After graduating from college last fall, Arlene Dukes 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 Arlene several steps
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?

Several steps she could take to begin building a strong credit record are:
*First steps in establishing credit
Open checking and savings account => signal stability to lenders and indicate that you handle your finan
Use credit: open 1-2 charge accounts and use them periodically
Obtain a small loan
*Build a strong credit history => Consistently make payments on time
Explain the loan situation for the loan officer
Ask for an extension of 1-2 months on your loan
Pick up where you left off and resume your normal monthly payments on the loan
*How much credit can you stand?
Monthly payment burden < 20% of your monthly take-home pay
Debt safety ratio closer from 15%/10%
icate that you handle your financial affairs in a businesslike way
 Monthly consumer loan payments & debt safety ratio

Name: Beverly Smitham

Type of loan Current monthly payment

Auto and personal loan $ 380
Overdraft protection line $ 60
Personal line of credit $ 120
Credit cards $ 85
Total monthly payment $ 645

Monthly take-home pay $ 3,320

Debt safety ratio 19.43%

Changes needed to reach a new debt safety ratio

1. Target debt safety ratio 12.5%
2. At current home pay of $ 3,320
Total monthly payment must be equal to $ 415
Or
2. With current monthly payment of $ 645
Total take home pay must equal to $ 5,160
debt safety ratio Beverly Smitham is evaluating her debt safety ratio.
Monthly take-home pay $ 3,320
Auto loan $ 380
Personal line of credit $ 120
Department store charge card $ 60
Bank credit cards $ 85

Maximum amount of monthly debt payment ? Is she wants her deb

Given her current monthly debt payment load, Beverly's take-home pay
 ? Is she wants her debt safety ratio is 12.5%
y's take-home pay ? If she wants a 12.5% debt safety ratio
Bill and Ethel Patterson have a home with:
Home value $ 180,000
Mortgage balance $ 90,000
Loan-to-value ratio 75%
Total loan amount that bank can lend them $ 135,000 (Home value*Loan to value ratio)
Home equity credit line $ 45,000

>>>The homeowners are allowed to fully deduct the interest charges on home equity loans up to $100,000
alue*Loan to value ratio)

up to $100,000
 The Average Daily Balance and Finance Charge

Number of days Balance (1) x (2)

(1) (2) (3)
(i) 1-Jun 3 $ 386 $ 1,158
(ii) 4-Jun 8 $ 523 $ 4,184
(iii) 12-Jun 8 $ 601 $ 4,808
(iv) 20-Jun 1 $ 699 $ 699
(v) 21-Jun 5 $ 664 $ 3,320
(vi) 26-Jun 5 $ 739 $ 3,695
Total 30 $ 17,864

Average daily balance $ 595.47

Finance charge $ 89.32

William Douglas recently received his monthly Mastercard bill for the period
June 1-30, 2010, and wants to verify the monthly finance charge calculation, which
is assessed at rate of 15% per year and based on average daily balances including
new purchases. His outstanding balance, and payments are as follows:
Previous balance: $ 386
Purchases: Payments:
4-Jun $ 137 21-Jun $ 35
12-Jun $ 78
20-Jun $ 98
26-Jun $ 75

Calculate number of days:

(i) From June 1 to June 4 (1,2, 3
(ii) From June 5 to June 12 8
(iii) From June 13 to June 20 8
(iv) June 21 1
(v) From June 22 to June 26 5
(vi) From June 26 to June 30 5
Total 5
ulation, which
ily balances including
as follows:
Name: Bill Henderson
Loan amount $ 10,000
Term 5 years
Interest rate 9%
Periods in a year 12

a. Total interest owed

simple interest method $ 5,656.81
add-on method $ 4,500
b. Bill's monthly payment is: $207.58
c. Difference of monthly payments of 2 methods: $ 1,156.81
 AN INVENTORY OF CONSUMER DEBT

Name: Burt Simmons

Current Monthly Latest Balance

Type of Consumer Debt Creditor
Payment Due
Auto loan New car loan $ 375$ 8,600
Personal loan $ 85$ 750
Home mortgage $ 750$ 70,000
Home improvement loan $ 125$ 4,000
Single-payment loan $ 2,000
Credit card Visa card $ 40 $ 960
Shell credit $ 70
Personal line of credit $ 60 $ 1,200

Total $ 1,435 $ 87,580

Debt safety ratio 57.40%

Debt safety ratio is more than 20% (57.40% > 20%)
> Relying too much on credit
> This ratio is considered to be bad
Every 6 months, Burt Simmons takes an inventory of the consumer debts he has
outstanding:
Home improvement loan $ 4,000 monthly payments $ 125.00
Personal loan $ 750 monthly payments $ 85.00

Secured, single-payment loan $ 2,000

Home mortgage $ 70,000 monthly payments $ 750.00
New car loan $ 8,600 monthly payments $ 375.00
Balance:
Visa card $ 960 minimum payments $ 40.00
Personal line of credit $ 1,200 monthly payments $ 60.00
Shell credit $ 70
Take-home pay $ 2,500
 BUY ON TIME OR PAY CASH

Name: Marrie Herrera

COST OF BORROWING
1. Terms of the loan
a. Amount of the loan $ 4,500
b. Length of the loan (in years) 3
c. Monthly payment $ 143.10
2. Total loan payments made $ 5,151.56
(monthly loan payment x length of loan in months)
3. Less: Principal amount of the loan $ 4,500.00
4. Total interest paid over life of loan $651.56
5. Tax considerations
Is this a home equity loan? No
Do you itemize deductions on your federal tax returns? Yes
6. Federal tax bracket 28%
7. Taxes saved due to interest deduction 0

Total after-tax interest cost on the loan $ 651.56

COST OF PAYING CASH

9. Annual interest earned on savings $ 225.00
(Annual rate of interest earned on savings x amount of loan)
10. Annual after-tax interest earnings $ 162.00
11. Total after-tax interest earnings over life of loan $ 486.00

NET COST OF BORROWING

12. Difference in cost of borrowing vs. cost of paying cash $ 165.56

>>>> She should pay cash for the entertainment center

 Marie Herrera wants to buy a home entert
Loan
Interest
Term
*Calculate monthly payment Installment loan rate
Loan $ 4,500.00 Tax bracket
Term 36
Installment loan rate 9%
PMT $143.10
Marie Herrera wants to buy a home entertainment center.
$ 4,500.00
5%
36 months
Installment loan rate 9%
Tax bracket 28%
 BUY ON TIME OR PAY CASH

Name: Marrie Herrera

COST OF BORROWING
1. Terms of the loan
a. Amount of the loan $ 4,500
b. Length of the loan (in years) 4
c. Monthly payment $ 111.98
2. Total loan payments made $ 5,375.17
(monthly loan payment x length of loan in months)
3. Less: Principal amount of the loan $4,500.00
4. Total interest paid over life of loan $875.17
5. Tax considerations
Is this a home equity loan? Yes
Do you itemize deductions on your federal tax returns? Yes
6. Federal tax bracket 28%
7. Taxes saved due to interest deduction $83.14

Total after-tax interest cost on the loan $ 792.03

COST OF PAYING CASH

9. Annual interest earned on savings $ 225.00
(Annual rate of interest earned on savings x amount of loan)
10. Annual after-tax interest earnings $ 162.00
11. Total after-tax interest earnings over life of loan $ 648.00

NET COST OF BORROWING

12. Difference in cost of borrowing vs. cost of paying cash $ 144.03

>>>> No change
 Marie Herrera wants to buy a home entert
Money fund
Interest
Term
*Calculate monthly payment installment loan rate
Loan $ 4,500.00 Tax bracket
Term 48 Rate of home equity loan
Installment loan rate 9%
PMT $111.98
Marie Herrera wants to buy a home entertainment center.
Money fund $ 4,500.00
5%
48 months
installment loan rate 9%
Tax bracket 28%
Rate of home equity loan 9.5%