PFIN3 Study Set 1

Business

Quiz 6 :

Using Credit

Quiz 6 :

Using Credit

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After graduating from college last fall, Jessica Stevens took a job as a consumer credit analyst at a local bank. From her work reviewing credit applications, she realizes that she should begin establishing her own credit history. Describe for Jessica several steps that she could take to begin building a strong credit record. Does the fact that she took out a student loan for her college education help or hurt her credit record?
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Credit is an amount used through credit card to buy (or) full fill our personal requirements. Here Ms. J is wise enough to create her own credit history. She should start recording her credit history by opening a bank account and applying for credit cards.
Then, she should use these credit cards and start paying the bills in due time promptly. If she had paid the interest of the education loan on time, then taking the education loan will demonstrate her eligibility to meet her loan obligation.

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David and Joan Mead have a home with an appraised value of $180,000 and a mortgage balance of only $90,000. Given that an S L is willing to lend money at a loan-to-value ratio of 75 percent, how big a home equity credit line can David and Joan obtain? How much, if any, of this line would qualify as tax-deductible interest if their house originally cost $200,000?
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According to the provision of the tax code, all of the interest paid on home equity loan would be fully deductible (for federal purposes). It makes no difference what the original cost of the house is. The only concerned part is the indebtedness of the house does not exceed the fair market value.
A house owner is allowed to fully deduct his interest charges on home equity loan up to $100,000.
The original cost of the house is $200,000.
The home appraised value is $180,000.
The mortgage balance is $90,000.
The loan to value ratio is 75%.
Calculate the loan amount at loan-to value ratio as follows:
img Therefore, the loan amount is
img .
Calculate the maximum amount of home equity credit line as follows:
img Therefore, the home equity credit line is
img .
Conclusion:
Mr. D and J home equity line is within the limit i.e. $45,000; hence, it is completely tax deductible.

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Robert Denby has a monthly take-home pay of $1,685; he makes payments of $410 a month on his outstanding consumer credit (excluding the mortgage on his home). How would you characterize Robert's debt burden? What if his take-home pay were $850 a month and he had monthly credit payments of $150?
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Calculate the Debt safety ratio; if he has taken monthly home pay of $1,685:
Debt safety ratio is a ratio (or) proportion of total monthly consumer credit obligations to monthly take-home pay. This debt safety ratio is a bit above the maximum suggested unit of 20%. Hence, Robert should be cautious about incurring any more debt before he pays off his current obligations.
img Hence, his debt safety ratio is;
img Therefore, the debt safety ratio is 24%, if he has taken monthly home pay of $1,685
Calculate the debt safety ratio; if he has taken monthly home pay of $850:
img Hence, his debt safety ratio is;
img Therefore, the debt safety ratio is 18%, if he has taken monthly home pay of $850
Conclusion: This is within the recommended guidelines. Hence, 18% is closer to the suggested limit of 20%, so, he would try to reduce his debt load.

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Isaac Primack recently graduated from college and is evaluating two credit cards. Card A has an annual fee of $75 and an interest rate of 9 percent. Card B has no annual fee and an interest rate of 16 percent. Assuming that Isaac intends to carry no balance and pay off his charges in full each month, which card represents the better deal? If Isaac expected to carry a significant balance from one month to the next, which card would be better? Explain.
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Use Worksheet 6.1. Rebecca Collins is evaluating her debt safety ratio. Her monthly takehome pay is $3,320. Each month, she pays $380 for an auto loan, $120 on a personal line of credit, $60 on a department store charge card, and $85 on her bank credit card. Complete Worksheet 6.1 by listing Rebecca's outstanding debts, and then calculate her debt safety ratio. Given her current take-home pay, what is the maximum amount of monthly debt payments that Rebecca can have if she wants her debt safety ratio to be 12.5 percent? Given her current monthly debt payment load, what would Rebecca's take-home pay have to be if she wanted a 12.5 percent debt safety ratio? img
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Lei Sung was reviewing her credit card statement and noticed several charges that didn't look familiar to her. Lei is unsure whether she should "make some noise," or simply pay the bill in full and forget about the unfamiliar charges. If some of these charges aren't hers, is she still liable for the full amount? Is she liable for any part of these charges-even if they're fraudulent?
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Janine Waite has several credit cards, on which she is carrying a total current balance of $14,500. She is considering transferring this balance to a new card issued by a local bank. The bank advertises that, for a 2 percent fee, she can transfer her balance to a card that charges a 0 percent interest rate on transferred balances for the first nine months. Calculate the fee that Janine would pay to transfer the balance, and describe the benefits and drawbacks of balance transfer cards.
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