Honors Financial Literacy - Chapter 4: Debt, Credit, and Loans

Vocabulary flashcards covering Honors Financial Literacy Chapter 4 (Lessons 1 through 6), detailing debt classifications, credit scoring, loan terms, interest mechanics, and debt elimination strategies.

Debt

Money owed to another person or company, representing a promise to repay funds already spent, often with added costs such as interest and fees.

Credit Card

An open-end, unsecured revolving line of credit that allows cardholders to borrow funds for purchases up to a preset limit and pay later, potentially incurring interest and fees if the balance is not settled in full each month.

Debit Card

A payment card tied directly to a checking or savings account that utilizes the cardholder's own money, involving no borrowed funds, interest charges, or annual fees.

Revolving Credit

An open-end line of credit that automatically renews as the borrower makes payments to reduce the outstanding balance, featuring flexible repayments and no fixed maturity date.

Installment Credit

A closed-end loan for a fixed sum of money that is repaid in regular, equal monthly installments over a predetermined payoff schedule.

Secured Debt

A loan backed by a specific asset pledged as collateral, which presents lower risk to the lender because the asset can be seized if the borrower defaults.

Unsecured Debt

Debt that is not backed by any collateral or pledged asset, carrying higher risk for the lender and leading to debt accumulation for the borrower in the event of default.

Collateral

An asset of value owned by the borrower that is pledged as security on a loan, which is forfeited to the lender if the debt is not repaid according to contract terms.

Lien

A legal claim or right against a property or asset held by a creditor until the underlying debt is fully repaid.

Appreciating Asset

An asset that increases in monetary value over time, such as most residential real estate.

Depreciating Asset

An asset that loses monetary value over time, such as a motor vehicle that declines in market value each year.

Equity

The monetary value of ownership in a property, calculated as the current market value minus the total balance owed on the mortgage.

Default

The failure of a borrower to meet the legal obligations and repayment schedule of a loan.

Predatory Lending

Deceptive, unfair, or abusive loan practices deployed by lenders against cash-strapped borrowers, typically charging exorbitant interest rates and excessive fees (e.g., payday loans, title loans, pawn shops).

Home Equity Line of Credit (HELOC)

A revolving line of credit secured against the borrower's home equity that allows flexible withdrawals up to a limit with variable interest rates.

Home Equity Loan

A fixed-rate installment loan provided as an upfront lump sum that is secured against the borrower's home equity.

Credit Score

A statistical number calculated by scoring models to represent a consumer's creditworthiness to potential lenders.

Credit Bureau

A credit reporting agency (such as Equifax, Experian, or TransUnion) that collects and maintains consumer credit histories and provides them to lenders and creditors.

FICO Score

The most widely used credit scoring model in the United States, developed by Fair Isaac Corp., featuring a standard credit score range of $300$ to $850$.

Payment History (FICO Component)

The largest component of a FICO score ($35\%$), which tracks whether bills and debt accounts have been paid on time and evaluates the severity and recency of late payments.

Amounts Owed (FICO Component)

A FICO score factor ($30\%$) measuring total debt load and credit utilization ratio, where experts recommend using under $30\%$ and ideally within $10\%$ of available credit limits.

Length of Credit History (FICO Component)

A FICO score factor ($15\%$) that evaluates the age of credit accounts and the overall duration over which the borrower has maintained open credit.

New Credit (FICO Component)

A FICO score factor ($10\%$) analyzing recently opened credit accounts and the number of recent hard inquiries resulting from credit applications.

Credit Mix (FICO Component)

A FICO score factor ($10\%$) reflecting the diversity of credit types held by a borrower, such as a mix of installment loans and revolving accounts.

Credit Report

A detailed record of an individual's past borrowing, credit accounts, and repayment behavior, accessible for free weekly from each of the three major bureaus via Annualcreditreport.com.

Creditworthiness

A comprehensive measure of an applicant's ability and willingness to repay a debt, assessed by lenders using the Three C's plus Collateral.

Character (The 1st C)

A creditworthiness assessment metric that gauges financial integrity and reliability by reviewing the applicant's credit history and FICO score.

Capacity (The 2nd C)

A creditworthiness assessment metric evaluating an applicant's financial ability to repay a loan based on their income, current debt load, and recurring fixed expenses.

Capital (The 3rd C)

The total value of an applicant's owned financial and tangible assets (including bank accounts, property, stocks, and mutual funds) that can support debt repayment.

Cosigner

An individual who signs a loan contract alongside the primary borrower, legally guaranteeing to fulfill all repayment obligations if the borrower fails to pay.

Annual Fee

A fee assessed once per year by a credit card company simply for keeping the card account open and available for use.

Credit Limit

The maximum dollar balance that a lender authorizes a borrower to carry on a credit card or line of credit.

Finance Charge

The total dollar cost associated with using credit, encompassing interest charges, service charges, and associated fees.

Origination Fee

An upfront processing and setup fee charged by a lender for establishing and underwriting a new loan, commonly applied to mortgages.

Loan Term

The duration of time specified in months or years over which a borrower is obligated to make payments until the loan is satisfied.

Grace Period

The window of time during which a credit card issuer charges zero interest on new purchases, provided the total statement balance is paid in full each month.

Annual Percentage Rate (APR)

The standardized yearly cost of borrowing funds, expressed as an annual percentage that all lenders are legally mandated to calculate uniformly.

Introductory Rate

A temporary promotional interest rate (often $0\%$) offered by credit card issuers to attract new customers, which increases to a higher standard rate after a set period.

Merchant Fee

A processing fee between $2\%$ and $3\%$ charged by credit networks to merchants on every transaction, which businesses generally incorporate directly into retail prices.

Principal

The initial base amount of money borrowed or invested, excluding any added interest or financing charges.

Interest

The fee charged by a lender to a borrower for the privilege of using borrowed money.

Depreciation

The progressive loss in market value of a physical asset over time due to wear, tear, or aging.

Negative Equity

A financial situation (commonly called being 'upside down') where the outstanding loan balance exceeds the actual market value of the underlying asset.

Simple Interest

Interest calculated solely on the original principal balance for the entire loan duration ($\text{Principal} \times \text{Rate} \times \text{Time}$), producing linear financial growth.

Compound Interest

Interest computed on the initial principal plus all previously accumulated interest ('interest on interest'), resulting in exponential debt or investment growth.

Direct Financing

An auto loan arrangement where a borrower secures financing directly from a bank, credit union, or dealership lender, making fixed installment payments until receiving vehicle title.

Vehicle Lease

A contractual agreement where a consumer makes monthly payments to operate a car owned by a leasing company over a set period and mileage cap, without gaining equity.

Debt Snowball

A debt payoff method where debts are listed from smallest to largest balance, attacking the smallest with maximum funds while paying minimums on the rest, and rolling repaid amounts into each subsequent debt.