Unit 3 Flashcards
Credit
Goods, services, and/or money received IN EXCHANGE TO PAY IT BACK IN THE FUTURE
Credit history
Record of the borrower’s past loan and credit-related transactions
Credit Score
A numerical summary of your credit history that indicates your credit worthiness
Credit Limit
the amount of money you are authorized to spend on your card
Interest
Interest is charged each month the balance is not paid in full
Annual Percentage Rate
(APR) Rate at which interest is charged on your credit card, expressed in a %. The cost of credit expressed as a yearly interest rate
Minimum payment
The minimum amount owed each month to keep your account in good standing.
Loans 3 Components
The principal
the interest rate, and
the loan term
Installment
Loan which the borrower must repay the amount in a specified number of equal payments, signing a contract in advance with the repayment terms such as a mortgage, student loan, or car loan
Revolving
Extended line of credit established in advance Loan may be paid (usually monthly) in a single payment or series of (un)equal payments such as a credit card
Secured
Debt is tied to a specific asset that can be used as collateral and repossessed for nonpayment
Unsecured
Debt is not tied to a specific asset; there is NO collateral
Fixed Rate
Interest rate remains constant throughout the length of the loan
Variable Rate
Interest rate can change during the length of the loan based on prime or an index rate
Credit card
Revolving, Unsecured, Variable rate
Mortgage Loan
Installment, Secured, Fixed Rate
Student loan
Installment, Unsecured, Fixed rate
Payday loan
Revolving, Unsecured, Variable Rate
Why are you spending future income when you use credit?
When borrowing, individuals are spending their future income because they are committing to making payments for a specified amount of time to pay back the loan.
What is the difference between a debit card, credit card, and prepaid card?
A debit card withdraws money immediately from your checking account. You must HAVE the money to spend it! A credit card allows charges to accumulate over the billing month with at least a minimum payment due when the bill is received. You PROMISE to PAY the money back in the future. A prepaid card acts like a credit card but you pay the money to buy the card in advance and when the money on the card is spent, it is no longer usable.
What are typical sources of credit?
depository institutions, credit card companies, auto dealers
What is predatory lending? What are some “tricks” used by predatory lenders to get you to take out a loan?
Lending practices that impose unfair and abusive loan terms on borrowers. Tricks include
Focus on people in “difficult” situations, Create sense of urgency, Guaranteed approval / no credit check, Quick access to cash, Evade traditional banking rules, Small type to hide terms
What is the process to get a credit card?
Fill out a credit application with your personal information and information about your ability to repay. Your credit history will be checked to see whether you are a good credit risk. Be sure to shop your credit offers!
How does the amount paid on your credit card bill impact the interest charges you will incur (be charged)? What is the impact of ONLY paying the minimum each month?
You pay very little towards the principal and the interest continues to accumulate. It will be very expensive (additional interest) and take a long time to pay off your bill. The more you pay, the quicker you pay it off and the less interest & fees you pay.
What are the advantages and disadvantages of using credit/credit cards?
Advantages
No need to carry cash
Useful for emergencies
Hold a reservation
Purchase “big ticket” items and spread out payments
Protection against fraud and safer online shopping
Establish a positive credit history
Possibility of receiving bonuses & rewards
Disadvantages
Interest can be costly when not paid in full each month
Additional penalty fees may apply
Tempting to overspend
If not used responsibly, it will have a negative impact on your credit score
How do you develop a good credit history?
Pay your credit card balance in full each month, be conscious of how credit cards affect your credit history, pay your credit card bills on time, check yous statement for fraud
What information do lenders & data furnishers provide to the Credit Reporting Agencies?
Lenders usually report all information positive and negative
What are the 4 main areas of a credit report and what types of information does each contain?
Personal information (who you are), public information (like bankruptcy and unpaid taxes), trade lines/account information (accounts you have opened and closed & how you’ve managed them), public inquiries (made from potential lenders about your credit usage)
What elements go into your credit score? (NOTE: specific percentages are NOT required)
Payment History (most important), Debt-to-Credit Ratio/Credit Utilization (how much credit you’re using compared with your credit limit), Length of Credit, Types of Credit, Inquiries and New Credit
How does your credit score affect the APR you will likely receive when you apply for new credit?
The higher your credit score, the lower the APR will be
What to do if you get into debt?
First, try to come up with a payment strategy to pay the loan off. If that is not possible, Call the lender to negotiate terms, finally. Call a Consumer Credit Counseling Services to help you come up with a plan
