Debt Management Flashcards
Identify benefits of a high credit score.
Easier time obtaining a loan Lower interest rates when borrowing Easier time renting an apartment/home Lower premiums on some insurance Increased appeal to employers
When assuming steady future income and a goal of accelerating the paydown of debt, what strategy should a planner recommend?
Prioritize debts and allocate extra cash flow only to highest-interest-rate debt (while making minimum payments required on all other debts)
What assets are exempt in a consumer bankruptcy?
Qualified retirement plans
Deferred compensation
Annuities
Cash value life insurance
Residence (partial based on exemption amounts)
Rollover IRA (amount is unlimited)
Roth and traditional IRA (up to $1,000,000 indexed)
Limited QTP/529 Plan contributions (depending on amount and time of contribution)
How are the 28% and 36% housing ratios calculated?
Principal, interest, taxes, and insurance (PITI) < = Monthly Gross Income ⇐ 28%
(PITI + All Other Recurring Debt) < = Monthly Gross Income ⇐ 36%
Depending on the contextual factors, debt can be viewed as:
Problematic or strategic
A credit score is based on what?
Payment history, making payments on time: 35 percent
Balances outstanding, including unsecured-debt-to-credit ratio or utilization ratio: 30 percent
Credit history, how long accounts have been open: 15 percent
Applications for new credit accounts (called hard inquiries): 10 percent
Variety of credit accounts (e.g., mortgages, car loans, credit cards): 10 percent
Define “credit score.”
A number that rates a person’s credit risk at a particular point in time and predicts the likelihood of his/her defaulting on a loan
What negative information may be included in a credit report?
Missed payments
Accounts in default
Public records data (e.g., tax liens, judgments, bankruptcies)
Identify the information found on credit reports.
Personal information
Credit accounts (including payment history)
Collection items
Pubic records
What are the primary uses of credit reports?
Help lenders decide whether to extend credit or approve a loan; determine interest rate; data for calculating a credit score
Provide data on past financial behavior for prospective employers, landlords, insurance companies, and other companies (cable TV, Internet, utility, or cell phone)
Differentiate between Chapter 7 and Chapter 13 consumer bankruptcy.
Chapter 7 is considered liquidation bankruptcy.
Chapter 13 is considered income-based bankruptcy.
For how long can most negative information be included on a credit report?
Seven years, but no longer (Exception: Chapter 7 bankruptcy stays on a report for ten years.)
