financial literacy

24 multiple choice...answer 4 open response

Credit

Any arrangement where you get "stuff" (money, goods, services), and agree to pay for it in the future

Loan

An agreement where you are credited with a fixed amount (usually of money) for a fixed period of time, usually with interest

Interest Rate

The percentage charged for the privilege of borrowing money

Principal

The amount you borrow

Term

The amount of time you have to repay your principal

Collateral

Something valuable that the lender can take as payment if you can't pay back your loan (like a house or car)

Co-signer

Someone who legally agrees to take responsibility for a person's debt if they cannot repay it.

Variable-rate loan

Interest rate can change, based on prime rate or index rate, over the course of the loan.

Fixed-rate loan

Interest rate is determined before loan is granted and remains constant as long as on time payments are being made.

Credit Card

A card issued by a financial company giving the holder an option to borrow funds. Credit cards charge interest and are primarily used for short-term financing. Interest usually begins one month after a purchase is made and borrowing limits are pre-set according to the individual's credit rating.

Schumer Box

A table that appears in credit card agreements showing basic information about the card's rates and fees.

Annual Percentage Rate (APR)

The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan.

Grace Period

The number of days between a consumer's credit card statement date and payment due date when interest does not accrue.The grace period is a window of time during which a consumer owes money to a credit card company for new purchases made during the last billing cycle but isn't being charged interest.

Minimum Payment

The smallest amount of a credit card bill that a credit card holder must pay each billing cycle.

Balance Transfer

The transfer of all outstanding balances from one credit card to a new credit card. Credit card balance transfers are typically used by consumers who want to move their debt to a credit card with a lower interest rate, fewer penalties or other benefits, such as reward points or travel miles.

Cash Advance

A service provided by many credit card issuers allowing cardholders to withdraw a certain amount of cash, either through an ATM or directly from a bank or other financial agency. Cash advances typically carry a high-interest rate - even higher than credit card itself. and the interest begins to accrue immediately.

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

A type of credit card that is backed by a savings account used as collateral on the credit available with the card. Money is deposited and held in the account backing the card.

Default

The failure to promptly pay interest or principal when due. Borrowers may default when they are unable to make the required payment or are unwilling to honor the debt.

Credit History

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

Credit Report

A document containing financial information about a person, focusing on his or her history of paying obligations, such as mortgages, car payments, utility bills and credit cards.

Credit Score

A three-digit number (from 300-850) that reflects the credit history detailed by a person's credit report.

FICO Score

The most commonly used credit score. The name comes from the Fair Isaac Corporation, which developed the scoring model. The score is used to predict the likelihood that a person will pay his or her debts. The scores use only information from credit reports.

amortization

the reduction of a loan balance through payments made over a period of time

installment

regular periodic payment made to pay off the cost of an item when buying it on credit.

revolving credit

credit that is automatically renewed as debts are paid off (credit is "running", there is no term limit).

secured loan

Loan that is usually backed up by collateral; seen as less risky to lenders given that there is something they are guaranteed to receive if not paid back.

unsecured loan

Loan guaranteed only by a promise to repay it; no collateral involved.

debit card

A bank card that automatically deducts the amount of a purchase from the checking account of the cardholder.

prepaid debit card

A card that is loaded with a specific cash amount before you use it. It is not linked to a bank or credit union account.

credit limit

The maximum dollar amount that can be borrowed from your credit card issuer.

mortgage

a specific type of loan that is used to buy real estate (house, property, etc.)

fixed rate mortgage

A mortgage in which the interest rate does not change during the entire term of the loan.

adjustable rate mortgage (ARM)

has a interest rate that increase or decreases during the life of the loan.

predatory lending

taking advantage of poorly-informed consumers through excessively high fees and/ or interest rates.

Payday Loan

a relatively small amount of money lent at a high rate of interest on the agreement that it will be repaid when the borrower receives their next paycheck.

loan shark

person or entity that charges borrowers interest rates above an established legal rate.

point of sale (POS)

Any point where a consumer buys a product.

Personal Loan

A product that allows someone to borrow a fixed amount over a fixed period at a fixed amount of interest..

Peer-to-Peer Lending**

financial transaction that occurs directly between individuals or "peers".

small business loan

A loan used to fund expenses connected with operating a smaller rather than a larger business.

Explain what net worth is used for and how it is calculated.

Net worth shows your overall financial health. It tells you if you owe more than you own. Formula:
Net Worth = Assets – Liabilities

Why might someone use a credit card instead of cash or a debit card?

Credit cards give fraud protection, rewards, the ability to build a credit score, and sometimes extra time to pay without interest if you pay during the grace period

How can someone under age 21 build credit?

• Becoming an authorized user on a parent’s or guardian’s credit card

• Getting a secured credit card with a security deposit

• Taking out a student loan (repaying it helps build credit)

• Paying bills on time if they are reported (like a phone bill through Experian Boost)

Why is it important to review a Schumer Box when choosing a credit card?

The Schumer Box shows the key costs and terms of a credit card in one place. It lists the APR, fees, penalty rates, minimum payment rules, and the length of the grace period.
Reviewing it helps you compare cards and avoid surprises, like high interest or hidden fees.

Explain why making only the minimum payment on a credit card is a bad idea.

Paying only the minimum keeps your account open, but it’s a bad idea because the rest of your balance builds interest.
Since credit card interest is high, the balance can grow fast, and it can take years to pay off. You end up paying much more than what you originally bought.

Explain how an amortized loan works and why paying extra reduces interest.

With an amortized loan, each payment is split between interest and principal. In the beginning, more of your payment goes toward interest. Over time, more goes toward principal.
When you pay extra, the extra money goes straight to the principal. This lowers the remaining balance faster and reduces the total interest you pay because there is less principal for the bank to charge interest on.

Fixed-rate vs adjustable-rate mortgage

Fixed-Rate Mortgage:

• The interest rate stays the same for the entire loan.

• Monthly payments stay predictable and stable.

• Good for long-term budgeting.

Adjustable-Rate Mortgage (ARM):

• The interest rate can change based on the market.

• Payments can go up or down over time.

• Often starts with a lower rate but can become more expensive later.

Explain how payday loans cause a cycle of debt.

Payday loans are short-term loans with very high fees and interest. They must be repaid by your next paycheck. If someone can’t repay it, they often take out another payday loan to cover the first one.
This creates a cycle where the person keeps borrowing more and paying mostly fees instead of the loan itself, trapping them in debt.

Auto loan monthly payment factors (credit score, APR, term, down payment).

• Large down payment → decreases monthly payments

• Long loan term → decreases monthly payments (but more interest overall)

• Low credit score → increases monthly payments (higher interest rate)

• High APR → increases monthly payments

Amara buying a house—how to save money on a mortgage.

Amara can save money by:

• Improving her credit score to qualify for a lower interest rate

• Making a larger down payment so she borrows less

• Comparing lenders to find the best APR

• Choosing a shorter term if she can afford the higher payments (less total interest)

• Avoiding unnecessary fees and closing costs

• Considering a fixed-rate loan if rates are low and she wants predictability