Unit 3 - Credit

Fixed-Rate Mortgage

A loan that has an interest rate that remains the same for the entire term of the loan as long as ontime payments are being made.

Adjustable Rate Mortgage (ARM)

A mortgage in which the initial interest rate is fixed for a specified period of time after which it is reset periodically.

5/1 ARM

Refers to a mortgage that keeps its initial interest rate for 5 years and then resets to the current rate every year after.

Annual Percentage Rate (APR)

The cost you pay each year to borrow money.

Monthly Interest Calculation

If you owe $500 on a credit card with an APR of 17.99%, divide the rate/months in a year, then multiply the amount owed by the monthly rate.

Collateral

Something valuable that the lender can take as payment if you can't or don't repay your secured loan.

Credit Limit

The maximum amount that can be borrowed on a credit card.

Default

Long-term failure to repay a loan according to the terms agreed to, which has a substantial negative impact on the borrower's credit score.

Installment Loan

Loan used for a specific amount of time, during which regular payments pay the accrued interest and a portion of the principal.

Principal

Original amount of money borrowed, separate from interest or fees.

Repossession

The taking back of property after a borrower has defaulted on payments.

Revolving Credit

An open line of credit that can be used for any purchases as long as you are under the limit.

Credit Report

A document with information about a person's credit activity and history.

Credit Score

A three-digit number (ranging from 300-850) based on an individual's credit history detailed in a credit report.

FICO Score

The most commonly used credit score, based on information collected such as payment history, credit mix, utilization rate, etc.

Payment History

All of the transactions made on a borrower's credit accounts.

Credit Utilization Rate

A measurement of outstanding debt divided by total available credit.

Credit History

A record of a person's use of credit over time.

Credit Mix

The entirety of a borrower's active accounts, including credit cards, personal loans, business loans, etc.

New Credit

The number of recently opened credit accounts and all new credit inquiries.

Equifax

One of the three main credit reporting agencies that compiles a credit score based on information collected.

Experian

One of the threex main credit reporting agencies that compiles a credit score based on information collected.

TransUnion

One of the three main credit reporting agencies that compiles a credit score based on information collected.

Authorized User

A person who has permission to use and/or carry another person's credit card, but isn't legally responsible for paying the bill.

Secured Credit Card

Requires the borrower to pay a fixed, up-front amount of money as collateral, which becomes the credit limit of the card.

Debt Avalanche Method

A repayment method where the borrower prioritizes paying down debts with the highest interest rates first.

Debt Snowball Method

A repayment method where the borrower prioritizes paying down debts with the smallest balances first.