Credit (Personal Finance)

Credit When goods, services, or money are received in exchange for a promise to pay back a definite sum of money at a future date.
Who is the lender? Credit card company.
5 Cs of credit worthiness Character, capital, capacity, collateral, and conditions.
Character A person’s honesty and reliability, determined by their history of paying bills.
Capital A person’s net worth and how much a person has in savings or tied to major assets
Capacity A person’s job stability, the number of loans currently being paid, and how much cash surplus a person has.
Collateral Property that can be taken if a person doesn’t repay a loan.
Conditions The general state of the economy (the only characteristic people can’t control).
Close-ended credit/installment credit A one time loan that has a specified amount of equal payments. Example: mortgage.
Open-ended credit/revolving credit Credit is extended in advance with payments that vary. Example: credit card.
Advantages of credit Convenient, you don’t have to use your own money right away, you can stretch amount owed into payments, etc.
Disadvantages of credit Interest, credit card companies can try to trick you, minimum payments build up, you might end up paying more than you would if you just paid it in full up front, etc.
What are the benefits of using credit wisely? A consumer can receive products/services, rebates (cash back), additional warranties, travel accident insurance, etc.
What are ways to establish good credit? Paying bills on time, paying loans on time, having a longer history of using credit, etc.
What are ways to establish bad credit? Not paying bills on time, choosing minimum payments, taking out loans for things that aren’t necessities, etc.
Why should you comparison shop for a credit card? Cards have different incentives and interest rates.
What is a Schumer Box? It contains information about your current credit card balance. Credit card companies are required to provide this information
What act started the Schumer Box? Truth and Lending Act.
According to the 20-10 rule, what percentage of your annual and monthly income should be held by debt? 20% annual. 10% monthly.
What is the past due amount? The required amount not paid before the due date.
What is the amount that must be paid each month to avoid penalty fees? Minimum payment.
What happens to the purchase price when you only make the minimum payment? The loan ends up costing more than the original object you purchased.
Credit report A record of an individual’s past borrowing and repaying history.
What information is found on an individuals credit report? Personal information, account summary, negative items, and credit inquiries.
Where can you get your credit report? Equifax, TransUnion, and Experian.
How many times can you get your credit report for free? 3 times (one from each credit reporting agency).
What is the range for credit scores? 300-850.The higher, the better.
Credit card Preapproved credit, charged now payed later, pay interest.
Debit card No interest, linked to a bank account, money is immediately taken from bank.
Interest Price of borrowing money to make a purchase and pay later. Rates vary.
Fair Isaac Company (FICO) The most common credit scoring system.
What are the categories used to determine your credit score? Payment history (35%), outstanding debt (30%), credit history and length (15%), pursuit of new credit (10%), and credit mix (10%).
Which category has the greatest weight? Payment history (35%)
Annual percentage rate (APR) for purchases Interest rate charged for amount borrowed per year.
Grace period for purchases Amount of time allowed before finance charges are applied.
Minimum finance charges Minimum amount charged for card use.
Balance calculation method for purchases Method used to determine balance for finance charges.
Annual fees Yearly charge for credit card ownership.
Transaction fees for cash advances Cash withdrawal fees.
Late payment fees Penalty fee for payments not made by the due date.
Closing date Last day for transactions are reported on a statement.
Credit line The maximum amount of charges allowed to an account
Charges, payments, and credits The transactions which occur with the use of a credit card.
Finance charges Charges assessed for credit card use.
Balance transfers Transfer balance from one card to another
Over credit limit fee Credit card companies will charge consumers a fee if they go over their limit.
Past due amount The required amount not paid before the due date
New balance The total amount owed on a credit card.
Minimum payment due The minimum amount to be paid
Due date The day by which the company requires a payment to be made.
Credit application A form requesting information about a person’s ability to repay debt
Credit Reporting Agency (CRA) Keeps records of consumers credit history.
Equal Credit Opportunity Act Prevents discrimination based on…Race, religion, nationality, age, gender, and marital status.

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