Focus on Personal Finance - Chapter 5: Consumer Credit

Vocabulary practice flashcards covering fundamental terms, metrics, calculations, credit regulations, and debt relief strategies from Chapter 5: Consumer Credit.

Credit

An arrangement to receive cash, goods, or services now and pay for them in the future.

Consumer Credit

The use of credit for personal needs, with the exception of a home mortgage.

Closed-End Credit

A category of credit in which a borrower pays back a one-time loan within a specified period of time and through payments of equal amounts.

Installment Sales Credit

A form of closed-end credit that allows a consumer to receive merchandise, usually high-priced items, and pay for it over time.

Installment Cash Credit

A direct loan of money for personal purposes that is repaid in regular installments.

Single Lump-Sum Credit

A closed-end loan that must be repaid in total on a specified day, typically within $30$ to $90$ days.

Open-End Credit

A line of credit where loans are made on a continuous basis and the consumer is billed periodically for at least a partial payment.

Grace Period

A time period during which no finance charges are assessed on a credit account.

Finance Charge

The total dollar amount paid to use credit, including interest costs and potentially other expenses such as service charges, credit-related insurance premiums, or appraisal fees.

Debit Card

A card that electronically subtracts funds directly from a checking or savings account to pay for goods and services.

Inexpensive Loans

Loans that carry low interest rates, commonly obtained from family members.

Medium-Priced Loans

Loans with moderate interest rates, commonly provided by commercial banks, savings and loan associations, and credit unions.

Expensive Loans

Loans with high interest rates, typically ranging from $12\%$ to $25\%$, often obtained from finance companies, retail stores, or through credit card cash advances.

Home Equity Loan

A loan based on the difference between the current market value of a home and the remaining balance owed on its mortgage.

Equal Credit Opportunity Act (ECOA)

Federal legislation prohibiting creditors from discriminating against applicants on the basis of race, color, age, sex, marital status, or receipt of public assistance.

Debt Payments-to-Income Ratio

A debt capacity measure calculated by dividing monthly debt payments (excluding housing payments) by net monthly income, recommended not to exceed $20\%$.

Debt-to-Equity Ratio

A financial ratio calculated by dividing total liabilities by net worth (excluding home value and mortgage), where a value of $1$ is considered the upper limit of debt obligations.

Character

One of the five Cs of credit, evaluating borrower trustworthiness, attitude toward credit obligations, and credit history.

Capacity

One of the five Cs of credit, referring to the borrower's financial ability to repay debt from income.

Capital

One of the five Cs of credit, representing the borrower's net worth or the amount by which total assets exceed total liabilities.

Collateral

A valuable asset pledged by a borrower to secure a loan, subject to seizure if the loan defaults.

Conditions

One of the five Cs of credit, referring to general economic factors, such as recessions or local unemployment rates, that can impact a borrower's ability to repay a loan.

Credit Report

A detailed record of an individual's past borrowing and bill-paying history, compiled by credit bureaus.

Credit Bureau

A reporting agency that collects and maintains credit records on consumers and businesses; the three major bureaus are Experian, TransUnion, and Equifax.

Fair Credit Reporting Act

A 1971 federal law regulating credit reporting agencies, ensuring consumer access to credit files, establishing dispute procedures, and requiring obsolete information to be removed after seven or ten years.

Credit Score

A numerical summary of the information contained in a credit report used by lenders to predict the likelihood of debt repayment.

FICO Score

A credit scoring model ranging from $300$ to $850$, calculated from payment history ($35\%$), amounts owed ($30\%$), length of credit history ($15\%$), types of credit used ($10\%$), and new credit ($10\%$).

VantageScore

A credit scoring model collaboratively developed by Equifax, Experian, and TransUnion, featuring a score range from $501$ to $990$.

Redlining

An illegal lending practice involving discrimination against loan applicants based on the racial or ethnic demographics of the neighborhood in which the property is located.

Annual Percentage Rate (APR)

The percentage cost of credit expressed on a yearly basis, serving as the standard metric for comparing borrowing costs across lenders.

Approximate APR Formula

The mathematical formula $r = \frac{2 \times n \times I}{P(N + 1)}$, where $r$ is the approximate APR, $n$ is the annual payment periods, $I$ is the total dollar cost of credit, $P$ is the loan principal, and $N$ is total scheduled payments.

Simple Interest

Interest calculated solely on the principal amount borrowed, without any compounding.

Declining Balance Method

A method of computing simple interest on installment loans where interest charges are computed only on the outstanding, unpaid principal balance.

Add-On Interest Method

A loan interest calculation method in which interest is calculated on the entire original principal amount for the full term, regardless of the installment payments made.

Fair Credit Billing Act (FCBA)

A 1975 federal statute establishing standardized procedures for consumers to challenge billing errors, halt payment on defective goods, and receive credit for prompt payments.

Cosigning

A contractual commitment in which a secondary party agrees to assume legal liability for repayment of a debt if the primary borrower defaults.

Fair Debt Collection Practices Act (FDCPA)

Federal legislation enforced by the Federal Trade Commission prohibiting third-party debt collection agencies from using deceptive, abusive, or unfair debt collection practices.

Consumer Credit Counseling Services (CCCS)

A nonprofit organization that provides financial education, personal budgeting guidance, and managed debt repayment programs to consumers facing financial distress.

Bankruptcy

A formal legal process governed by federal law wherein a debtor's assets are evaluated and distributed to creditors when they are unable to pay their debts.

Chapter 7 Bankruptcy

A form of bankruptcy under the U.S. Bankruptcy Act of 1978 known as straight bankruptcy, involving the liquidation of nonexempt assets to eliminate qualifying debts.

Chapter 13 Bankruptcy

A court-supervised bankruptcy procedure under the U.S. Bankruptcy Act of 1978, often called a wage earner plan, permitting debtors to propose a repayment plan across three to five years.