0 78.7 291996 7.47 1.07 7.64 27.9 186.3 77.8 341997 7.52 1.10 7.69 27.1 190.6 76.7 171998 6.93 0.98 7.08 27.5 194.6 75.4 91999 6.95 0.82 7.08 28.3 209.1 75.9 262000 7.59 0.66 7.69 29.1 223.0 75.8 302001 6.85 0.57 6.94 27.4 234.8 72.8 122002 6.31 0.44 6.37 26.6 245.9 71.1 20

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2003 5.50 0.26 5.54 26.0 252.6 69.8 19Source: Federal Home Finance Board

RatesThere are two general ways in which interest can be determined. The first is a fixed-rate mortgage where the interest rate is fixed for the entire time that the money is borrowed. The lower the interest rate the less you pay to borrow the money. Most people like to buy a home and take a mortgage when interest rates are low, but unfortunately, that is usually the time when the prices of houses are higher. Here is how interest rates can affect the monthly payment on your mortgage:

Adjustable-rate mortgages are where the interest rate can be reset based on a benchmark interest rate such as treasury (money the federal government borrows) bill rates. Sometimes adjustable-rate mortgages will be offered with a “teaser” rate (a rate that is low relative to other rates) that will be fixed for a set number of years. For example, an adjustable 5/1 would be one in which the initial interest rate would hold for 5 years and then it would reset every year after that. The rate resets based on the benchmark. Since interest rates can vary, your interest rate on an adjustable-rate mortgage can change. Loans secured by a dwelling need to have a maximum (cap) on how high the rate can go. The good news about adjustable-rate mortgages is that often they are offered at low interest rates that allow you to qualify to buy a higher-priced house. The bad news is that they can make your monthly mortgage payments go up substantially.

As you can see from the chart above, if you got an adjustable-rate mortgage in 2004 that was fixed for two years on a low teaser rate or 4%, when the rate resets in 2006 you will move up to 6%. Looking at the rate chart above, your monthly payment will go up 26%.

Each of your mortgage payments is divided between interest and repayment of principal or the money borrowed. Over the life of a mortgage even though the monthly payment stays the same, the interest portion of the monthly decreases while the principal increases. The number of years that you hold a mortgage determines how much interest you pay. The longer the term of the mortgage, the more interest you pay. Now some folks may protest that the interest is tax

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deductible. But interest is still an expense even if you get some taxes back for it. So if you pay $100 in interest and after tax it’s $70, that is still $70 out the door.

Here is a comparison of a 30-year mortgage versus a 15-year mortgage at 6%. Although the annual payments are lower with a 30-year mortgage, you pay twice as much interest.

Given all the options you have for a mortgage, it is important that you get as much information as possible when you comparison shop. Ask each lender and broker for a list of its current mortgage interest rates and whether the rates being quoted are the lowest for that day or week.

Ask even more questions about adjustable-rate mortgage. Some adjustable-rate mortgages are fixed for a few years and then they reset. Looking at how interest rates can vary in the chart above, it’s important to understand what your risk is. Some people think that they can predict

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where interest rates will go and will use an adjustable-rate mortgage for the lower rates in the hopes that interest rates will fall and they can refinance when they do. Even the experts have a hard time predicting where interest rates will go. Ask what the maximum rate is. Some mortgages have balloons meaning they require payment in full in a few years. Understand exactly how the mortgage works before you sign on.

Given the exotic combinations that some lenders can offer, one of the key measures is the loan’s annual percentage rate (APR). The APR for a mortgage takes into account not only the interest rate but also points, broker fees, and certain other credit charges that you may be required to pay, expressed as a yearly rate. But be aware, APRs generally do not include appraisals, credit report fees, house inspections or title fees. You can include those fees and do your own calculation with an APR calculator on the internet. (http://www.occ.treas.gov/aprwin.htm has the Comptroller of Currency’s APR calculator for download.)

Points

Points are fees paid to the lender or broker for the loan and are often linked to the interest rate; usually the more points you pay, the lower the rate. For example if you are borrowing $100,000, 3 points or 3% of the value of the mortgage may be linked with a 6% rate while 2 points or 2% of the value may be linked with a 6.5% rate. Check your local paper to see a comparison of the rates and points. Ask the lender to calculate the points as a dollar amount so you can see what it will cost. Often the lender will match lower points with higher interest rates making it difficult to see what the better deal is. In this case, be sure to ask for the APR (Annual Percentage Rate) which takes into account all the fees and points in calculating the rate you have to pay.

FeesA home loan often involves many fees, such as loan origination or underwriting fees, transaction, settlement and closing costs. The New York Times estimates that consumers paid $50 billion in mortgage fees in 2006. Your lender or broker should be able to give you an estimate of its fees. Many of these fees are negotiable. Some fees are paid when you apply for a loan (such as application and appraisal fees), and others are paid at closing. In some cases, you can borrow the money needed to pay these fees, but doing so will increase your loan amount and total costs. "No cost" loans are sometimes available, but they usually involve higher rates.

Down Payments and Private Mortgage InsuranceDown payments are cash payments that lenders require and represent the buyer’s equity in the house. It follows that the bigger the down payment you put on a house, the less your monthly payment will be. This provides for some security in that if you lose your job or your salary is reduced, you will have less of a financial strain.

Effect of Down Payment on $100,000 Purchase at 6% for 30 years

Down Payment

MonthlyPayment

0% $605.41 5% $575.14

10% $544.87 15% $514.60 20% $484.33 25% $454.06 30% $423.79

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Some lenders require 20 percent of the home’s purchase price as a down payment. Some lenders will require that you show where the down payment is held. However, many lenders now offer loans that require less than 20 percent down--sometimes as little as 5 percent. If a 20 percent down payment is not made, lenders usually require the home buyer to purchase private mortgage insurance (PMI) to protect the lender in case the home buyer fails to pay. If PMI is required, ask how much it adds to your monthly payment and ask how long you will have to pay it. When government-assisted programs such as FHA (Federal Housing Administration), VA (Veterans Administration), or Rural Development Services are available, the down payment requirements may be substantially smaller.

Subprime MortgagesThe homeownership rate has grown to 69% from 65% over the past decade; about half of this growth was subprime lending or lending to people who would not qualify under the conventional mortgage criteria, according to a study by the Federal Reserve Bank of Chicago. Subprime loans made up 12.75% of the $10.2 trillion mortgage market in 2006, up from 8.5% in 2001. Although it appears that subprime lending is helping folks who might otherwise not get to buy a home, this is not always the case. In fact, many of the people who borrowed subprime money were put in a situation where they were forced to live beyond their means. These mortgages were adjustable rate and rates increased by as much as 2% and many of these homeowners face losing their homes and foreclosure. The Center for Responsible Lending estimates that use of subprime loans will cause less people in this group to own houses because of foreclosures.

Although it is enticing to be offered the opportunity to buy a house, it’s important to think about securing your financial future. This can be done by saving enough for a good down payment, making sure that your debt-to-income ratio is low, and preparing for bad times by having an emergency reserve.

Once you know what each lender has to offer, negotiate for the best deal that you can. On any given day, lenders and brokers may offer different prices for the same loan terms to different consumers, even if those consumers have the same loan qualifications. The most likely reason for this difference in price is that loan officers and brokers are often allowed to keep some or all of this difference as extra compensation. Generally, the difference between the lowest available price for a loan product and any higher price that the borrower agrees to pay is an overage. When overages occur, they are built into the prices quoted to consumers. They can occur in both fixed and variable-rate loans and can be in the form of points, fees, or the interest rate. Whether quoted to you by a loan officer or a broker, the price of any loan may contain overages. According to research by Harvard professor Howell E. Jackson, who testified before the U.S. Senate Committee on Banking in 2002, the average customer paid $1,850 in the form of an overage. Professor Jackson also testified that African Americans ($474 more) and Hispanics ($580 more) pay mortgage brokers more for their services.

Have the lender or broker write down all the costs associated with the loan. Then ask if the lender or broker will waive or reduce one or more of its fees or agree to a lower rate or fewer points. You’ll want to make sure that the lender or broker is not agreeing to lower one fee while raising another or to lower the rate while raising points.

If you are satisfied with the terms you have negotiated, you may want to obtain a written lock-in from the lender or broker. The lock-in should include the rate that you have agreed upon, the period the lock-in lasts, and the number of points to be paid. A fee may be charged for locking in the loan rate. This fee may be refundable at closing. Lock-ins can protect you from rate increases while your loan is being processed; if rates fall, however, you could end up with a less favorable rate. Should that happen, try to negotiate a compromise with the lender or broker.

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Be aware that some disreputable lenders disclose that they can change the terms of the mortgage at any time and may jack up the rates considerably just before closing in hopes the prospective buyer will feel obliged to continue with the transaction. Be very careful and evaluate the situation. It may be best to walk away from the deal.

Mortgage Shopping Worksheet  (From the Federal Reserve)     

  Lender 1 Lender 2

Name of Lender: ___ ___

Name of Contact: ___ ___

Date of Contact: ___ ___

Mortgage Amount: ___ ___

  mortgage 1 mortgage 2 mortgage 1 mortgage 2

Basic Information on the LoansType of Mortgage: fixed rate, adjustable rate, conventional, FHA, other? If adjustable, see below

___ ___ ___ ___

Minimum down payment required ___ ___ ___ ___

Loan term (length of loan) ___ ___ ___ ___

Contract interest rate ___ ___ ___ ___

Annual percentage rate (APR) ___ ___ ___ ___

Points (may be called loan discount points)

___ ___ ___ ___

Monthly Private Mortgage Insurance (PMI) premiums

___ ___ ___ ___

How long must you keep PMI? ___ ___ ___ ___

Estimated monthly escrow for taxes and hazard insurance

___ ___ ___ ___

Estimated monthly payment (Principal, Interest, Taxes, Insurance, PMI)

___ ___ ___ ___

FeesDifferent institutions may have different names for some fees and

___ ___ ___ ___

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may charge different fees. We have listed some typical fees you may see on loan documents.

Application fee or Loan processing fee

Origination fee or Underwriting fee ___ ___ ___ ___

Lender fee or Funding fee ___ ___ ___ ___

Appraisal fee ___ ___ ___ ___

Attorney fees ___ ___ ___ ___

Document preparation and recording fees

___ ___ ___ ___

Broker fees (may be quoted as points, origination fees, or interest rate add-on)

___ ___ ___ ___

Credit report fee ___ ___ ___ ___

Other fees ___ ___ ___ ___

Other Costs at Closing/SettlementTitle search/Title insurance    For lender

___ ___ ___ ___

   For you ___ ___ ___ ___

Estimated prepaid amounts for interest, taxes, hazard insurance, payments to escrow

___ ___ ___ ___

State and local taxes, stamp taxes, transfer taxes

___ ___ ___ ___

Flood determination ___ ___ ___ ___

Prepaid Private Mortgage Insurance (PMI)

___ ___ ___ ___

Surveys and home inspections ___ ___ ___ ___

Total Fees and Other Closing/Settlement Cost Estimates

___ ___ ___ ___

  Lender 1 Lender 2

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Name of Lender:    

  mortgage 1 mortgage 2 mortgage 1 mortgage 2

Other Questions and Considerations about the LoanAre any of the fees or costs waivable?

___ ___ ___ ___

Prepayment penaltiesIs there a prepayment penalty?

___ ___ ___ ___

If so, how much is it? ___ ___ ___ ___

How long does the penalty period last? (for example, 3 years? 5 years?)

___ ___ ___ ___

Are extra principal payments allowed?

___ ___ ___ ___

Lock-insIs the lock-in agreement in writing?

___ ___ ___ ___

Is there a fee to lock-in? ___ ___ ___ ___

When does the lock-in occur—at application, approval, or another time?

___ ___ ___ ___

How long will the lock-in last? ___ ___ ___ ___

If the rate drops before closing, can you lock-in at a lower rate?

___ ___ ___ ___

If the loan is an adjustable rate mortgage:What is the initial rate?

___ ___ ___ ___

What is the maximum the rate could be next year?

___ ___ ___ ___

What are the rate and payment caps each year and over the life of the loan?

___ ___ ___ ___

What is the frequency of rate change and of any changes to the monthly payment?

___ ___ ___ ___

What is the index that the lender will use?

___ ___ ___ ___

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What margin will the lender add to the index?

___ ___ ___ ___

Credit life insuranceDoes the monthly amount quoted to you include a charge for credit life insurance?

___ ___ ___ ___

If so, does the lender require credit life insurance as a condition of the loan?

___ ___ ___ ___

How much does the credit life insurance cost?

___ ___ ___ ___

How much lower would your monthly payment be without the credit life insurance?

___ ___ ___ ___

If the lender does not require credit life insurance, and you still want to buy it, what rates can you get from other insurance providers?

___ ___ ___ ___

Laws That Protect YouA house is probably the single largest loan for most people and one of the most complicated. The Real Estate Settlement Procedures Act, like Truth in Lending, requires that the lender give you, in advance, certain information about the costs you will pay when you close the loan. The act also requires that lenders give you the booklet “Buying Your Home: Settlement Costs and Information” to help you understand the closing process and shop for lower settlement costs. The Federal Reserve pamphlet “A Consumer’s Guide to Mortgage Closing Costs” also contains useful information.

The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, whether all or part of the applicant’s income comes from a public assistance program, or whether the applicant has in good faith exercised a right under the Consumer Credit Protection Act.

The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status, or national origin. Under these laws, a consumer cannot be refused a loan based on these characteristics nor be charged more for a loan or offered less favorable terms based on such characteristics.

Although there are many laws to protect you, be aware that many studies have shown that minorities often receive rates that are higher than their economic status warrants. It is important that you assert your rights and ask questions. If you feel that you have been discriminated against, file a complaint.

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Canceling a Mortgage The right to cancel (or right of rescission) was provided to protect you from decisions that are hasty or made under pressure, possibly putting your home at risk if you are unable to repay the loan. The law does not apply to a mortgage to finance the purchase of your home; for that, you commit yourself as soon as you sign the mortgage contract. This is true.

Question 15

A debt-to-income ratio of 28/36 refers to:

a) the percent of your monthly income after tax put to debtb) the percent of your loan payments put to mortgage paymentc) the percent of your gross monthly income put to housing expenses and other loan paymentsd) the percent of your mortgage payments put to other loan payments

Answer 15A debt-to-income ratio of 28/36 refers to:

a) the percent of your monthly income after tax put to debtb) the percent of your loan payments put to mortgage paymentc) the percent of your gross monthly income put to housing expenses and other loan paymentsd) the percent of your mortgage payments put to other loan paymentsCorrect answer c.

Question 16

Which payments are included in the first number in the debt –to-income ratio?Auto loan payments ____Student loan payments _____Personal loan payments _____Mortgage payments _____Alimony paid out _____Real estate taxes ____Home insurance ______

Answer 16

Which payments are included in the first number in the debt –to-income ratio?Auto loan payments ____Student loan payments _____Personal loan payments _____Mortgage payments __X__Alimony paid out _____Real estate taxes __X__Home insurance ___X___

Question 17

Which payments are included in the second number in the debt –to-income ratio?Auto loan payments ____Student loan payments _____Personal loan payments _____Mortgage payments _____

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Alimony paid out _____Real estate taxes ____Home insurance ______

Answer 17

Which payments are included in the second number in the debt –to-income ratio?Auto loan payments __X__Student loan payments ___X__Personal loan payments __X___Mortgage payments _X____Alimony paid out __X__Real estate taxes __X__Home insurance ___X___

Question 18

Your gross household income is $60,000. Using the 28/36 debt to income ratio, how much mortgage can you afford? Assume housing expenses other than mortgage is $400 per month.

Answer 18

Your gross household income is $60,000. Using the 28/36 debt to income ratio, how much mortgage can you afford?

Your gross monthly income is $5000 ($60,000/12). 28% of $5000 is $1400. $1400 less $400 for other housing expenses leaves you $1000 for monthly mortgage payments.

Question 19

True or False

Going to one lender is enough when you want to get a mortgage.

A mortgage broker is not obligated to get the best deal for you.

It’s not important to know whether you’re dealing with a lender or a mortgage broker.

Answer 19

True or False

Going to one lender is enough when you want to get a mortgage.

False. There are many different rates and offers. You need to comparison shop for your mortgage. It can cost you a lot over a long period of time of you don’t.

A mortgage broker is not obligated to get the best deal for you.

True. Unless you contract with the mortgage broker to act on your behalf, he or she is not obligated to get the best deal for you. And even if the broker is contracted by you, be sure to go to a few mortgage brokers to comparison shop.

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It’s not important to know whether you’re dealing with a lender or a mortgage broker.

False. A mortgage broker will charge a fee on top of the cost of the mortgage so you need to know what that will cost you.

Question 20

What do the following do to your finance charges in a mortgage? Indicate whether it makes the charges higher or lower.

Higher down payment ____________

30-year term as compared to 15-year term _____________

3 points as compared to 1 point ______________

Answer 20

What do the following do to your finance charges in a mortgage?

Higher down payment _Lower_

30-year term as compared to 15-year term __Higher___

3 points as compared to 1 point ___Higher____

Question 21

When is it good to use an adjustable-rate mortgage over a fixed-rate mortgage?

Answer 21

When is it good to use an adjustable-rate mortgage over a fixed-rate mortgage?

When interest rates are high, often people will do an adjustable-rate mortgage so that they can get a lower rate. They plan to lock into a fixed-rate mortgage when interest rates fall. Unfortunately, it’s not possible to predict for certain where interest rates will go.

Question 22

A lender is advertising 5% mortgages with an APR of 5.2%. How is the noted (nominal) rate different from the APR? Which should be used to evaluate a mortgage?

Answer 22

A lender is advertising 5% mortgages with an APR of 5.2%. How is the noted (nominal) rate different from the APR? Which should be used to evaluate a mortgage?

The APR is the cost of credit on an annual basis. Lenders are required to disclose this so that consumers can compare across different lenders. It is important that you ask for the APR when you are comparison shopping on mortgages. It is also important to ask whether all fees are included in the calculation of the APR.

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Question 23

You have an adjustable-rate mortgage that resets after a year. The rate is set at 2% above the 90-day treasury bill. When you assumed the mortgage a year ago, you were given the rate of 4.97%. The treasury bill rate is 5.03%. What will your rate be changed to? What increase will you see in your monthly payments?

Answer 23

You have an adjustable-rate mortgage that changes annually. The rate is set at 2% above the 90-day treasury bill. When you assumed the mortgage a year ago, you were given the rate of 4.97%. The treasury bill rate is 5.03%. What will your rate be changed to? What increase will you see in your monthly payments?

The new rate will be 7.03%. You add 2% to 5.03% to get the new rate. Your monthly payments will increase about $125 for every $100,000 that you borrowed.

Question 24

You are comparing two mortgage lenders for a $200,000 mortgage. The first is offering a 5.75 rate with 3 points, while the second is offering 6.00% with 1 point. Which is the better deal?

Answer 24

You are comparing two mortgage lenders for a $200,000 mortgage. The first is offering a 5.75 rate with 3 points, while the second is offering 6.00% with 1 point. Which is the better deal?

You have to do an APR calculation on this one to determine which is the better deal. Go to: http://www.dinkytown.net/java/MortgageApr.html and input the numbers. The 6% with 1 point wins by a hair.

Question 25

The local newspaper had these rates for 30-year fixed rate mortgages. Using an APR calculator determine what the APRs are for each:

Company Interest rate Points Down payment

APR

A 5.75 0 0 – 20%

B 5.875 1 0 – 20%

C 4.875 5.875 0 – 20%

D 5.25 2.875 0 – 20%

Answer 25

The local newspaper had these rates for 30-year fixed rate mortgages. Using an APR calculator determine http://www.dinkytown.net/java/MortgageApr.html what the APRs are for each:

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Company Interest rate Points Down payment

APR

A 5.75 0 0 – 20% 5.75

B 5.875 1 0 – 20% 5.967

C 4.875 5.875 0 – 20% 5.31

D 5.25 2.875 0 – 20% 5.5

Assignment 1: Buying a house

Go to zillow.com. Identify a house that you want to buy. The sky is the limit.

Find at least two mortgage rates including points. Estimate the other closing costs. Assume a reasonable down payment. Determine what your monthly payment will be.

Activity

Comparison shop mortgage fees. Determine what typical fees are for a mortgage. Go to the website www.feedisclosure.com. Read the sample disclosure report and compare to your analysis.

Unit 5. Home Equity Line of Credit

Home Equity Summary1. Don’t use home equity loans to finance spending on day-to-day items.2. Evaluate the home equity loan against refinancing your mortgage.3. Comparison shop for home equity loans.4. Use the APR to compare offers but remember that APRs for home equity loans do not

include closing costs. Look at all costs.5. Look at the highs and lows for the index that is used for your home equity loan. Figure

out the maximum payment you will need to pay.6. Understand what you are paying back. Ask the lender to show you both principal

repayment and interest charges. Will you be required to make a balloon payment?7. On a home equity line of credit, determine a repayment schedule. You do not want the

loan to be outstanding for an indeterminate period of time.8. You have 3 days to cancel the credit lines and they have to pay everything back to you.9. If you are denied credit, ask why.10. If you have a dispute about payment, the lender must respond to you.11. If you have problems that persist, report them to the FTC.

A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a family's largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills and not for day-to-day expenses. According to the 2004 Consumer Finance Survey 1.3% of families used a home

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equity line for a median balance of $4,200. Many of these families use a home equity loan to pay for home improvements.

Homeowner remodeling has become a huge industry accounting for almost $300 billion a year. It makes sense that when you buy a home, there will be the need to maintain or upgrade parts of your house. This can run from $500 to $1000 for appliances such as a refrigerator or dishwasher, $5000 for a furnace, and more for items like a new roof or driveway. Other homeowners may want to upgrade their homes to enjoy or they may want to put in energy-efficient features. Just be aware that only a few home renovations pay themselves back if you are planning to sell. According to Remodeling magazine’s 2005 Cost vs Value Survey these include new siding ($10,000), bathroom ($10,000) and kitchen renovations ($15,000) which may pay back 75% to 100% of the value—and only if your home is not above the average value in your neighborhood. If you are planning to sell, don’t spend too much on remodeling. Extra fancy or customized remodeling rarely pays back as new owners may not have the same taste as you do. Other renovations recoup only a portion of their cost. So, as with any other time that you assume debt, evaluate very carefully before you spend.

Some people may use a home equity loan to consolidate loans which are not tax-deductible. Interest payments on a home equity loan and other mortgages totaling up to $1 million are tax-deductible while other kinds of loans may not be. In comparison to mortgages, home equity loans typically have a higher interest rate, so if you are thinking of a substantial home equity loan, you may want to evaluate the finance charges and fees against refinancing your mortgage.

With a home equity line, you will be approved for a specific amount of credit you may borrow at any one time under the plan. Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the home's appraised value and subtracting from that the balance owed on the existing mortgage. For example:

Appraised Value  $  200,000.00 75%  $  150,000.00 

Mortgage owed  $  125,000.00 Potential credit  $    25,000.00 

In determining your actual credit limit, the lender will also consider your ability to repay, by looking at your income, debts, and other financial obligations as well as your credit history.

Many home equity plans set a fixed period during which you can borrow money, such as 10 years. At the end of this "draw period," you may be allowed to renew the credit line. If your plan does not allow renewals, you will not be able to borrow additional money once the period has ended. Some plans may call for payment in full of any outstanding balance at the end of the period. Others may allow repayment over a fixed period (the "repayment period"), for example, 10 years.

Once approved for a home equity line of credit, you will most likely be able to borrow up to your credit limit whenever you want. Typically, you will use special checks to draw on your line. Under some plans, borrowers can use a credit card or other means to draw on the line. There may be limitations on how you use the line. Some plans may require you to borrow a minimum amount

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each time you draw on the line (for example, $300) and to keep a minimum amount outstanding. Some plans may also require that you take an initial advance when the line is set up.

If you decide to apply for a home equity line of credit, look for the plan that best meets your particular needs. Read the credit agreement carefully, and examine the terms and conditions of various plans, including the annual percentage rate (APR) and the costs of establishing the plan. The APR for a home equity line is based on the interest rate alone and will not reflect the closing costs and other fees and charges, so you'll need to compare these costs, as well as the APRs, among lenders.

RatesHome equity lines of credit typically involve variable rather than fixed interest rates. The variable rate must be based on a publicly available index (such as a business lending rate such as the prime rate published in some major daily newspapers or a U.S. Treasury rate) plus a “margin” such as 2%. So if the prime rate is 5%, you would pay 7% interest. Interest rates change frequently and this means your rate will change. It is important to find out which index is used, how often it changes, and how high and low it goes.

Lenders sometimes offer a low or “teaser” rate for home equity lines--a rate that is much lower than the market and may last for only an introductory period, such as 6 months. These can be dangerous as you are lulled into thinking that you will always have a low rate. When the loan resets at market rates, your payments can go up substantially.

Variable-rate loans secured by a dwelling must, by law, have a ceiling (or cap) on how much your interest rate may increase over the life of the loan. Some variable-rate loans limit how high and how low your interest rate will go. Some lenders allow you to convert from a variable interest rate to a fixed rate during the life of the plan. It may be good to have this option so you can lock in on low rates.

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Plans generally permit the lender to freeze or reduce your credit line under certain circumstances. For example, some variable-rate plans may not allow you to draw additional funds during a period in which the interest rate reaches the cap.

Costs Many of the costs of setting up a home equity line of credit are similar to those you pay when you buy a home. It could include a property appraisal, an application fee, which may not be refunded if you are turned down for credit, up-front charges, such as one or more points (one point equals 1 percent of the credit limit), and closing costs including fees for attorneys, title search, and mortgage preparation and filing; property and title insurance; and taxes. You may have to pay other fees such as annual membership or maintenance fees and a transaction fee every time you draw on the credit line.

You could be paying hundreds of dollars to draw only a small amount against your credit line, so really evaluate before you borrow. On the other hand, home equity lines have generally lower rates than other types of credit. Some folks may consolidate their other consumer credit and take out a home equity loan to pay for it. Additionally, this interest is tax deductible.

Repayment Before entering into a plan, work out how you will pay back the money you borrow. Some plans set minimum payments that cover a portion of the principal (the amount you borrow) plus accrued interest. But (unlike with the typical installment loan) the portion that goes toward principal may not be enough to repay the principal by the end of the term. Other plans may require the payment of interest alone so you will owe the whole principal at the end of the loan. You must be prepared to make this "balloon payment" by refinancing it with the lender or you might have to come up with the money from somewhere else. If you are unable to make the balloon payment, you could lose your home. Ask to see the entire payment schedule broken out by principal and interest charges so you understand how it works.

If you sell your home, you will probably be required to pay off your home equity line in full immediately. If you are likely to sell your home in the near future, consider whether it makes sense to pay the up-front costs of setting up a line of credit. Also keep in mind that renting your home may be prohibited under the terms of your agreement.

Disclosures From Lenders The federal Truth in Lending Act requires lenders to disclose the important terms and costs of their home equity plans, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. The lender can’t charge a fee until after you have received this information. You usually get these disclosures when you receive an application form. If any term (other than a variable-rate feature) changes before the plan is opened, the lender must return all fees if you decide not to enter into the plan because of the change.

When you open a home equity line, the transaction puts your home at risk. If the home involved is your principal dwelling, the Truth in Lending Act gives you 3 days from the day the account was opened to cancel the credit line. This right allows you to change your mind for any reason. You simply inform the lender in writing within the 3-day period. The lender must then cancel its security interest in your home and return all fees--including any application and appraisal fees--paid to open the account.

The Consumer Credit Protection Act of 1968 requires that creditors state the cost of borrowing in a common language so that you can figure out what the charges are, compare costs, and shop

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for the best deal. It also requires that consumers be told why credit is denied, let borrowers find out about their credit records, and set up a way for consumers to settle billing disputes. Let the buyer beware! It is important to know your rights and how to use them.

Question

When obtaining a home equity line of credit, are the costs included in the APRs?

Answer

When obtaining a home equity line of credit, are the costs included in the APRs?

No. The APR does not always include all costs when dealing with home equity lines of credit.

Question

You have a home equity loan for $50,000 that resets every year based on the prime rate and a 15-year term. It is calculated by adding 3% to the rate. Using the calculator on www.bankrate.com, find your monthly payment on the following years:

Year Prime rate Home equity loan rate Monthly Payment200420012006

Answer

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Year Prime rate Home equity loan rate

Monthly Payment

2004 0.04 0.07 $449.41

2001 0.09 0.12 $600.08

2006 0.0726 0.1026 $545.28

Monthly payments can vary substantially.

Unit 6. Lease Agreements

Lease (Car) Summary1. Make sure that leasing is right for you. Compare the cost of leasing to the cost of buying

a car. Don’t forget that when you buy a car, you own the car at the end of the period.2. Shop as if you’re buying a car. Make sure the capitalized cost of the car on the lease is a

fair market value and use trade-ins and a down payment to reduce the cost.3. Ask whether extra charges will be assessed for excessive mileage, wear and tear,

disposition and early termination, and find out the amount of these charges. Have the lessor define what normal wear and tear is.

4. Make sure that you are protected by warranty or insurance.5. Comparison shop and have the lessors fill out the Lease Evaluation form, take it home

and carefully evaluate the lease. Make sure that you have all fees included.6. If the lessor claims a difference in value when you return the car, make sure that it is not

more than three times a monthly payment.7. If you dispute the difference in value, have an independent appraisal (at your cost) done.8. If you want to file a complaint, contact www.ftc.gov.

A lease is a contract between a lessor (the property owner) and a lessee (the property user) for the use of a car or property subject to terms and limits for a specified period at a specified payment. Leasing has become a popular alternative to buying when you plan to use the property for a short period of time.

A consumer lease is a contract between a lessor (the property owner) and lessee for the use of personal property primarily for personal, family, or household purposes for a period of more than four months and for no more than $25,000. These leases are covered by the Consumer Leasing Act. They include long-term leases of cars, furniture, and appliances, but not daily car rentals or apartment leases.

In the case of leasing a car versus buying, leasing can involve lower monthly payments but at the end of the lease, you will not own the car. Even though you are leasing you have to shop as if you're buying a car. The capitalized cost is the price of the car for leasing purposes plus taxes and extra charges like service contracts and registration fees. The capitalized cost reduction is similar to a down payment. The value of a trade-in can be applied to the price your lease is based on. Negotiate all the lease terms, including the price (capitalized cost) of the vehicle. Lowering the lease price will help reduce your monthly payments.

In a closed-end lease, you return the car at the end of the lease and "walk away," but you're still usually responsible for certain end-of-lease charges, such as excess mileage, wear and tear, and disposition. In an open-end lease, you pay the difference between the value stated in your contract and the lessor's appraised value at the end of the lease. The Consumer Leasing Act

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gives consumers with some protections against unreasonable end-of-term charges in open-end leases. Assuming that you have met the wear-and-use standards, the residual value is considered unreasonable if it exceeds the realized value by more than three times the base monthly payment (the “Three Payment Rule”). If you cannot reach a settlement with the lessor, you cannot be forced to pay the excess amount unless the lessor brings a successful court action and pays your reasonable attorney’s fees.

You have the right to an independent appraisal of the property’s worth at the end of the lease term; however, you must pay the appraiser’s fee. The Federal Reserve pamphlet “Keys to Vehicle Leasing: A Consumer Guide” (http://www.federalreserve.gov/pubs/leasing/) also contains useful information on leasing and a form to have your lessor fill out.

Lease inception fees are payments you must make when the lease starts. These may include a down payment, security deposit, acquisition fee, first month's payment, taxes and title fees. It could also include conveyance and preparation fees. Get full disclosure of all fees when the lease starts. You may be able to negotiate some or all of the terms.

Ask whether extra charges will be assessed for excessive mileage, wear and tear, disposition and early termination, and find out the amount of these charges. Most leases allow you to drive 12,000 to 15,000 a year; if you put on more miles you will have to pay more. Ask questions to determine what is normal wear and tear. Check out penalties for an early return; expect to pay a substantial charge if you give the car up before the end of your lease.

Federal law requires lessors to provide lease cost information before you sign the lease. Take a copy of form available at the FTC for lease disclosure to the dealer and ask them to complete it. Some dealers may be willing to provide the information during your shopping process. If the dealer declines, consider shopping elsewhere.

As with mortgages and credit cards, the important two factors to analyze when you enter a lease is the finance charges you will be paying and the APR. The finance charge is the total dollar amount you pay to use credit. It includes interest costs and other costs, such as service charges and some credit-related insurance premiums.

For more information about buying or leasing a car, visit the FTC's Web site at www.ftc.gov/autos. To file a complaint or to get free information on consumer issues, visit www.ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261.

Rent-to-BuyA rent-to-buy agreement will allow you to put your rent payments toward the purchase of the item. For example, you may use your rental payments for furniture such that you will own the furniture after a period of time. Although, these arrangements may sound attractive, it is important that you carefully assess the offer before you take it. As with other loans, assess the APR and total finance charges. Some people find that they are paying three or four times the value of the item to own it—not a very good deal.

Question 27

Describe the difference between a closed-end lease and an open-end lease.

Answer 27

Describe the difference between a closed-end lease and an open-end lease.

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In a closed-end lease you return the car at the end of the lease and are only responsible for excess mileage, wear and tear, and disposition. In an open-end lease, you pay the difference between the value stated in your contract and the lessor’s appraised value at the end of the lease.

Question 28

When are the end-of-term charges considered unreasonable in open-end leases? When can you be forced to pay these unreasonable charges?

Answer 28

When are the end-of-term charges considered unreasonable in open-end leases? When can you be forced to pay these unreasonable charges?

The end-of-term charges are considered unreasonable for open-end leases when the residual value exceeds the realized value by more than three times the base monthly payment. You can be forced to pay this amount when a lessor brings a successful court action after paying your reasonable attorney’s fees.

Unit 7. Applying for Credit

Credit Summary1. Check your credit report annually by requesting a free credit report from

www.annualcreditreport.com or contacting the three credit reporting services. Ask to correct any errors in writing to the credit rating service.

2. Opt out of pre-approved credit offers by calling 888-5-OPT-OUT (888-567-8688).3. Pay all your bills on time and don’t spend to your credit limit. Check to make sure that

your creditors post your payments in a timely fashion.4. Establish an emergency fund of 3 to 6 months.5. If you’ve been denied credit, check to see if the lender has violated any laws. File a

complaint if you feel this is the case.6. Maintain accurate records and reconcile your accounts.

What Creditors Look For The Three Cs. Creditors look for your credit and earning history to determine your ability to repay the loan and your responsibility record. They speak of the three Cs of credit:

Capacity. Can you repay the debt? Creditors ask for employment information: your job, how long you’ve worked, how many times you’ve changed jobs, and how much you earn. They also want to know your expenses and responsibilities: how many dependents you have, whether you pay alimony or child support, and the amount of your other loan obligations.

Character. Will you repay the debt? Creditors will look at your credit history to see how much you owe, how often you borrow, whether you pay bills on time, and whether you live within your means. They also look for signs of stability such as how long you’ve lived at your present address, whether you own or rent your home, and the length of your present employment.

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Collateral. What assets do you have? Creditors want to know what assets you may have to back up or secure your loan and other resources you have for repaying debt other than income, such as savings, investments, or property.

Creditors use different combinations of these facts to reach their decisions. Some set high standards and others are anxious to get you to borrow money. Creditors also use different rating systems. Some rely strictly on their own instinct and experience. Others use a “credit-scoring” or statistical system to predict whether you’re a good credit risk. Different creditors may reach different conclusions based on the same set of facts. One may give you the loan, while another may deny you a loan.

Also be aware that studies over the past 15 years show that credit reports can contain errors. In a study conducted by the National Association of State Public Interest Research Groups in 2004, it was found that 79% of all credit reports contain some type of error and 25% contained serious enough errors that those individuals could be denied credit. It is essential that you request your credit report annually and that you correct any errors you find. Credit reports are used to determine what interest rates to charge. Insurance companies routinely pull them to determine what kind of risk you are. About 35% of all employers use credit reports as pre-screening for employment; 40% of retailers do so.

Your Credit Score

Source: www.fico.com

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Payment HistoryYour payment history is the largest component of your credit score. In assessing your payment history, the credit company will look at account payment information on credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc. They will look to see if you paid on time or how long you were delinquent in payments. They will look for adverse public records such as bankruptcy (up to 10 years), judgments, suits, liens, wage attachments, collection items, and/or delinquency (up to 7 years on past due items). How long your payments were past due and how much you owed will figure into your payment history score. The number of past due items on file will be reviewed as will the number of accounts paid on time.

Amounts OwedA separate analysis is made of the amount owing on accounts. The credit rating company will look at the number of accounts, the amount owing on each account, proportion of credit lines used (how much of the credit limit) and proportion of installment loans still owning (proportion of balance as compared to original loan). If you have a tendency to spend up to your credit limit, that will count against you.

Length of Credit HistoryThe length of time since accounts have been opened will be considered and the time of the account activity will be considered. Anyone who has had a long history of paying on time will have a better credit rating.

New CreditAny number of recently opened accounts, and proportion of accounts that are recently opened, by type of account will factor into the new credit proportion of your credit score. Although there is legislation again this, the number of recent credit inquiries may affect your credit rating. Re-establishment of the positive credit history following past payment problems will also be examined.

Types of Credit UsedThe number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts) will be examined.

According to FICO, the score does not count inquiries initiated by you for your credit report, or promotional inquiries made by lenders in order to make you a pre-approved credit offer, or administrative inquiries made by lenders to review your account with them. Requests that are marked as coming from employers are not counted either.

Here is the distribution of FICO scores as of early 2007.

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Since employers may check your credit rating as part of application screening, it can figure in whether you get a job. Credit reports can be used for setting your insurance rates as well. Your credit score figures very much in the amount of interest you will be charged as can be seen by the table below. A person with a good FICO score could pay $200 less per month or almost $2500 per year. Over the life of a 30-year mortgage for $200,000, that could account for over $75,000 in interest.

FICO score Interest rateMonthly payment $200,000

30-yr fixed mortgage

760 - 850 5.78% 1,182.45

700 - 759 6% 1,210.82

680 - 699 6.18% 1,234.23

660 - 679 6.39% 1,261.77

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640 - 659 6.82% 1,318.90

620 - 639 7.37% 1,393.37

Source: www.fico.com 3/07

Information the Creditor Can’t Use The Equal Credit Opportunity Act bars discrimination based on age, gender, marital status, race, color, religion, and national origin. The act also bars discrimination because you receive public income, such as veterans’ benefits, welfare or social security, or because you exercise your rights under federal credit laws to file a billing error notice with a creditor. It does not guarantee that you will get the loan. You still have to pass the creditworthiness tests. The creditor cannot discourage you from applying for a loan, refuse you a loan if you qualify, lend you money on terms different from those granted another person with similar creditworthiness because of age, gender, marital status, race, color, religion, national origin, receipt of public income or because you exercise your rights under federal credit laws. Although creditors may not discriminate on the basis of national origin, they may consider your immigration status when making a loan decision.

In the past, many older persons have complained about being denied credit because they were over a certain age of when they retired. A creditor may ask your age to determine if you’re old enough to sign a binding contract (usually 18 or 21 years old depending on state law). A creditor may not turn you down, offer you less credit, or offer you less favorable credit terms because of your age. They cannot ignore your retirement income in evaluating your loan application. Nor can they close your credit account or require you to reapply for it because you reach a certain age or retire or may not be eligible for credit insurance because of your age. If you are 62 or older you must be given at least as many points for age as any person under 62 in credit scoring. The law lets creditors consider how long until you retire or how long your income will continue.

You may not be denied credit just because you receive social security or public assistance, such as Temporary Assistance to Needy Families (TANF). A creditor may consider such things as how old your children are if you may lose benefits when they reach a certain age or whether you will continue to receive the benefits.

The Equal Credit Opportunity Act bars discrimination because of characteristics such as your race, color, gender or because of the race or national origin of the people in the neighborhood where you live or want to buy your home. Creditors may not use any appraisal of the value of the property that considers the race of the people in the neighborhood. You are entitled to a copy of an appraisal report that you paid for in connection with an application for credit with a written request.

Many of the Equal Credit Opportunity Act’s provisions were designed to stop particular abuses that generally made it difficult for women to get credit. The general rule is that you may not be denied credit because you are a woman or because you are married, single, widowed, divorced, or separated.

Gender and Marital Status. Usually, creditors may not ask your gender on an application form (one exception is on a loan to buy or build a home). You do not have to use Miss, Mrs., or Ms. with your name on a credit application. But in some cases, a creditor may ask your marital status.

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Childbearing Plans. Creditors may not ask about your plans to have children, and they may not assume anything about those plans.

Income and Alimony. The creditor must count all of your income, even income from part-time employment. Child support and alimony payments are a source of income for many women and creditors must count them. A creditor may consider whether alimony and child support is steady and reliable.

Your Own Accounts. Women have the right to their own credit, based on their own credit records and earnings. It is a good idea to set up your own credit history. Your own credit means a separate account or loan in your own name which could be your last name, your husband’s name or a combined last name. You are not required to have your husband cosign for the account. Creditors may not ask for information about your husband or ex-husband unless that income is alimony, child support, or separate maintenance payments from your spouse or former spouse. This assumes that your husband is not responsible for paying the debt.

Change in Marital Status. Widowed or divorced women may face a cut-off of credit. The law says that creditors may not make you reapply for credit because you marry or become widowed or divorced. Nor may they close your account or change the terms of your account on these grounds. There must be some sign that your creditworthiness has changed because of your change in marital status.

New to CreditIt’s frustrating to know that you have to already have credit to get credit. Your salary and job and the other financial assets that you put on the application count for something but most creditors want to know about your track record in handling credit. They want to know how reliably you’ve repaid past debts. There are several ways you can begin to build a good credit history:

1. Open a checking account or a savings account or both. Cancelled checks can be used to show that you pay utilities or rent bills regularly, a sign of reliability.

2. Apply for a credit card. Repaying credit card bills on time is a plus in credit histories. 3. If you can’t open a credit card because of lack of credit history, ask whether you may

deposit funds with a financial institution to serve as collateral for a credit card. This secured credit card can support purchases up to the limit of your deposit. This is a good way to start a credit history without having the credit history.

4. You can offer to have someone cosign your application. But make sure that the cosigner understands the full extent of the liability.

5. If you’re turned down, find out why and try to resolve any misunderstandings.

Under the Equal Credit Opportunity Act, you must be notified within 30 days after your application has been completed whether your loan has been approved or not. If credit is denied, this notice must be in writing and must explain the specific reasons that you were denied credit. You have the same rights if an account you have had is closed.

Maintaining Complete and Accurate Credit Records Mistakes on your credit record can hurt your financial future. Your credit rating is important, so be sure that credit-bureau records are complete and accurate. The Fair Credit Reporting Act says that you must be told what’s in your credit file and have any errors corrected.

The three companies have set up a central website, a toll-free telephone number, and a mailing address through which you can order your free annual report. To order, click on

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annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. You may order your reports from each of the three nationwide consumer reporting companies at the same time, or you can order your report from each of the companies, one at a time.

If a lender refuses you credit because of unfavorable information in your credit report, you have a right to get the name and address of the agency that keeps your report and request a copy of the file. The law also says that the credit bureau must help you interpret the data in the report if you don’t understand it. If you’re questioning denial of credit made within the past 60 days, the credit rating service cannot charge a fee for giving you information.

If you notify the credit rating service about an error, generally it must investigate and resolve the dispute within 30 days of receiving your letter. The credit rating service will contact the creditor who supplied the data and remove any information that is incomplete or inaccurate from your credit file. If you disagree with the findings, you can file a short statement (100 words) in your record, giving your side of the story. Future reports to creditors must include this statement or a summary of it.

There is a limit on how long certain information may be kept in your file. Bankruptcies must not be reported after 10 years. However, information about any bankruptcies at any time may be reported if you apply for life insurance with a face value over $150,000, for a job paying $75,000 or more, or for credit with a principal amount of $150,000 or more. Suits and judgments paid, tax liens, and most other kinds of unfavorable information must not be reported after 7 years. Your credit record may not be given to anyone who does not have a legitimate business need for it. Stores to which you are applying for credit may examine your record; curious neighbors may not. Prospective employers may examine your record with your permission which often is granted when you sign an application form with the employer.

If you write to your creditor about an error the creditor must not release information to other creditors or credit bureaus that would hurt your credit reputation. Until your complaint is answered, the creditor cannot collect the disputed amount. If the creditor disagrees with your error and you do not pay in the time allowed, you may be reported as delinquent and the creditor may take action to collect. You can still disagree in writing and the creditor must report that you have challenged your bill and give you the name and address of each person who has received information about your account. When the matter is settled, the creditor must report the outcome to each person who has received that information. Remember that you may tell your own side in your credit record with a 100-word explanation.

Prompt Credit for Payments and Refunds for Credit Balances Some creditors will not charge a finance charge if you pay your account within a certain period of time, often called a grace period. This requires that you get the bill on time and that your payment is received on time. Check to see if your creditor bills according to the law. If your account is one on which no finance or other charge is added before a certain due date, then creditors must mail their statements at least 14 days before payment is due. Check the postmark to see if that is the case. Creditors must credit payments on the day they arrive. Check to see when the funds clear your bank account. This is a good method of verifying that your bank online service pays on a timely basis. If you pay more than the amount you owe or you return a purchase, the creditor must make a refund to you within seven business days after your written request or automatically if the credit balance still exists after six months.

Question 29

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Check all the factors that may be used to determine your credit standing:

Marital status _______

Gender ________

Age _________

Alimony paid ________

Whether you plan to have children _______

Stability of job ________

Income from public assistance __________

If you don’t fit in with the people in the neighborhood ________

How many loans you have ________

Whether you’ve been fired from your job _______

How much your monthly expenses are _________

Whether you were late in paying obligations ________

How old your children are _________

Immigrant status ______________

Answer 29

Marital status - only if your spouse is cosigning

Gender - No

Age – only if you are going to retire and have a drop in income

Alimony paid - Yes

Whether you plan to have children - No

Stability of job - Yes

Income from public assistance – They should include your income from public assistance.

If you don’t fit in with the people in the neighborhood - No

How many loans you have - Yes

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Whether you’ve been fired from your job - Yes

How much your monthly expenses are - Yes

Whether you were late in paying obligations - Yes

How old your children are - Yes

Immigrant status - Yes

Assignment 2 – Reading a Credit Report

Read the sample credit report. The sample credit report shows a judgment against you that never happened. What would you do to correct the error? How many days does the credit rating service have to respond to you? What action would you take if they responded that you were incorrect?

Students may download their own credit reports and reflect on what it shows.

Activity 1- FICO Score

Checking out your FICO score. To get a rough estimate of your FICO score, go to:http://www.bankrate.com/brm/fico/calc.asp?lpid=BKRATE29

Unit 8. Dealing with Credit Problems

Credit Problems Summary1. Remember, when dealing with credit problems, stay clam. Deal with the problem when it

is small. Don’t delay.2. Review your credit report and report problems or errors quickly.3. Seek financial counseling. 4. Maintain open lines of communication with your creditors and set forth reasonable

expectations regarding your ability to meet your obligations.5. List your debts and create a debt repayment plan. Stick to it.6. Consider using a portion of your safety net to help you with this crisis. Obtain a second

job. 7. Pay yourself first, put money into savings to ensure that once you make your way out of

this problem you don’t have to face it again.8. Be persistent and patient. Things will get better in the end. 9. Be aware of scams. Continue to protect your credit as you build your way out of the

problems.

Poor money management from compulsive shopping and buying things you can’t afford can result in credit problems. In this case, working towards a good spending plan is the path to take. But, the most common causes of credit problems are issues that people face every day and for the most part are not due to them. These include losing a job, divorce, death in the family, emergency expenses such as hospital bills, defective goods and services such as a car or roof, or fraudulent use of credit cards. It is important to plan for them by keeping an emergency fund.

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For some people, it’s important to assess your financial situation and determine whether or not you are financially stressed. These warning signs include maxing out credit cards, being charged late fees consistently, only paying the minimum of credit card balances, putting off going to see the doctor about a medical problem, working overtime or a second job just to pay for basic living, paying more than 40% of your income on debt servicing.

How to Deal with Credit Problems

These coping tips are adapted from Consumer Credit Counseling Services (CCCS), part of the National Foundation for Credit Counseling. For more, go to www.nfcc.org.

1. Stay calm and work your way slowly and surely through the problem. By taking action you are already improving the situation as it is better to manage the problem now before it gets bigger. Don’t delay. Take action now and make it a priority.

2. If you feel that an error caused your credit problem, tell the credit rating service what information you think is wrong (they must respond within 30 days). Provide copies (not originals) of documentation. Be diligent about monitoring your credit report.

3. Seek financial counseling right away. Use free counseling services that are listed in www.usdoj.gov/ust. It helps to have experienced and clear eyes looking at your problem. But be aware of credit counseling services (even though they claim to be nonprofit) that charge you fees.

4. Make a list of all the debts you owe with the creditor names and addresses. Call your lenders and creditors. Let them know you're having financial difficulties. Some of them have different credit standards and you may still be able to get credit to bide you over.

5. Prepare a realistic spending plan to pay down your debt. Some folks pay the higher interest rate debts first. Others pay smaller debts first so they can feel a sense of accomplishment that will help them tackle the rest. You might even be able to restructure your debt. They would rather you pay something than nothing at all.

6. If you have savings, consider using it to pay as many bills as you can. Consider selling some assets. Consider getting a second job to pay off your debt.

7. It might take longer than you thought for your financial crisis to go away. Be persistent with your creditors and payment plan. Establishing a good relationship will get you farther than running away from your obligations.

8. As you start to pull yourself out of the financial crisis, remember to set aside money for savings. This will give you a safety net for financial crises in the future.

The first step in getting out of debt is to identify what debts you have. To help you get a handle on how much you owe—and to whom—here's a handy worksheet to plan how to pay off these debts.

Debt Identification Worksheet

Debt owed $ Amount owed Owed to whom? Action taken

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Taxes (federal and/or state)

Alimony ex-spouse

Child support ex-spouse

Credit cards

Credit cards

Credit cards

Personal loan(such as a car)

Personal loan(other)

businesses

Personal loan family members

Personal loan friends

Back rent/ mortgage

Other debts

Once you’ve identified all your debts, put together a debt reduction plan using the worksheet below. Make steady payments and persist. For example an outstanding credit card balance of $9000 will take almost 5 years to pay off with the minimum $250 per month. If you make short-term sacrifices and pay $1000 per month, the debt will be gone in a year. Making extra payments whenever you can is a good way of reducing your interest charges. Don’t forget interest charges only add more to your debt.

Here are two ways you can choose between:

1. Put your worksheets in order with the highest interest rate first. You will pay down your debts faster and reduce your interest charges, if you pay more on the debt with the highest interest rate.

2. Pay the creditor with the smallest balance first to get rid of that debt. It might motivate you to see progress in reducing the number of creditors.

When you've paid off one debt, congratulate yourself. Celebrate your progress, and then start using that money to pay off another debt.

Interest Rate and Debt Payment Worksheet

Creditor: Debt is for:

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Interest rate Amount owedMonthly payment

Paymentdue date

Amount paidand date

Be aware that when you are having credit problems you will be enticed by all sorts of firms who will make promises such as creating a new credit identity for you or removing bankruptcies or bad loans from your credit files. These companies prey on desperate consumers with poor credit histories. They promise, for a fee, to clean up your credit report so you can get a car loan, a home mortgage, insurance, or even a job. Don’t believe these statements. No one can legally remove accurate and timely negative information from a credit report. You can dispute as inaccurate or incomplete and there is no charge for this. Everything a credit repair clinic can do for you legally, you can do for yourself at little or no cost. Only time, a concerted and persistent effort, and a personal debt repayment plan will improve your credit report.

According to the Federal Trade Commission, you should look for these signs of a scam. Watch out for companies that:

Want you to pay for credit repair services before they provide any services. Do not tell you your legal rights and what you can do for yourself for free. Recommend that you not contact a credit reporting company directly. Suggest that you try to invent a “new” credit identity — and then, a new credit report —

by applying for an Employer Identification Number to use instead of your Social Security number.

Advise you to dispute all information in your credit report or take any action that seems illegal, like creating a new credit identity. If you follow illegal advice and commit fraud, you may be subject to prosecution.

Know that you could be charged and prosecuted for mail or wire fraud if you use the mail or telephone to apply for credit and provide false information. It’s a federal crime to lie on a loan or credit application, to misrepresent your Social Security number, and to obtain an Employer Identification Number from the Internal Revenue Service under false pretenses.

By law, credit repair organizations must give you a copy of the “Consumer Credit File Rights Under State and Federal Law” before you sign a contract. They also must give you a written contract that spells out your rights and obligations. Read these documents before you sign anything. The law contains specific protections for you. A credit repair company cannot make

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false claims about their services, charge you until they have completed the promised services, perform any services until they have your signature on a written contract and have completed a three-day waiting period. During this time, you can cancel the contract without paying any fees. Your contract must specify the payment terms for services, including their total cost,a detailed description of the services to be performed, how long it will take to achieve the results, any guarantees they offer and the company’s name and business address. If you’ve had a problem with a credit repair company, don’t be embarrassed to report it. Contact the Washington State Attorney General’s office at www.atg.wa.gov.

If you are considering filing for bankruptcy, as of October 17, 2005, you must get credit counseling from a government-approved organization within six months before you file for bankruptcy relief. You can find a state-by-state list of government-approved organizations at www.usdoj.gov/ust. That is the website of the U.S. Trustee Program, the organization within the U.S. Department of Justice that supervises bankruptcy cases and trustees.

Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops. Their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.

Debt Management Plans

Credit counselors often arrange for you to pay debts through a debt management plan (DMP). You deposit money each month with a credit counseling organization and it uses these deposits to pay your bills, loans, and other debts according to a payment schedule they’ve worked out with you and your creditors. Creditors may agree to lower interest rates or waive certain fees if you are repaying through a DMP.

The FTC has found that some organizations that offer debt management plans (DMPs) have deceived and defrauded consumers. If you are paying through a DMP, contact your creditors and confirm that they have accepted the proposed plan before you send any payments to the organization handling your DMP. Once the creditors have accepted the DMP, it is important to make regular, timely payments and read your monthly statements promptly to make sure your creditors are being paid according to your plan.

If payments to your DMP and creditors are not made on time, you could lose the progress you’ve made on paying down your debt, or the benefits of being in a DMP, including lower interest rates and fee waivers. Although creditors may have forgiven late payments that you made before you began the DMP, this will not be the same once you are in a DMP. If you fall behind on your payments, your credit report will have “late” marks and you will rack up late fees.

If you are considering working with a credit counselor for the first time, the Federal Trade Commission recommends that you ask these questions:

1. What services do you offer?Look for an organization that offers a range of services, including budget counseling, savings and debt management classes, and counselors who are trained and certified in consumer credit, money and debt management, and budgeting. Counselors should discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems now and avoid others in the future. An initial counseling session typically lasts an

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hour, with an offer of follow-up sessions. Avoid organizations that push a debt management plan (DMP) as your only option before they spend a significant amount of time analyzing your financial situation. DMPs are not for everyone. You should sign up for a DMP only after a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered you customized advice on managing your money.

2. Are you licensed to offer your services in my state?Many states require that an organization register or obtain a license before offering credit counseling, debt management plans, and similar services. Do not hire an organization that has not fulfilled the requirements for your state.

3. Do you offer free information? Avoid organizations that charge for information about the nature of their services.

4. Will I have a formal written agreement or contract with you? Don’t commit to participate in a DMP over the telephone. Get all verbal promises in writing. Read all documents carefully before you sign them. If you are told you need to act immediately, consider finding another organization.

5. What are the qualifications of your counselors? Are they accredited or certified by an outside organization? If so, which one? If not, how are they trained?Try to use an organization whose counselors are trained by an outside organization that is not affiliated with creditors.

6. Have other consumers been satisfied with the service that they received?Once you’ve identified credit counseling organizations that suit your needs, check them out with your state Attorney General, local consumer protection agency, and Better Business Bureau. These organizations can tell you if consumers have filed complaints about them. The absence of complaints doesn’t guarantee legitimacy, but complaints from other consumers may alert you to problems.

7. What are your fees? Are there set-up and/or monthly fees?Get a detailed price quote in writing, and specifically ask whether all the fees are covered in the quote. If you’re concerned that you cannot afford to pay your fees, ask if the organization waives or reduces fees when providing counseling to consumers in your circumstances. If an organization won’t help you because you can’t afford to pay, look elsewhere for help.

8. How are your employees paid? Are the employees or the organization paid more if I sign up for certain services, pay a fee, or make a contribution to your organization?Employees who are counseling you to purchase certain services may receive a commission if you choose to sign up for those services. Many credit counseling organizations receive additional compensation from creditors if you enroll in a DMP. If the organization will not disclose what compensation it receives from creditors, or how employees are compensated, go elsewhere for help.

9. What do you do to keep personal information about your clients (for example, name, address, phone number, and financial information) confidential and secure?Credit counseling organizations handle your most sensitive financial information. The organization should have safeguards in place to protect the privacy of this information and prevent misuse.

To file a complaint or to get free information on consumer issues , visit www.ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261.

Activity: Develop a Debt Reduction Plan

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Make several copies of this worksheet—one for each company or credit card company to which you owe money. Then, list the interest rate, how much money you owe to each creditor, and how much you will pay off each month.

Using a Debt Reduction Plan you will soon see the amount you owe decrease, as you make steady payments. It will shrink even faster if you pay something extra whenever you can.

Put your worksheets in order with the highest interest rate first. You will pay down your debts faster and reduce your interest charges, if you pay more on the debt with the highest interest first.

Or you can pay the creditor with the smallest balances first to get rid of them to see progress in the number of creditors you owe. This is like a stair-step to financial success.

When you've paid off one debt, congratulations! Celebrate your progress, and then start using that money to pay off another debt.

Interest Rate and Debt Payment Worksheet

Creditor: Debt is for:

Interest rate Amount owedMonthly payment

Paymentdue date

Amount paidand date

Activity

Case Study in Debt Reduction The following register (used with permission) is from the credit card records of a family who had set up automatic bill payment on their bank account and was using their credit card as overdraft protection. The family had sufficient money to pay their bills but was not monitoring their account. Analyze what happened and what it cost.

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Answer

Keeping an accurate ledger book is a challenge when using funds from a joint account. My spouse and I became victim to late payment fees, high finance charges, overdraft fees, and cash advance fees. In this case, we were charged $873 in fees and $675 in cash advances while we had nothing material to show for the debt. We were not making purchases; all the cash advances were for bills we were paying through automatic bill-pay. It didn’t make sense to us because our account always looked like we had money in it, but it seemed we never had enough. The problem was not that we were paying our bills with money we didn’t have. In fact, we had enough money to pay all of our bills with money left over, but our account was set up to pay the bills on certain days; consequently, the bills were being paid and were posting before our paychecks were being posted. So our accounts appeared as if the funds were there when in actuality, they were not yet available. This allowed the bank to make cash advances from our credit card and say that it was for “Overdraft Protection.”

Also, notice the late payment fees. We had our account set up to pay our credit cards on time, including this one; however, we were still charged late payment fees. These were fees we hadn’t caught until we really started looking at our bills. I cringe when I imagine how many times we were probably over-charged in the past that we had not caught.

To get rid of this debt, I re-dated some of the automatic payments, started manually paying some of the bills, and transferred this balance to another card at 0% interest. Since we have good credit, we always get good offers, but the contracts are tricky and I find I have to read every offer with a fine-tooth comb. I am also very careful to make sure I either pay off the balance within the allotted time or transfer the balance before the introductory time-frame runs out.

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Unit 9. Protecting Your Wealth

Protect Your Wealth Summary1. Safeguard all your financial information. Shred or burn all old financial documents. Lock

up your financial documents.2. Don’t give out your social security number unless absolutely necessary. If you do, ask

how they protect your financial information. Ask for another identification number for most routine things. Check to see if your social security number is on the internet at StolenIDSearch.com.

3. Review all your credit card bills and reconcile with your receipts. Do the same with your bank statement. Check all your account statements to ensure that they are correct.

4. Review your credit report annually and correct any errors.5. Report fraud or file complaints when you find financial service companies have violated

the law.

The Federal Trade Commission received over 674,354 Consumer Sentinel complaints in 2006, 64% represented fraud and 36% were identity theft complaints. Identity theft occurs when a thief uses another person’s personal identification to open new credit card accounts, take over existing accounts, obtain loans in the victim’s name, or otherwise steal funds from the victim. Victims go through a difficult and time-consuming ordeal to clear their names. They must first try to convince the lenders and the credit-reporting agencies that they are victims of identity theft. They also must deal with calls from collection agencies and endless paperwork in trying to remove erroneous information and fraudulent accounts from a credit record.

Many victims of this fraud are unwittingly impersonated for years. They struggle to get their finances, jobs, and lives back in order. The thieves seldom discriminate. For instance, several cases filed with the Broward Sheriff’s Office in Ft. Lauderdale, Fla., revealed a variety of victims – from the unemployed to the self-employed and from an electrician to a judge. The main offenses committed were establishing public utility accounts, and obtaining credit cards to order merchandise in the victims’ names. Identity thieves target everyone.

Credit card fraud (28%) was the most common form of reported identity theft followed by phone or utilities fraud (19%), bank fraud (18%), and employment fraud (13%). Other significant categories of identity theft reported by victims were government documents/benefits fraud and loan fraud. The percentage of complaints about “Electronic Fund Transfer” related identity theft doubled between 2002 and 2004.

Thieves get information from Garbage – pre-approved credit cards, bank and credit card statements, and utility bills Mailboxes – both incoming and outgoing mail Loan applications – banks, car dealerships, mortgage companies Rental applications – cars or apartments Schools – classroom attendance sheets that list the student’s Social Security number Desk drawers in the workplace Certifications/licenses placed on walls (in the workplace) Job applications Health club applications Internet – information resulting from the sale of personal banking and investment details, chat

rooms, and false merchants Telephone companies

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Information freely given by the public – from warranty cards, for contests, to department stores, and “Win a Free Membership…” forms

Advice to avoid identity theft Don’t disclose any personal information that isn’t integral to a transaction. Don’t keep your Social Security card in your wallet; bring only the one or two credit cards that

you use regularly. Keep your Social Security number as private as possible. If a salesperson requests it, ask

why. If your health plan prints it on your membership card, ask for one without it. Don’t write it on your class attendance sheet (your school already has your number on official records). Divulge this number only for legitimate purposes, such as paying taxes, requesting credit, or obtaining a driver’s license. Check to see if your social security number is on the internet at StolenIDSearch.com.

Shred or burn mail containing personal information – from account numbers to travel itineraries.

Prevent mail theft. Have a locked mailbox. Don’t leave mail in your mailbox for the mail carrier. Don’t have new checkbooks delivered to your home.

Lock up your personal papers and canceled checks in your home, in case of a break-in. Be cautious on the telephone. Never give out your name, address, Social Security number, or

other personal information unless you initiate the call. Demand secure information handling. If you’re filling out a credit application at a department

store or auto dealership, find out what the establishment does with old applications. If it doesn’t lock them in file cabinets or shred them, take your business elsewhere.

Pay attention to your bills. If you suddenly stop receiving your mail, particularly bills, that could be a sign that someone has taken over your account.

Let federal, state, and local representatives know you’re concerned about this issue. Tell them you want tougher laws against identity thieves and better protection from the credit industry.

Source: Beth Givens, director of the Privacy Rights Clearinghouse, a nonprofit consumer information and advocacy program in San Diego, Calif.

Checking Credit ReportsFraud examiners recommend that people review their credit reports once a year; all three bureaus will need to be contacted.

Equifax – To order a credit report: 800-685-1111. To report fraud: 800-525-6285 Experian – To order a credit report and report fraud: 888-EXPERIAN (888-397-3742) Trans Union – To order a credit report: 800-888-4213. To report fraud: 800-680-7289

It’s also wise to opt out of pre-approved credit offers by calling 888-5-OPT-OUT (888-567-8688). A scam artist can retrieve a discarded credit card offer and send it to the company, saying, “Yes, I’m interested – and here’s my new mailing address!”

What To Do If You Are A Victim of Identity TheftThe Attorney General of Washington state suggests the following actions if you are a victim of identity theft.

Step 1: Call the toll-free fraud number of any one of the three major credit bureaus to place a fraud alert on your credit report.This can help prevent an identity thief from opening additional accounts in your name. As soon as the credit bureau confirms your fraud alert, the other two credit bureaus will automatically be notified to place fraud alerts, and all three credit reports will be sent to you free of charge.

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Step 2: Report the ID theft to your bank and other creditors.Ask to speak to someone in the security or fraud department. They may advise you to close your accounts and start over with new ones. Also, ask your financial institution what procedures they require of victims whose credit cards or checks have been stolen or forged.

Step 3: Report the ID theft to the police or sheriff in the area where you live.ID theft is a felony, and charges may be filed against the thief in the county where you live. Ask the police to make a police report and give you a copy. You will need this to help correct your credit rating.

Step 4: Consider requesting a credit report security freeze.A security freeze means that your credit file cannot be shared with potential creditors. A security freeze can help prevent identity theft since most businesses will not open credit accounts without checking a consumer's credit history first.You, too, will not be able to open new credit while a freeze is in place. Individuals can request that a freeze be temporarily lifted for the purpose of obtaining new credit.

Step 5: Send a copy of the police report to the three main credit reporting companies.The credit bureaus are required to block information victims identify as resulting from identify theft. Once the three consumer-reporting agencies receive the police report and a request from you, they are required to block any adverse credit reports resulting from the crime.

Step 6: Ask businesses to provide you with information about transactions made in your name.Under the Identity Theft law, businesses must give you this information, but may, if they choose, require proof of your identity—including a copy of the police report and your fingerprints. If you need to obtain your fingerprints for this purpose, the Washington State Patrol provides this service. You will pay a fee and will have to wait for processing before you receive a letter notifying you that the fingerprints are on file. Businesses refusing to provide information to you may be subject to actual damages, plus a $1,000 penalty for willful violations. You may present this letter to businesses and creditors as proof of your identity.

Step 7: Be prepared for contacts from creditors who may want you to pay the debts of ID thieves who used stolen or fake checks to make purchases or pay bills in your name.Explain to them that you have been the victim of identity theft. Provide them with the police report and, if you have one, an Order Correcting Records. Once the collection agency has been notified that the debt is a result of an identity theft, under the law the collection agency may not continue to call you. This prevents victims from being inundated with calls for every misused check if they have had a box or book of checks stolen or forged.Although calls might stop, you may still be subject to legal action by credit agencies. However, there are limits on what a collection agency can do to try to collect a debt from you. The Attorney General’s Consumer Protection web site provides more information about debt collection, or you can call the AG's consumer line at 1-800-551-4636.

Step 8: Contact the Federal Trade Commission’s Identity Theft Hotline, 1-877-IDTHEFT or visit http://www.ftc.gov/bcp/edu/microsites/idtheft/.Among other things, the FTC site provides a uniform http://www.ftc.gov/bcp/conline/pubs/credit/affidavit.pdf that is accepted and endorsed by many businesses.

Step 9: Tell the prosecuting attorney that if the person who stole your identity is found guilty, you'd like the court to issue you an Order Correcting Public Records.

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This is a Court Order you can use to correct public records damaged by identity theft. Show the Order Correcting Records to your bank and send a copy to your creditors so they can correct your records.

Your rights

According to the Federal Reserve, the following are the penalties allowed by law for violations of laws relating to banking and credit.

Truth in Lending and Consumer Leasing Acts. If any creditor fails to disclose information required under these acts, or gives inaccurate information, or does not comply with the rules about credit cards or the right to cancel certain home-secured loans, you as an individual may sue for actual damages and any money loss you suffer. In addition, you can sue for twice the finance charge in the case of certain credit disclosures, or if a lease is concerned, 25 percent of total monthly payments. In either case, the least the court may award you if you win is $100, and the most is $1,000. In any lawsuit that you win, you are entitled to reimbursement for court costs and attorney’s fees. Class action suits are also permitted. A class action suit is one filed on behalf of a group of people with similar claims.

Equal Credit Opportunity Act. If you think you can prove that a creditor has discriminated against you for any reason prohibited by this act, you as an individual may sue for actual damages plus punitive damages—that is, damages for the fact that the law has been violated—of up to $10,000. In a successful lawsuit, the court will award you court costs and a reasonable amount for attorney’s fees. Class action suits are also permitted.

Fair Credit Billing Act. A creditor who breaks the rules for the correction of billing errors automatically loses the amount owed on the item in question and any finance charges on it, up to a combined total of $50 even if the bill was correct. You, as an individual, may also sue for actual damages plus twice the amount of any finance charges, but in any case not less than $100 nor more than $1,000. You are also entitled to court costs and attorney’s fees in a successful lawsuit. Class action suits are also permitted.

Fair Credit Reporting Act. You may sue any credit-reporting agency or creditor for breaking the rules about who may see your credit records or for not correcting errors in your file. Again, you are entitled to actual damages, plus punitive damages that the court may allow if the violation is proved to have been intentional. In any successful lawsuit, you will also be awarded court costs and attorney’s fees. A person who obtains a credit report without proper authorization or an employee of a credit-reporting agency who gives a credit report to unauthorized persons may be fined up to $5,000 or imprisoned for one year or both.

Electronic Fund Transfer Act. If a financial institution does not follow the provisions of the EFT Act, you may sue for actual damages (or in certain cases when the institution fails to correct an error or recredit an account, for three times actual damages) plus punitive damages of not less than $100 nor more than $1,000. You are also entitled to court costs and attorney’s fees in a successful lawsuit. Class action suits are also permitted.

If an institution fails to make an electronic fund transfer or to stop payment of a preauthorized transfer when properly instructed by you to do so, you may sue for all damages that result from failure.

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Take action against fraud The best place to start with a complaint is with the Washington State Attorney General’s office http://www.atg.wa.gov/ or the Washington Department of Financial Institutions http://dfi.wa.gov/default.htm 1-877-RINGDFI. For more information on how to file a complaint, go to http://www.dfi.wa.gov/consumers/complaint.htm.

Complaints about discrimination in housing are covered by the Fair Housing Act. These complaints are investigated by the Federal Reserve and referred to the U.S. Department of Housing and Urban Development. First, please try to settle the problem directly with your bank. This may involve contacting senior bank management or the bank's customer service representative.

If you cannot resolve the problem with your bank, you may want to file a complaint with the appropriate federal regulator (see "Contacting Federal Agencies"). If you cannot identify the federal regulator, contact the Federal Reserve Board, and we will forward your complaint to the appropriate agency.

For complaints about state member banks, you can use the online complaint form https://federalreserve.gov/secure/iccs/iccsquery.cfm or file a written complaint with the Federal Reserve at:

Board of Governors of the Federal Reserve SystemDivision of Consumer and Community Affairs20th and C Streets, NW, Stop 801Washington, DC 20551Telephone (202) 452-3693.For more information, go to http://www.federalreserve.gov/pubs/complaints/.

Complaints about credit unions can be filed at:National Credit Union AdministrationOffice of Public & Congressional Affairs1775 Duke StreetAlexandria, VA 22314- 3428Phone: 1-703-518-6330

Complaints about finance, mortgage, credit card and credit bureaus can be filed at:Federal Trade CommissionCRC-240Washington, D.C. 20580Phone: 1-877-FTC-HELP (382-4357)For the online complaint form go to:https://rn.ftc.gov/pls/dod/wsolcq$.startup?Z_ORG_CODE=PU01

Activity: Protect Yourself --Take Quizzes on Identity Theft, Spyware, Phishing, Spam Scam Slam, Online Shopping

Go online to the OnGuard website to check your knowledge about many electronic crimes at www.onguardonline.gov/quiz There are a series of nine short fun, colorful quizzes to test your knowledge to protect yourself, your work or your family.

Sources

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AARP, Be a Wise Consumer, http://www.aarp.org/money/wise_consumer/

Be Crime Smart, Federal Bureau of Investigation, www.fbi.gov

Canadian government has an excellent explanation of credit reports. http://www.fcac-acfc.gc.ca/eng/publications/CreditReportScore/CreditReportScoreTOC-eng.asp. Review the two sample credit reports provided.

Center for Responsible Lending has many statistics on subprime mortgages and predatory lending. http://www.responsiblelending.org/index.html

Federal Trade Commission (FTC) Consumer Information-ID Theft, www.ftc.gov/ftc/consumer.htm www.ftc.gov/idtheft

Federal Deposit Insurance Corporation (FDIC) on interest only loans: http://www.fdic.gov/consumers/consumer/interest-only/index.html

Freddie Mac’s mortgage calculatorshttp://www.freddiemac.com/corporate/buyown/english/calcs_tools/

MyMoney.gov, America’s One Stop Shop for Free Personal Finance Information from the Federal Government, www.mymoney.gov

The ID Theft Resource Center, www.idtheftcenter.org/index.shtml

Washington State Attorney General, Identity Theft—A Guide for Consumers, www.atg.wa.gov

Washington State Department of Financial Institutions, Consumer Protection information, http://www.dfi.wa.gov/

San Francisco Federal Reserve has information on credit reports. http://www.frbsf.org/publications/consumer/creditreport.html

GLOSSARY

Adjustable-rate loans: Also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on a benchmark such as the London Interbank Offered Rate (LIBOR) or a treasury bond rate, but the loan agreement generally sets maximum and minimum rates. When interest rates rise, generally, so do your loan payments; and when interest rates fall, your monthly payments may be lowered.

Annual percentage rate (APR): The cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fees, and certain other credit charges that the borrower is required to pay. Here is an example of how repaying a loan over time can affect your APR.

APR 10% APR 18%Month Principal Interest Principal Interest

1     $7.96 $1.50 2     $8.02 $1.38 3     $8.09 $1.27

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4     $8.16 $1.15 5     $8.23 $1.03 6     $8.30 $0.91 7     $8.36 $0.78 8     $8.43 $0.66 9     $8.50 $0.53

10     $8.58 $0.40 11     $8.65 $0.27 12 $ 100.00 $ 10.00 $8.72 $0.14

$ 100.00 $ 10.00 $100.00 $10.02

Appraisal Fee: The charge for estimating the value of property offered as security. This fee should be included into your evaluation when comparison shopping between banks as not all lenders may require an appraisal.

Asset: An item owned by an individual or organization that has monetary value.

Automated Teller Machines (ATMs): Electronic terminals located on bank premises or elsewhere, through which customers of financial institutions may make deposits, withdrawals, or other transactions as they would through a bank teller.

Balloon Payment: A large extra payment that may be charged at the end of a loan or lease. For example, a loan may start off with the regular principal and interest and at the end of a specified period the balance of the principal may be due.

Billing Error: Any mistake in your monthly statement as defined by the Fair Credit Billing Act.

Business Days: Check with your institution to find out what days it counts as business days under the Truth in Lending and Electronic Fund Transfer Acts.

Closed-End Lease: A lease in which you are not responsible for the difference if the actual value of the item at the scheduled end of the lease is less than the residual value, but you may be responsible for excess wear-and-use charges and for other lease requirements.

Collateral: Property, such as stocks, bonds or a car, offered to support a loan and subject to seizure (may be taken from you) if you default.

Compounding: The interest earned on principle plus previously accrued interest.

Conventional loans: Mortgage loans other than those insured or guaranteed by a government agency such as the FHA (Federal Housing Administration), the VA (Veterans Administration), or the Rural Development Services (formerly know as Farmers Home Administration, or FmHA). These do not include subprime loans which are given to folks who might not qualify for a conventional loan.

Cosigner: Another person who signs your loan and assumes equal responsibility for it. It is not recommended that you cosign loans for others.

Credit: The right granted by a creditor to pay in the future to buy or borrow in the present; a sum of money due a person or business.

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Credit Bureau: An agency that keeps your credit record; also called a credit-reporting agency. There are three main credit reporting companies Equifax, Experian and Trans Union.

Credit Card: A card issued to you by a financial company to buy goods or services on credit (meaning you buy now and pay in a month) and borrow money. The best way to use credit cards is to pay your outstanding balance in full every month.

Credit History: The record of how you’ve borrowed and repaid debts including the amount of the debts and whether you paid on time or late and how late. Your credit history determines how much you are charged for credit.

Credit Insurance: Health, life, accident, or disruption of income insurance designed to pay the outstanding balance on a debt.

Creditor: A person or business from whom you borrow money.

Credit-Scoring System: A statistical system used to rate credit applicants according to various characteristics relevant to creditworthiness. A fico score is an example of a credit score.

Creditworthiness: Past, present, and future ability to repay debts. The record of how you’ve borrowed and repaid debts including the amount of the debts and whether you paid on time or late and how late. Your credit history determines how much you are charged for credit.

Debit Card (EFT Card): A plastic card, which looks similar to a credit card, that consumers may use at an ATM or to make purchases, withdrawals, or other types of electronic fund transfers. Transactions with debit cards are taken from your bank account usually within 24-hours. Often it is difficult to reverse the transaction.

Default: Failure to repay a loan or otherwise meet the terms of your credit agreement.

Disclosures: Information that must be given to consumers about their financial dealings.

Electronic Fund Transfer (EFT) Systems: A variety of systems and technologies for transferring funds electronically rather than by check. This includes direct deposit of your paycheck, online bill payment services, and electronic transfer of funds between banks.

Escrow: Money or documents held by a neutral third party prior to closing on the purchase of a house. It can also be an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance that may be due in the future.

Finance Charge: The total dollar amount credit will cost. This and the APR are the most important factors in evaluating a loan.

Fixed-rate Loans: Generally these have repayment terms of 15, 20, or 30 years. Both the interest rate and the monthly payments (for principal and interest) stay the same during the life of the loan. The interest portion of the monthly payment is larger at the beginning of the term and the principal portion is larger in the later part of the term.

Fraud: Intentional misrepresentation for illegal gain.

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Home Equity: The difference between what you paid for your home and what you get when you sell.

Home Equity Line of Credit: A form of open-end credit in which the home serves as collateral.

Interest Rate: The cost of borrowing money expressed as a percentage rate. Interest rates can change because of market conditions.

Joint Account: A credit account held by two or more people so that all can use the account and all assume legal responsibility to repay.

Late Payment: A payment made later than agreed upon in a credit contract and on which additional charges may be imposed. Credit card late payments may result in a higher interest rate.

Lessee: The party to whom the item is leased. In a consumer lease, the lessee is you, the consumer. The lessee is required to make payments and to meet other obligations specified in the lease agreement.

Lessor: The person or organization who regularly leases, offers to lease, or arranges for the lease of the item.

Liability: The dollar value of debts owed to others.

Liability on an Account: Legal responsibility to repay debt.

Loan origination fees: Fees charged by the lender for processing the loan and are often expressed as a percentage of the loan amount.

Lock-in: Refers to a written agreement guaranteeing a home buyer a specific interest rate on a home loan provided that the loan is closed within a certain period of time, such as 60 or 90 days. Often the agreement also specifies the number of points to be paid at closing.

Mortgage: a document signed by a borrower when a home loan is made that gives the lender a right to take possession of the property if the borrower fails to pay off the loan.

Net Worth: A person’s financial condition at a given time. Assets (things owned) minus liabilities (things owed) equals net worth.

Open-End Credit: A line of credit that may be used repeatedly, including credit cards, overdraft credit accounts, and home equity lines.

Open-End Lease: A lease agreement in which the amount you owe at the end of the lease term is based on the difference between the residual value of the leased property and its realized value. Your lease agreement may provide for a refund of any excess if the realized value is greater than the residual value. In an open-end consumer lease, assuming you have met the use and wear standards, the residual value is considered unreasonable if it exceeds the realized value by more than three times the base monthly payment (sometimes called the “three-payment rule”).

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Overages: The difference between the lowest available price and any higher price that the home buyer agrees to pay for the loan. Loan officers and brokers are often allowed to keep some or all of this difference as extra compensation. When comparison shopping between mortgages, it is important to include all fees in the calculations of APRs to properly compare.

Overdraft Checking: A line of credit that allows you to write checks or draw funds with an EFT card for more than your actual balance, with an interest charge on the overdraft.

Pay Yourself First: A practice that establishes an amount to be saved each payday and put into savings or invested.

Points: Fees paid to the lender for the loan. One point equals 1 percent of the loan amount. Points are usually paid in cash at closing. In some cases, the money needed to pay points can be borrowed, but doing so will increase the loan amount and the total costs. Include all points in the calculation of the APR.

Points and Origination Fees: Fees paid to the lender for the loan. One point equals 1 percent of the loan amount. Points are usually paid in cash at closing. In some cases, the money needed to pay points can be borrowed, but doing so will increase the loan amount and the total costs. An origination fee covers the lender’s work in preparing your mortgage loan.

Private mortgage insurance (PMI): Protects the lender against a loss if a borrower defaults on the loan. It is usually required for loans in which the down payment is less than 20 percent of the sales price or, in a refinancing, when the amount financed is greater than 80 percent of the appraised value.

Realized Value: (1) The price the lessor or assignee receives for the leased item at disposition, (2) the highest offer for the leased item at disposition, or (3) the fair market value of the leased item at termination. The realized value may be either the wholesale or the retail value as specified in the lease agreement.

Rescission: The cancellation of a contract. In some lending agreements such as home equity loans, the consumer is allowed 3 days to cancel a contract. This does not apply to mortgages.

Residual Value: The end-of-term value of the item established at the beginning of the lease and used in calculating your base monthly payment. The residual value is deducted from the adjusted capitalized cost to determine the depreciation and any amortized amounts. It is an estimate that may be determined in part by using residual value guidebooks. The residual value may be higher or lower than the realized value at the scheduled end of the lease.

Risk (Investment): The possibility that you may lose some (or all) of your original investment. In general, the greater the potential gain from an investment, the greater the risk that you might lose money.

Security: Property pledged to the creditor in case of a default on a loan; see collateral. When signing a rental lease, you may be required to submit a security deposit of a certain number of months.

Security Interest: The creditor’s right to take property or a portion of property offered as security.

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Service Charge: A component of some finance charges, such as the fee for triggering an overdraft checking account into use.

Social Security: A comprehensive federal benefit program that provides workers and their dependents with retirement income, disability income, and other payments.

Thrift institution: A general term for savings banks and savings and loan associations.

Transaction, settlement, or closing costs: May include application fees; title examination, abstract of title, title insurance, and property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorneys’ fees; recording fees; and notary, appraisal, and credit report fees. Under the Real Estate Settlement Procedures Act, the borrower receives a good faith estimate of closing costs at the time of application or within three days of application. The good faith estimate lists each expected cost either as an amount or a range.

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