Understanding Credit Cards and Their Impact

Credit Card

A form of unsecured credit that allows users to borrow money from a lender to make purchases and pay it back later with interest.

Debit Card

Uses money already available in the cardholder's account.

Advantages of Credit Card

1. Earn rewards (cash back, travel points, etc.). 2. Helps build credit history.

Disadvantages of Credit Card

1. Interest charges if the balance is not paid on time. 2. Easier to overspend and accumulate debt.

Minimum Payment

The smallest amount a borrower must pay by the due date to avoid penalties.

APR

Annual Percentage Rate; represents the yearly interest charged on a credit card balance.

Credit Limit

The maximum amount of credit that a lender extends to a borrower.

Major Credit Bureaus

Experian, Equifax, and TransUnion.

5 C's of Creditworthiness

1. Character - Credit history and reliability. 2. Capacity - Ability to repay based on income. 3. Capital - Assets and savings. 4. Collateral - Property pledged as security. 5. Conditions - Economic factors affecting approval.

FICO Credit Score

The highest possible FICO credit score is 850.

Impact on Credit Score

Payment history (35%) - Paying bills on time is the most important factor.

Advantage of Using Credit

Allows the purchase of valuable assets (e.g., home, car) without paying the full amount upfront.

Disadvantage of Borrowing Too Much Credit

Interest payments reduce disposable income and can lead to long-term debt.

Financial Concerns for Car Loan

1. Whether their income can support the monthly payments. 2. Whether the loan is worth the long-term financial commitment.

Credit Utilization

Keeping your credit utilization below 30% improves your credit score.

Credit Report Check Frequency

At least once a year to check for errors and fraud.

Applying for Multiple Credit Cards

It can lower your credit score temporarily and make lenders see you as a higher-risk borrower.