Personal Finance Chapter 7 – Credit Cards and Consumer Loans (AFCPE)

Installment Credit (closed-end credit) Credit arrangement in which the borrower must repay the amount owed plus interest in a specific number of equal payments.
Open-ended (revolving) credit Arrangement in which credit is extended in advance of any transaction so that borrowers do not need to reapply each time they need to use credit.
Credit Limit Maximum outstanding debt that a lender will allow on an open-ended credit account
Minimum Payment Payment that must be made to a credit account each month to cover interest and a portion of the amount owed.
Principal Total amount owed on a credit account not including interest.
Bank Credit Card Account Open-ended credit account with a financial institution that allows the holder to make purchases almost anywhere
Annual Percentage Rate The cost of credit on a yearly basis stated as a percentage rate.
Consumer Credit Non business debt used by consumers for expenditures other than home mortgages.
Two Types of Consumer Credit Installment and NonInstallment
Noninstallment credit Single payment, open-ended credit and service credit.
Credit (Charge) Card Plastic card identifying the holder as a participant in the charge account plan of a lender, retailer or financial institution.
Cash Advances Cash loan from a credit card account
Personal line of credit Form of open ended credit that allows the borrower access to a prearranged revolving line of credit provided by the lender. Includes a credit limit and flexible repayment schedule.
Credit Service Granted to consumers by public utilities, physicians, dentists and other service providers that do not require full payment when services are rendered.
Home-equity line of credit Personal line of credit for which your home equity is the collateral.
Balance Transfer Full or partial on the balance of one credit card using a cash advance from another.
Retail Credit Cards Allow customers to make purchases on credit at any of the outlets of a particular retailer.
Annual Fees Charges levied against cardholders for the privilege of having an open account but that are not included in the advertised APR
Transaction Fee Charge levied against cardholders per use of the card that is not included in the APR advertised
Introductory Rate A temporarily low initial interest rate to entice borrowers to apply for a credit card.
Default Rate A high APR that is assessed whenever a borrower fails to uphold certain rules of the account such as making on-time payments or staying within the specified credit limit.
Variable interest rate cards Cards with rates that change monthly or annually according to general changes in the economy as a whole
Credit Statement The monthly bill on a credit card account showing the charges and payments made, minimum payment required, and due date among other information; also called a periodic statement.
Billing/Closing/Statement Date The last day for which any transactions are reported on the credit statement.
Grace Period Time period between the posting date of a transaction and the payment due date during which no interest accrues.
Minimum payment amount Lowest allowable monthly payment required by the lender.
Credit Receipt Written evidence of any items returned that notes the specific amount and date of the transaction.
Periodic Rate The APR for a charge account divided by the number of billing cycles per year (usually 12)
Average Daily Balance Sum of the outstanding balances owed each day during the billing period divided by the number of days in the period.
Fair Credit Billing Act Helps people who wish to dispute billing errors on revolving accounts.
Chargeback The amount of the transaction is charged back to the business where the transaction originated in the case of a dispute or challenge by the cardholder.
Dunning Letters Notices that make insistent demands for repayment.
Promissory Note Written installment loan contract hat spells out the terms of the loan.
Unsecured loan/Signature Loan Loan granted based solely on borrower’s good creditworthiness.
Secured Loan Loan that is backed by collateral or a cosigner.
Lien A legal right to seize and dispose of (usually sell) property to obtain payment of a claim. Once the loan is paid the lien is removed.
Acceleration Clause Part of a credit contract stating that after a specific number of payments are unpaid (often just one), the loan is considered in default, and all remaining installments are due and payable upon demand of the creditor.
Truth in Lending Act (TILA) Requires lenders to disclose to credit applicants both the interest rate expressed as an annual percentage rate and the finance charge.
Variable-rate (adjustable-rate) loans Loans for which the interest rate varies with the monthly payment going up or down, allowing the loan to be paid off by the original end date.
Declining-Balance Method Interest calculation method in which interest is assessed during each billing period (usually each month) based on the outstanding balance of the installment loan that billing period.
Amortization Loan repayment method in which part of the payment goes to pay interest and part goes to repay principal. Extra payments toward principal shorten the life of the loan and decrease the total amount of interest paid.
Add-on Interest Method Interest is calculated by applying an interest rate to the amount borrowed times the number of years to arrive at the total interest to be charged.
Prepayment Penalty Special charge assessed to the borrower for paying off a loan early.
Rule of 78s method/sum of the digits method for calculating prepayment penalties A common method of calculating the prepayment penalty on a loan that uses the add-on method for calculating the interest.
Discount Method of Calculating Interest Interet is calculated based on a discount rate multiplied by the amount borrowed and by the number of years to repay. Interest is then subtracted from the amount of the loan and the difference is given to the borrower. In this method, interest is paid up front before any part of the payment is applied to the principal.

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