PFL: Credit and Debt Flashcards
Summarize the advantages
and disadvantages of
using credit.
adv: convenience, record keeping, build credit, perks (like points), buy things you cant afford yet
dis: have to verify statement (paperwork), can deepen debt if you are careless, high cost fees (if you miss)
Explain why using a
credit card is a form of
borrowing.
when you use a credit card, you borrow money, then pay it off every month
Explain how interest rate,
compounding frequency
and loan length affect the
cost of using credit.
cost of credit: the amount extra you pay on purchases
longer loan period + smaller monthly payments = larger COC
(coc disclosure: lender must tell borrower the coc)
Calculate the total cost
of repaying a loan under
various rates of interest
and over different periods.
compound:
A = P(1+(r/n))^nt
simple:
I = PRT
Discuss potential
consequences of using
“easy access” credit
short term, high interests loans (ex pawn shop)
Explain how individuals use
debt as an investment.
leveraging: borrowing money to invest, knowing that you will make more gains , so you can pay off the debt and make a profit
Explain how credit card grace periods, methods of interest calculation and fees affect borrowing costs.
grace period = usually 21 days
borrowing cost is the total cost of a debt obligation, including interest payments and other fees.
borrowing cost of a business tends to go up when market interest rates rise during inflation.
Categorize the types of
information needed when
applying for credit
- gross annual income
- SIN (optional)
- current and previous employers
- information on other cards held
Compare the total cost of reducing a credit card balance to zero with minimum versus above minimum payments, all other terms being equal and no further purchases being made
credit card balance = the amount of charges to credit card company
paying the minimum is the slowest path to zero
Decide the most cost-effective
option for paying
for a car.
- cash (cheapest but difficult for most)
- bank loan
- dealer financing plan (often more than bank loan)
- lease (good but have to return after, limit on km)
borrowing adds to the cost of the car. cash if you can, but if you need a loan, find the cheapest
Differentiate among various types of student loans and alternatives as a means of paying for post-secondary education
- deferred student loan: start paying off the loan after
- direct subsidized loans (student must display fin need)
- direct unsubsidized loans (doesnt need fin need)
- direct PLUS loans (grad students, pay for expenses other than tuition)
- direct consolidation loans (combine all student loans into one)
Predict the potential
consequences of deferred
payment of student loans
consequences of deferred student loan - if you cant find a job right out of school, you might fall into debt, are you willing to increase the total amount you owe?
Differentiate between
adjustable- and fixed-rate
mortgages
adjustable: rate periodically adjusted based on index that shows the cost of lender borrowing on the credit market
fixed rate: obvious…
Explain the effect of debt
on a person’s net worth.
net worth = assets - liabilities
the bigger the liabilities, the lower the difference (net worth)
Weigh the potential payoffs of a positive borrowing reputation versus the potential consequences of a poor borrowing reputation.
good credit score = easy to get loans, jobs, rent
bad = might be unable to open bank account, hard to get loans, high interest rates on loans you get, security deposit on utilities, high insurance premiums
