Personal Finance Credit Unit

What are 4 things to consider before taking out a loan?

Is it necessary?

Do monthly payments fit your budget?

Could you save up for it instead?

Is it worth the added interest?

How do you calculate your net worth?

What you own (assets) - what you owe (liabilities)

Credit

the ability to borrow money or access goods/services with the understanding you’ll pay later. Trust from lender that you’ll pay back what you owe (usually with interest)

Mortgages

long-term loan specifically for purchasing real estate, typically spanning 15-30 years. Your home serves as collateral, meaning the lender can take it if you fail to make payments

Loans

borrowed money for specific purposes like buying car, funding education, or starting a business. You receive a lump sum up front and repay it over time with interest through fixed monthly payments

Overdrafts

banking service that allows you spend more money than you have in your account, up to a certain limit. The bank charges interest on overdrawn amount until you pay it back

Credit Cards - Revolving

provide a credit limit that you can use repeatedly. As you pay down your balance, that credit becomes available again. You can carry a balance month to month but you’ll pay interest on the unpaid amount. Flexibility makes it convenient, but can be expensive if managed wrong

Non-Installment Loans

require full repayment by a specific date. Examples include payday loans (due on next payday) or certain business loans. Often carry higher interest rates/fees. Expensive and should be used cautiously

Regular Installment Loans

borrow a fixed amount and repay it through equal monthly payments over a set period. Includes college/auto/personal loans. Predictable payment schedule makes budgeting easier, and you know exactly when it will be paid off

Loan Principle

amount you’re borrowing

Loan Interest

% the financial institution charges you for lending you the money

Loan Term

the amount of time you have to pay it back

Secured Loan

have lower interest rates, collateral, and are less risky for lender

Unsecured Loan

no collateral, higher interest, more risky to lender

Collateral

something valuable the lender can take from you if you don’t pay back the loan

What are factors that determine interest rates?

• credit score (higher=lower rates)

• amount you borrow (more you borrow, longer term, higher interest)

• life situation (debt, job situation)

• Economy (rates set by central bank)

• Debt-to-income ratio

Cosigner

someone who agrees to pay back your loan if you fail to pay it back (have legal responsibility to pay back 100% of the loan)

Fixed Interest Rates

stay the same throughout the term (predictable, generally higher interest)

Variable Interest Rates

change based on a chosen index (unpredictable, generally lower interest)

Is an auto loan installment/revolving, secured/unsecured, or variable/fixed?

Installment, secured, fixed

Is a credit card installment/revolving, secured/unsecured, or variable/fixed?

revolving, unsecured, fixed

Is a mortgage installment/revolving, secured/unsecured, or variable/fixed?

installment, secured, could be either

Is a payday loan noninstallment/installment/revolving, secured/unsecured, or variable/fixed?

non installment, unsecured, fixed (high)

Is a personal loan from the bank installment/revolving, secured/unsecured, or variable/fixed?

installment, unsecured, could be either

Is a small business loan from the bank installment/revolving, secured/unsecured, or variable/fixed?

could be either, secured, could be either

Is a federal student loan installment/revolving, secured/unsecured, or variable/fixed?

installment, unsecured, fixed

Why do people pay use credit to pay for items instead of just using cash?

to build up their credit score so they can buy bigger thing on their own later for lower rates. They also use it for emergencies/large purchases they don’t have money for yet

When applying for credit, is it preferable to receive a low interest rate or high interest rate?

low because you’ll end up paying less

Sometimes, lenders allow or require a down payment before they extend you the loan. What would be the advantage to the lender? What would be the advantage to the borrower?

the lender would have some money back and available for them to use. It gives them some collateral against you

The borrower would already have some of their loan paid off and gain some trust from the lender

How does a credit card work?

the bank lends you a certain amount of money (line of credit) that you agreed to pay back after a certain amount of time (usually a month)

What is the advantage of paying your credit card balance in full each month?

you don’t have any outstanding debt or pay any interest. You get to spend the full limit next month

What is an outstanding balance?

the money you haven’t paid back to the credit card company

Why is it more difficult to get out of debt when only paying the minimum payment on a credit card?

because you owe the money you didn’t pay last month plus interest on it. Then, you also owe the money you spend in the next month

What does it mean to be a “deadbeat”?

pay off all your debt veery month on time and owe nothing/pay no late fees

What is a key difference between credit and debit cards?

debit: you spend money you already have in your account

Credit: you borrow money from a bank up to a limit and pay it back later (sometimes with interest, if paid late)

What could happen if you mix up your credit and debit card?

fees, overspending, debt

Annual Fee

yearly charge just for having the card. Some have $0 fees, others can cost $100+. Sometimes it’s worth it if your card gives you perks like travel dollars or cash back

APR

annual percentage rate; the interest rate you pay if you carry a balance. 15% APR means 15% on what you owe

Penalty Fees and Rates

charging you for breaking rules, like paying late. Late fees can be $40+

Grace Period

a window (usually 21-25 days) to pay your bill in full without interest. Only applies if you paid last month’s balance fully

What are was payday loans are attractive to borrowers?

• they are typically fro amounts lower than $500 that seem smaller and easier to pay back

• they usually do not use underwriting to assess your risk as a borrower

• they have minimal requirements to obtain the loan like having an ID and proof of income

What two ways do payday loans end up being very expensive to borrowers?

• payday lenders often charge the equivalent of 400-500% APR on their loans

• borrowers often use their credit cards to pay off payday loans and end up paying more in interest charges

What are two reasons payday loans are considered predatory?

• their high interest rates

• they don’t use underwriting

What are potential consequences of not paying off a payday loan?

• your credit score could drop significantly

• you could be taken to court for the balance of your loan

• your wages could be garnished or a lien put on your property

How do you find total interest?

Principe x rate x time

When loan payments are amortized, the total amount you owe every month is…

the same

Why does the amount of interest you pay decrease each month?

because the amount you owe in principal decreases over time

What happens to the monthly principal paid over time?

the amount that you owe towards principal increases since interest decreases. Allows you to pay off loan in a shorter time

What are the four main sections of a credit report?

• personal info (name, address, SSN, employment history)

• credit accounts—“tradelines” (your credit cards, loans, payment history)

• public records (bankruptcies, tax liens, court judgements)

• Inquiries (who has checked your credit and when)

What is the connection between a credit report and credit score?

credit report is the history, a multi-page document with lots of details about you

Credit score is like your grade, summarizes all information on your report in a 3 digit number

How long do financial records remain on your credit report?

usually 7 years

What are 2 reasons why you should request your 3 credit reports and review them regularly?

because there might be errors and you want to see how things you’re doing are affecting your score

How can you obtain a free copy of your credit report?

annualcreditreport.com

What is the scale of credit scores?

300-850

What are the 5 parts of your credit score?

• frequency of new credit

• types of credit used

• length of credit history

• amounts owed

• payment history

What % of your credit score does frequency of new credit make up?

10%

What % of your credit score does types of credit used make up?

10%

What % of your credit score does length of credit history make up?

15%

What % of your credit score does amounts owed make up?

30%

What % of your credit score does payment history make up?

35%

What is credit utilization?

this is part of the “amount owed” category. The percentage of your total credit lines that you have used

What should you keep your credit utilization at?

at 30% or lower (owe 300 on a card with a 1000 limit)

What are the 3 big credit reporting companies?

Experian, Equifax, transunion

What can sabatoge your credit score?

late or missed payments, high credit card balances, too many new credit applications, bankruptcies and collections

Why do lenders and landlords look at credit reports?

so they can decide whether to approve your loan and what interest rate to charge. They want to be sure you will pay back what you’re supposed to

What is included in your credit report tradelines?

payment history, current balances on your loans, when you opened your credit accounts

What is the #1 rule for paying debt?

pay at least these minimum on all your debts every month (don’t make it worse)

Snowball Method

approach prioritizes quick psychological victories to keep you motivated through your debt-free journey.

What are the steps of the Snowball method?

1. pay all minimums

2. attack smallest debts first (every extra dollar goes towards that)

3. roll it forward; once smallest debt is eliminated take all the money you were paying on it (minimum + extra) and use it on the next smallest debt

4. build momentum—repeat this process, watching your available “attack” money grow larger with each debt you eliminate

High Rate Method

also known as the Avalanche method; targets debt that is costing you the most money and saves you the maximum amount in interest charges. Is the fastest and more logical approach Why is

High Rate Method steps

1. pay all minimums

2. attack the highest rate (every extra dollar toward debt with highest interest rate)

3. move to next highest (roll all payments to next highest interest rate)

Why is it important to pay at least the minimum payment every month on your debts?

so you don’t end up having t pay more in interest/fees and risk your credit score dropping

Debtor

an individual, organization, or government that owes a debt or financial obligation to another party, known as the creditor. They are liable for repaying borrowed money

Creditor

a country, organization, or individual to whom money is owed. They are lenders who provide credit/loans and may charge interest

Secured Debt

debt that is backer by collateral which the lender has a lien on

Unsecured Debt

debt created without any collateral promised to the creditor

Exempt Property

any property creditors cannot seize and sell in order to satisfy debt during bankruptcy

Property Lien

a legal claim to a person’s property by their credit to recover an unpaid debt/obligation

Who can declare Chapter 7 bankruptcy?

an individual, partnership, corporation, businesses, etc

What happens to debt in chapter 7 bankruptcy?

discharges many of your debts

Who can declare chapter 13 bankruptcy?

individuals only

What happens to the debt in chapter 13 bankruptcy?

gives you a repayment plan for your debts for 3-5 years. After that, remaining debt is discharged

What debt is not excused through bankruptcy?

alimony, child support, fines/legal penalties, and sometimes student loans

What are some potential positive outcomes for filing bankruptcy?

provides relief from debt and offers fresh financial start

What are some potential negative outcomes for filing bankruptcy?

damages credit scores and can lead you to lose property

What money given to students is free money?

grants and scholarships

What money do students have to pay back?

loans

Finance Charge

cost paid by a borrower for accessing credit, encompassing interest and any additional fees associated with a loan

Penalty Rate

an elevated interest rate applied to your credit card balance due to contract violations like late payments or exceeding your credit limit.

Single Payment Loan

A loan that you repay with one single payment at the end of a specified period of time