Financial Literacy - Credit

Credit

A medium of exchange which allows individuals to buy goods or services now and pay for them later

Closed-end

A loan for a specific amount that must be repaid with finance charges by a specific date

Finance charge

The total amount the borrower must pay the lender for the use of credit

Contract

A legally binding agreement between the borrower and the creditor; it states the terms of a loan

Principal

The amount borrowed

Open-end credit

Allows the borrower to use a specific amount of money for an indefinite period of time

Secured loan

A loan that requires collateral

Collateral

The property that a borrower promises to give up in case of default

Default

When the borrower fails to pay the debt; creditor may take collateral

Unsecured loan/signature loan

A loan made on the strength of a person’s signature

Cosigner

A person with strong credit rating who also signs on the loan; responsible for repaying the loan if the borrower defaults

Creditworthy

One who is judged to have the assets, income, and tendency to repay debt

Credit report

A record of a person’s credit history and financial behavior

Credit score

Rates your creditworthiness at that point in time; based on payment history, amounts owed, credit history, new credit, and types of credit used

Annual percentage rate (APR)

The amount cost of credit charged by a lender

Line of credit

The preapproved amount that an individual can borrow

Credit card

A piece of plastic that allows the cardholder to make credit purchases

Cash advance

A loan against the available credit on your account

Store credit card

Issued by major department store chains to charge purchases

Travel and entertainment card

Usually require you to pay the entire balance each month

Regular charge account

Let’s you charge goods and services in exchange for a promise to pay in full within 25 days of the billing date, no finance charge if paid in full and on time

Revolving credit account

Choice of paying in full each month or spreading payments over time, minimum payment and finance charge are required if not paying in full

Acceleration clause

Allows the creditor to require full and immediate payment of the entire balance if you miss a payment or fail to abide by contract

Grace period

The time between purchase billing date and the start of interest charges, during which you may pay the full balance without interest

Collection agency

Businesses that specialize in debt collection for other businesses

Repossession

Taking back collateral when borrower fails to repay a loan

Foreclosure

A forced sale of a property (home)

Lien

A legal claim on a borrower’s property by a creditor who is owed money

Garnishment

A legal procedure that reduces debtors’ paychecks to pay their creditors

Bankruptcy

When the court excuses debtor from some or all of debt in return for debtor giving up certain assets and possessions

Chapter 7 Bankruptcy

Most common; court sells the debtor’s possessions with proceeds divided among creditors, home and car may be excluded

Chapter 13 Bankruptcy

Court sets up a 3–5-year payment schedule, creditors may not take action against the debtor

Credit counseling service

Provides debt and financial management advice and services at little or no cost

Loan shark

Lends money at excessive interest rates

Easy-access credit

Short-term loans regardless of credit history at high interest rates

Payday loans

Short-term, high interest loans; borrowers must provide personal check, or access to their bank account

Pawnshop

Provides high-interest loans with personal property held as collateral

Rent-to-own

Agreements that require consumers to pay much more than the product’s purchase price

Title loan

High-cost loan in which the borrower’s car is collateral

Credit fraud

Fraudulent use of someone else’s credit information

Identity theft

Stealing someone’s personal information and using it to commit theft or fraud

Phishing

Emails that seek your personal information by claiming to be a business where you may have an account

5 C’s of Credit

Character

Capacity

Capital

Collateral

Conditions

Character

One of the five C’s of credit; sometimes called credit history, it refers to a borrower’s reputation or track record for repaying debts; appears on the borrower’s credit reports

Capacity

One of the five C’s of credit; measures a borrower’s ability to repay

Capital

One of the five C’s of credit; lenders also consider any assets or wealth the borrower may put toward a potential investment

Collateral

One of the five C’s of credit; something pledged as security for repayment of a loan, to be forfeited in the event of a default; can help a borrower secure loans

Conditions

One of the five C’s of credit; the conditions of the loan, such as its interest rate and amount of principal, influence the lender’s desire to finance the borrower; refers to how a borrower intends to use the money