Test Number 2 Flashcards
What is Credit?
means someone is willing to loan you money - called principal - in an exchange for you to repay it, usually with interest
Using a credit card to buy a car, house, etc
No money is needed up front
Common types of credit
Credit Card
Installment Loan
Student Loan
Mortgage
Credit Cards are given by :
Banks
Stores
Credit Unions
Gas Stations
Credit cards can…
can be used at almost any store,
no pay off deadline,
Monthly minimum payments vary,
Usually higher interest rates
Installment loans are given by :
Banks
Credit Unions
Auto Dealers
Financial Institutions
Installment Loans …
Used for larger purchases such as a car or appliances
Loan term can be a few months to years
Usually lower interest rates than credit cards
Student Loans are given by :
Banks
Credit Unions
Federal Gov
Student Loans…
Used to pay tuition and other college expenses
Loan term is usually up to 10 years
Monthly payments are usually set annually
Usually has a lower interest rate than an installment loan
Mortgage given by :
Banks and Credit Unions
Mortgage …
Used specifically for a loan to purchase a home
Usually repaid over 15-30 years
Monthly payments are set for the life of the loan
Annual Percentage Rate (APR)
- Tells you the cost of the loan per year as a percentage of the borrowed amount
- Law requires all lenders to calculate the APR the same say
The Goods of Credit
Convenience Protection Emergencies Opportunity to build credit Bonus and Special Offers
The Bads of Credit
Interest
Overspending
Debt
- The amount you have borrowed
Identity theftAnnual Fee
a yearly charge you pay for using credit
Finance Charge
The actual dollar cost of using credit
Origination Fee
The charge for setting up a loan
Loan Term
the length of the time you have to pay off the loan
Grace Period
the length of time before you accumulate interest
What is needed to get a credit card? (8 things)
Social Security Number Driver's License Date of Birth Address Phone Number Monthly income amount Total monthly payments for debt Amount of monthly rent or mortgage
The 4C’s
Collateral
Capital
Capacity
Character
Collateral
an asset of value that lenders can take from you if you do not repay the loan as promised
Capital
Lenders take comfort in knowing you have personal items of value
In the event that you do not pay your bills, lenders will want to know if you have items they can sell to repay the loan
Capacity
Lenders chief concern is whether you are able to repay your loan
Key factors of creditworthiness are your income and employment history
A pattern of steady income and rising employment, gives lenders confidence
Character
Lenders want to know if you are trustworthy
One way to look at your credit history
A history of paying your bills on time shows responsibility
Credit Report
a record of your personal financial transactions, or credit history
Basically your report card for 7-10 years
Credit Score
a number that reflects your creditworthiness, based on the 4C’s
Lenders want to know the risk they are taking
Who looks at your credit score?
Credit card companies When you apply to rent an appartment when you go to buy a house When you buy a cell phone Buy a car
FICO
Most popular credit score
Fair Isaac Corporation
How to build credit history
Always pay your bills on time
Make regular deposits into accounts
Apply only to credit card that fits your needs
Maintain a low balance and pay it off each month
What can affect your credit history?
One missed payment
“Bouncing” checks
Having many credit cards and loans
Maintaining a high balance on credit ards
