ANSWER KEY.
I teach financial fundamentals to hundreds of 20-30 year olds each year, I can tell you very few understand the fundamentals of savings and credit. If you're reading this, ask yourself a few questions:
Credit Cards:
What are the intended purposes of a credit card?
- Save money by leveraging Cashback, Travel points, travel and car rental insurances, buyer protections
- Grace period on purchases: use the bank's money free for 21-51 days.
- Building credit history and score
- Simplifying purchases for online shopping, hotel stays, car rentals
- Peace of mind knowing you have access to credit in an emergency
Explain how interest is computed on a credit card?
Cards carry 2 or more balances, usually at different rates (purchases, cash like transactions, and special financing transactions). Interest is calculated on the daily closing balances then posted at the end of each statement cycle. When card balances are paid in full, interest on purchases (only purchases) is waived.
What is late, what is delinquent?
Most card payments are due 21 days after the statement date. Late is typically after 30 days, delinquent is typically after 60 days.
Can increasing your credit limit increase your credit score?
Yes if you keep the balance below 30% of your credit limit, otherwise no. For example, if you carry a $1,500 balance on a card limit of $2,000, increasing your credit limit to $5K will normally increase your credit score as long as you keep the card balance at or below $1500.
What level of credit card utilization causes your credit score to drop?
Above 30% - if you do not pay your card down to 30% of the credit limit after each statement there is a chance it will negatively impact your credit.
How many days can you use the bank's money for free (before getting charged interest)?
21-51 days on purchases depending on when you made the purchase. For example, if your statement is generated on June 25 and you purchased something on June 25 you will have a grace period of 21 days. If you made that purchase May 26(the day after your last statement) you could use the bank's money 51 days!
Savings:
What are the 3 main reasons for savings?
- Rainy day fund to cover unforeseen expenses or income gaps
- To make a large purchase - big screen tv, motorcycle, home, wedding, vacation
- Retirement
If you put $100 biweekly into a RSP savings plan and reinvest the dividends & tax refund, how much will you have in 5 years?
Between $17,000-$20,000 would be conservative.
Explain a simple saving strategy.
Having an automatic contribution or transfer from your chequing account to a savings account. Some employers offer RSP programs through payroll deductions, any financial institution can set up an automatic transfer for you.
General:
If you carry 10K balance on a credit card, what is your annual carrying cost?
$2,100/year. If you carried 0 and put the equivalent interest charges into savings, how much would you have after 5 years.
Approx $16,000
What percentage of your gross income will most lenders considerable reasonable for housing costs, taxes and debt payments?
36% to 42% -- above 42% gets tough.
.... Now, if you have reasonable financial acumen you can answer those questions without the use of a calculator or the internet in about 5 minutes.
Then they actually try to convince you it's a bad idea to own things, then I leave and go buy it elsewhere.
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