Test Time

In the spirit of the new school year, here’s a pop quiz with 5 financial questions (and answers)

OK. It’s quiz time.

Parents, grab a No. 2 pencil and your teenager (he can help you with this test-taking business). In fact, this is a quiz that will be good for the two (or three) of you to take together.

Below are five questions to test your basic banking knowledge. The answers are supplied by Brad Norton, senior vice president of marketing and development for Utah Community Credit Union.

And, yes, this is an open-book test.

1. What is an IRA and how is it different than a money market?
An IRA, or Individual Retirement Account, provides either a tax-deferred or tax-free way of saving for retirement. A traditional IRA allows tax-deductible contributions of up to $5,000 per year (more if you are over age 50). Whatever you contribute toward your IRA comes off your yearly income, thereby reducing total tax liability. However, once the money in an IRA is withdrawn, it is subject to standard income taxes and an additional 10 percent penalty if withdrawn before the age of 59 1/2. Roth IRAs were created in 1997 to help middle-class Americans. These IRAs are not tax-deductible, but provide even greater flexibility than traditional IRAs. Generally, if you expect to be in a lower tax bracket when you retire than the one you’re in now, a traditional IRA is a better choice.

The rule of thumb for IRA vs. money market is simply liquidity. If you are sure you are not going to withdraw funds, then go ahead and put money into your IRA. However, if you anticipate needing to use these funds, you would be better off in a money market savings account.

2. What is the difference between a home equity loan and a home equity line of credit?
A Home Equity Line of Credit (HELOC) allows you to draw funds, up to a predetermined limit, whenever you need money. There is generally a minimum payment due each month, with the option to pay off as much of the line as you want. The way that you draw and repay funds for a HELOC is similar to the way you draw and repay funds for other revolving lines of credit, such as a credit card.

With a Home Equity Loan (HEL), you receive a lump sum of money and have a fixed monthly payment that you pay off over a predetermined time period. In each case, the amount you can borrow is based on factors such as your income, debts, the value of your home, how much you still owe on your mortgage and your credit history.

3. What are some common options for saving money for college?
One of the best tools to use when saving for college is Utah’s 529 college savings plan (www.uesp.org). Other popular options include savings accounts designed specifically to limit withdrawals and at the same time provide high money market yields. For example, UCCU offers a Money Smart Youth Saver account that allows one penalty free withdrawal per year and pays higher rates.

4. How does automatic bill payer work?
When you receive a bill that needs to be paid, simply login to your online or mobile banking account. Search for your payee in the national database or enter the name of the payee. Enter the account number that your Payee/Vendor has assigned to you, enter the amount to be paid, choose the day that you would like the money to come out of your account and click “Pay Vendor.” It’s that simple. And most bill payer services are now free. No more checks, envelopes or stamps. In short, it’s awesome.

5. What is the difference between using my debit card and using a credit card?
Debit cards are a tool to access the funds in your checking account. Debit cards are simply an alternative to check writing.

Credit cards are a tool to access a line of credit. Every time you use a credit card you are borrowing money. Consequently, you must apply and be approved for a credit card where debit cards rarely require an approval process.

A common misunderstanding with debit cards arises when you pull your debit card out of your wallet or purse to make a purchase and you are given the option of paying using “debit” or “credit.” Don’t be confused. Either payment method still accesses the funds in your checking account. If you choose “debit” you are simply using the ATM network to access the funds in your checking account. That’s why your PIN number completes the transaction. If you choose “credit” you are simply using the VISA network to access the funds in your checking account. That’s why your signature completes the transaction.

So, how did you do? E-mail editor@uvmag.com and let us know of any other money questions you have. We’ll see what we can do to help you pass that next test! UV