personal finance exam 3
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57 Terms
What does your credit score affect?
Whether you qualify for loans and the interest rate you pay.
What FICO score range is considered excellent?
750-850.
What FICO score range is considered good?
700-750.
What FICO score range is considered fair?
650-700.
Name the three major credit bureaus?
Equifax, transunion, experian
What do credit bureaus do?
Collect data on an individual's credit history and produce credit reports.
What is a credit report?
A report produced by a credit bureau showing your credit history.
What is a FICO score?
A cumulative score based on information from credit bureau reports used by lenders.
What percentage of lenders use FICO scores?
About 90%.
What are the five FICO score factors?
Payment history, credit utilization, length of credit history, credit mix, new credit.
What percentage of a FICO score is payment history?
35%.
What percentage of a FICO score is credit utilization?
30%.
What percentage of a FICO score is length of credit history?
15%.
What percentage of a FICO score is credit mix?
10%.
What percentage of a FICO score is new credit?
10%.
What is payment history?
A record of whether you have paid your debts on time.
What hurts payment history the most?
Late payments and bankruptcy.
How long can bankruptcy affect your credit?
7-10 years.
What is credit utilization?
The percentage of available revolving credit you are using.
What type of debt is included in credit utilization?
Revolving credit such as credit cards.
What is revolving credit?
A line of credit you can repeatedly borrow from up to a set limit.
Are mortgages considered revolving credit?
No.
Example: $7
000 balance on a $10
Why is 0% credit utilization not ideal?
It shows no recent borrowing activity for lenders to evaluate.
How can you improve credit utilization?
Pay down balances before the billing cycle ends.
What is length of credit history?
A measure based on the age of your credit accounts.
What three things are considered in length of credit history?
Oldest account, newest account, average of all credit cards
Why is opening a credit card young beneficial?
It helps build a longer credit history.
What is credit mix?
The variety of credit accounts you have.
What are the two main categories of credit mix?
Revolving loans and installment loans.
Give examples of installment loans.
Mortgages and auto loans.
Should you take out debt only to improve credit mix?
Generally no.
What is new credit?
A measure of recently opened credit accounts and inquiries.
Why can opening many new accounts hurt your score?
It may signal financial distress.
What is a hard inquiry?
A credit check that can lower your credit score.
What situations cause hard inquiries?
Applying for credit cards
How long do hard inquiries stay on your credit report?
Two years.
What is a soft inquiry?
A credit check that does not affect your credit score.
Examples of soft inquiries?
Checking your own credit score or background checks.
What is mortgage pre-approval?
A lender's estimate of how much you may qualify to borrow.
Why is pre-approval important when buying a home?
It shows sellers you are likely able to obtain financing.
Does pre-approval guarantee a mortgage loan?
No.
What is a buyer's agent?
A real estate professional who helps buyers find and purchase homes.
What is a seller's agent?
A real estate professional who helps homeowners sell their property.
What is an escalation clause?
A clause that automatically increases an offer above competing offers up to a maximum amount.
What is a home inspection?
A non-invasive visual examination of a home's condition.
What is an appraisal?
An independent estimate of a home's value.
What is a down payment?
The portion of the home's purchase price paid upfront by the buyer.
What are closing costs?
Fees due when finalizing a home purchase
What is escrow?
An account used to collect money monthly for taxes and insurance.
What is PMI?
Private Mortgage Insurance
When can PMI usually be removed?
When the loan-to-value ratio reaches 80% or less.
What can first-time homebuyer programs help with?
Down payments
What is a home warranty?
A service contract covering certain home repairs and replacements.
What is refinancing?
Replacing an existing mortgage with a new loan
What costs make up the true cost of homeownership?
Principal
When is renting generally recommended instead of buying?
If you expect to move within five years or less