Chapter 8 Financial Literacy

Credit

is an agreement between two parties in which one party lends money or provides goods or services to another party with the understanding that payment will be made at a later date

Creditor

the lender, the party to whom money is owed

Debtor

the borrower, one who owes money to the creditor

Principal

the amount of money borrowed

Co-signer

a responsible person who signs the loan along with the person to whom the loan is granted. By signing the loan, the cosigner promises to repay the loan if the borrower fails to pay

Collateral

is property that a borrower promises to give up in the event he or she can no longer repay the loan

Creditworthy

means having the assets, income, and willingness to repay debt

Secured Credit

loans that require collateral

Credit bureau

an organization that collects information about the financial and credit transactions of consumers also called a credit reporting agency

Consumer Credit

is credit granted to individual consumers by a retail business

Finance Charge

the total amount paid by a borrower to a lender for the use of credit

Credit History

an individual's credit and financial behavior over a period of time

Contract

a legally binding agreement between the borrower and the lender

Open-end Credit

is an agreement that allows the borrower to use a specific amount of credit over a period of time

Credit report

a record of a person's credit history

Acceleration clause

is a statement in a contract that allows the creditor to require full and immediate payment of the entire balance if a payment is missed or the individual fails to abide by the terms of the contract

Revolving Credit account

a type of open-end credit agreement that offers a choice of paying in full each month or spreading payments over a period of time

Low-risk borrower

are those who are most likely to pay their debts.An individual with a poor credit report is a high-risk borrower. High risk borrowers have established a record of not paying bills on time and are risks for creditors

Closed-end credit

is a loan for an agreed amount of money that must be repaid with interest by a specified date or according to a defined schedule.

Credit score

is a numerical measure of a loan applicant's creditworthiness at a particular point in time

Installment Loan

a loan for a specific amount of money that is repaid with interest in regular payments or installments

Line of credit

a preapproved maximum amount that an individual can borrow

Credit rating

is the creditor's evaluation of an applicants willingness and ability to pay debts and is typically expressed as a letter grade

Down payment

a portion of the purchase price paid up front

Unsecured credit

credit granted based on a signed credit agreement. Also called a signature loan. No collateral is required, just the promise to pay and the signature of the borrower.

Annual Percentage Rate (APR)

is the annual cost of credit a lender charges for extending credit

Title loan

is a secured short-term loan made using a borrower's vehicle as collateral

Cash Advance

a loan against the available credit on an individual's account

Easy-access credit

is a short-term loan at a high interest rate that is granted regardless of the borrower's credit history

Rent-to-own agreement

are arrangements in which a consumer pays rent for the use of a product and eventually owns it

Pawnshop

businesses that give customers high interest loans with personal property, such as jewelry, held as collateral

Subprime Credit Card

are cards offered to people who have a poor credit history. Often they carry very high interest rates, large annual fees, sign-up fees, participation fees, late payment penalties and other charges

Payday Loan

is a short-term, high interest loan that usually must be repaid on the borrower's next payday

Grace period

the time between the billing date and the start of interest charges

Three C’s of Credit

• Capacity

• Character

• Capital

Three Credit Bureaus

• TransUnion

• Equifax

• Experian

FICO score

“Fair Isaac Corporation”

• assigns points and is calculated by five categories of info

FICO Score Categories

• payment history is 35%

• amounts owed is 30%

• length of credit history is 15%

• new credit is 10%

• types of credit used is 10%

FICO Credit Scores

• 800-850 is excellent

• 740-799 is very good

• 670-739 is average

• 580-669 is fair

• 300-579 is poor

VantageScore Categories

• Total credit usage is extremely influential

• credit mix and experience is highly influential

• payment history and age of credit history is moderately influential

• new accounts is less influential

VantageScore Credit Scores

• 750-850 is excellent

• 700-749 is good

• 650-699 is fair

• 550-649 is poor

• 300-549 is very poor

Credit Traps

• payday loans

• title loans

• pawnshops

• rent to own agreements