Financial Background – Q and A

ANSWER KEY

We are going to examine some pages online, each regarding a short lesson on a specific economic issue that is based on budgets and personal finance. As we read, you will be responsible for answering the following questions either on this sheet or a separate sheet of paper.

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  1. What things do you need in order to write a check?

You need to open a checking account with a bank, savings and loan, or credit union; you have to deposit money into your checking account; you have to purchase checks from your bank.

  1. How do you bounce a check? What penalty is there for bouncing a check?

If you write a check for more than what is in your checking account you will be charged a fee by the bank.

  1. Describe three ways to protect yourself from check fraud.

Write your checks in pen; always write the numbers as far to the left as you can; if you lose blank checks call the bank immediately to let them know.

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  1. Why is it important to live on a budget?

It is a blueprint for your financial well-being; it is a foundation for good financial habits.

  1. What are the main components of a budget?

Keep track of where your money is spent; look at discretionary spending on things like food, clothing, and entertainment; keep track of your mortgage or rent payment; car loan; credit cards; utilities; internet; insurance; savings and investment; travel; and gas.

  1. What are ways that you can reach a balanced budget if your expenses are more than your income?

Cut down on discretionary expenses; increase your income; manage your debt by using debt consolidation; pay off your highest interest credit card first; if you get paid biweekly take your “extra paychecks” on the five Fridays and apply them toward your debt.

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  1. What are the main things used to calculate a person’s credit score?

His or her credit payment history, current debts, time length of credit history, credit type mix and frequency of applications for new credit.

  1. What is considered the top range for a credit score?

800+

  1. What items make up your credit score?

Previous credit performance, current level of indebtedness, time credit has been in use, types of credit available, and pursuit of new credit.

  1. What are ways that you can improve your credit score?

Pay more than the minimum, and work out a plan if you fall behind on debt. You can switch from credit to debit cards, and/or cut up store credit cards that have high interest rates. You can add comments to your credit report if there is some discrepancy or a situation you would like to explain to potential creditors. Other ways: make loan payments on time; avoid overusing your credit; be aware the type of credit you have; keep your outstanding debt low; limit your number of credit applications.

  1. What are the reasons why your credit rating is so important?

Your credit is checked for a credit card, a mortgage, or even a phone hookup; it makes it possible for stores to accept checks, and for banks to issue credit or debit cards.

  1. Why is it important to check your credit yearly?

It is important to check your credit yearly to see if there are any errors or mistakes and to make sure someone isn’t using your credit that you are unaware of.

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  1. What is the difference between a charge card and a debit card?

If you use a charge card you must pay off the balance in full each time you get your statement or you have to pay interest. A debit card allows you to make purchases in real-time by accessing money from your checking or savings account.

  1. What is the APR? Why is this rate important to understand?

APR is a measure of the cost of credit, expressed as a yearly interest rate. It is important to understand because it explains how much the finance charge will be for you for each billing period.

  1. What are some fees that may be charged if you use a charge card? List at least three types of fees and/or charges.

Examples of fees: annual fees; transaction fees for a cash advance; transaction fee for when you exceed your credit limit.Some charge a monthly fee if you use the card or if you don’t each month.

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  1. What are the four types of insurance that financial experts recommend all people have?

Life insurance, health insurance, long-term disability coverage, auto insurance.

  1. What are three arguments for why you need to carry each of the types of insurances above?
  2. Life insurance: to provide for those you leave behind; if you have someone dependent on your income; to pay for existing expense and funeral expense; to provide your family a financial cushion
  3. Health insurance: your family is one serious illness away from bankruptcy; 62% of all bankruptcies in the US were caused by health problems in 2007; even minimal coverage will help pay for expensive hospital stays
  4. Long-term disability coverage: 3 in 10 workers entering the workforce will become disabled before retirement; nearly 12% of the U.S. population is currently disabled and nearly 50% are in their working years; to prepare in case you cannot work for weeks to months or maybe never return to your job; disability causes nearly 50% of all mortgage foreclosures; every 10 minutes 498 Americans become disabled; will guarantee you have some income when you can’t work
  5. Auto insurance: 10 million traffic accidents in 2009; 33,808 people died in accidents in 2009; number one cause of death for Americans age 5 to 34 is auto accidents; over 2.3 million drivers and passengers received treatment in emergency rooms in 2009; cost of the accidents including death and disabling injuries was $70 billion; fines if you do not have auto insurance and even possible suspension of your license; you can lose your home if you get in an accident without insurance