Personal finance

Credit is crucal to our economy, it can be ______ if used wisely but _____ if mistreated

Beneficial / destructive

Credit vs Debt

Credit is the ability to borrow and debt is the amount borrowed that must be re-paid with interest.

When you use credit to buy goods/services you take out a loan with the expectation of repayment with interest over time.

Creditor-The person that lends money

Loan-The sum of money that is borrowed

Debtor-The person who owes money

Credit risk

The potential loss due to a debtors inability/unwillingness to repay money owed tot he creditor.

Interest rate

A percentage charged on the principal amount of a loan, representing the cost of borrowing and the return earned on savings or investments.

Why do individuals use credit

Buying a home, covering emergencies, paying tuition

Why do businesses build credit

expand operations, purchasing inventory, investing in technology

Why do governments use credit

Funding infrastructure projects, Providing public services.

What are the benefits of using credit

Increased purchasing power

Building credit history

Convience and security

emergency funds

rewards and benefits

What are the risks of using credit

High interest rates and accrued interest '

Debt accumulation

Financial stress and mental health

Negative impact on credit score

Predatory lending practices

Bankruptcy

The legal process where an individual or company is unable to fufill their financial obligations, seeks relief from some or all of their liabilities.

What are the three primary sources of credit

Revolving credit, installment credit, open credit

revolving credit

A type of credit that allows the borrower to withdraw, repay, and withdraw again, up to a set credit limit, typically associated with credit cards.

Installment credit

A type of credit that requires the borrower to repay the borrowed amount in fixed payments over a specified period, commonly used for loans such as auto loans and mortgages.

Open credit

A type of credit extended by a service provider, where a customer uses a service and pays for it at the end of the billing period ex. utility bills

Primary sourced of creidt

Financial institutions

Government programs

online lenders

Retail stores

peer to peer

Friends and family

Secured vs unsecured credit

Secured is a type of loan that is backed by collateral and unsecured is a type of loan that has no collateral is is based on your credit score (high risk for lenders means a high interest rate)

Collateral

An asset a borrower pledges to a lender as security for repayment of a loan

factors influencing credit accessibility

Credit score

Income and employment stability

Debt to income ratio

Economic conditions

Interest rates

Lending policies and regulations

Collateral and loan type

Credit card

An electric method of payment allowing the card owner to make purchases on credit

Types of credit cards

Standard credit cards

Rewards credit cards

Secured credit cards

Student credit cards

Business credit cards

travel credit cards

The cost of credit

Interest changes, credit card companies change interest to compensate for credit risk.

annual perfectage rate

The total cost of borrowing money for one year expressed as a rate

periodic percentage rate

a percent charged on a loan over a specific period of time

Average daily balance

A calculation of interest based on the sum of the balance owed each day / the number of the days in the billing period

grace period

The time in which a borrower can make a payment without incurring a late fee or penalty.

Late fee

Addition fee that credit users charge their custmomers if they don’t pay the minimum amount

Credit card benefits

Convience

building credit history

emergency funds

rewards and cash back

credit card risks

High interest rates

debt accumulation

fees and penalties

credit score impact

temptation to spend

fraud risk

Credit worthiness

The assessment of a borrowers ability to repay a loan based on their financial history and current financial status

facts that impact creditworthiness

Character

credit

capacity

collateral

credit score

a numerical representation of an individuals creditworthiness

credit reporting agency

a company that creates and maintains credit reports and credit scores

Credit report

a detailed report of a persons credit history

credit score calculation

payment history- most curcuial factor 35%

Amounts owed 30%

Length of credit history 15%

new credit 10%

credit mix 10%

credit score ranges

800-850 excellent

740-799 very good

670-739-good

580-669-fair

200-579-poor

capacity

current ability to repay loans based on income

building and managing credit

first start with a secured credit card

become and authorized user

apply for a credit building loan

pay bills on time

Keep credit utilization low

limit credit inquiries

diversify credit mix

monitor your credit report

pay more than the nunimum payment

keep old accounts open

Dealing with credit issues

Regularly check your credit reports from major bureaus, watch for unusual account activity identify theft report to the idc, place a fraud alert on your credit card, follow recovery plan provided by the identity theft.gov

recovering from bad credit

create and stick to a budget prioritizing debt payment