Personal Financial Literacy : 5. CREDIT, DEBT, AND CONSUMER SKILLS

an agreement in which the borrower buys something of value and agrees to repay the lender

credit

an amount of money that is owed to a bank, a credit card company, a store, or another individual

debt

Which of the following is not a Biblical principal as far as debt is concerned?

Only accumulate long-term debt.

Identify the strategies you can use to avoid debt.

Earn extra income to pay for special purchases.

Save.

Research the best prices.

Maintain a budget.

Be disciplined and only buy what you can afford.

Plan how you will spend your money.

Credit is the agreement to repay a lender for buying something.

True

Karina had an emergency fund saved. However, when she had to stay in the hospital, the bills added up to about $1,000 more than she had saved. She decided to use her credit card to pay for the remaining hospital bills. Was Karina using credit responsibly and being a good steward?

true

Annual Percentage Rate; the yearly interest rate a credit card company charges to borrow money

APR

cash borrowed from a credit card account, for which cash advance the credit card company charges fees and higher interest rates

cash advance

maximum amount of money that an individual is authorized to use

credit limit

an amount of money that is owed to a bank, a credit card company, a store, or another individual

debt

interest and fees charged for making purchases using a credit card

finance charges

a period of time before the credit card company starts charging interest

grace period

the least amount of money that must be paid at the end of a month

minimum payment

the interest rate one is charged for one payment period, a rate that is usually the APR divided by twelve

periodic rate

the amount owed at the end of the previous billing period

previous balance

the statement that federal law requires a credit card company to provide in order to explain their terms

Truth in Lending Disclosure

If an individual pays the minimum payment each month, she will quickly pay off her credit card.

False

Mario has a remaining balance of $1,300 on his credit card. His credit card has an APR of 20 percent. How much will he pay in interest in one month?

$21.67

If an individual has a balance on her credit card, but would like to pay less money in the long run, she should _____.

pay as much as possible each month

The grace period is the _____.

period of time before the credit card company starts charging interest

What is the most important factor to consider if an individual expects to carry a balance on his credit card from time to time?

APR

a report prepared by a credit bureau that shows details of an individual's credit history; used by a lender to determine whether an individual is creditworthy

credit report

a number that lenders look at to see if an individual is creditworthy; also called a FICO score

credit score

having an acceptable credit rating; considered responsible to borrow money

creditworthy

a request for a person's credit report

inquiry

equal payments usually made over several years

installments

the bank or company that lends money on the condition that it will be paid back

lender

a type of credit or promise to pay for services, such as phone, electricity, and water

service credit

type of credit.

credit card

installment account

loan

service credit

A credit report is a _____.

a report prepared by a credit bureau that shows details of an individual's credit history

To obtain your credit report, you should _____.

visit the official web site and complete the necessary steps

four factors that a lender investigates when considering whether you are creditworthy

credit cards

service credits

loans

installment credit

FICO is a credit score.

True

Collin has a credit card bill of $3,000. He makes only the minimum payment and is always close to the limit on his credit card. Is Collin using credit responsibly?

No

a legal statement that an individual is unable to pay lenders, involving a court process that protects people while they repay debts or the court removes the debts

bankruptcy

the amount of debt compared to income; a ratio used to determine if an individual has excessive debt

debt-to-income ratio

a process in which a lender tries to regain property because the borrower has not made payments

foreclosure

a process when a lender tries to obtain money from an individual's employer to pay an unpaid debt

garnishment

a claim to take and hold property until a debt is paid

lien

the seizing of the collateral or item that secured the loan when the debt has not been paid

repossession

loans with very high interest rates

subprime lending

Grace makes $2,200 per month. She spends $300 on credit card payments, $120 per month for a furniture purchase, and $450 on an auto loan. Does she have excessive debt?

yes

Garnishment is when finance charges are added to your credit card account when the bill is unpaid.

false

If a lender is not paid and they take the collateral that secured the loan, this is called _____.

repossession

all of the strategies for avoiding credit problems.

Set goals.

Use the debt-to-income ratio to determine if you are ready for a big purchase.

Run a credit report annually.

Create a budget and stick to it.

Get rid of unnecessary expenses.

Pay bills on time.

Jillian has a low credit score, and she will not be able to pay the minimum balance on her credit card bill next month. What should Jillian do?

Find credit counseling services.

Garnishment is what happens when a lender obtains money from an individual's employer to pay an unpaid debt.

true

A grace period is a length of time before the credit card company starts charging late fees.

false

A cash advance is _____.

cash borrowed from a credit card account

An installment loan _____.

has equal payments each month

Manuel has a remaining balance of $563 on his credit card. His credit card company has an APR of 15 percent. How much will Manuel pay in interest for one month?

$7.04

each of the Biblical principals regarding debt.

Debt should be avoided whenever possible.

Avoid long-term debt.

Don't promise to pay without having a sure way to do so.

The borrower has an absolute commitment to repay.

Good stewards avoid debt because _____.

debt can negatively affect contributing to God's work and giving generously in the future

Anthony received his first credit card bill. Since he wants to be a good steward and use credit responsibly, he should ____.

pay the entire balance

What is the most important factor to consider when selecting a credit card if you pay the balance every month on time?

annual fee

When an individual makes minimum payments on a credit card instead of paying as much as possible, _____.

the time it takes to pay off the credit card increases and the total cost increases

A report prepared by a credit bureau which shows details of an individual's credit history is called a _____.

credit report

all the possible consequences of excessive debt.

bankruptcy

subprime loans

foreclosure

repossession

How often should you get a credit report?

once per year

Cole has a credit card bill of $3,100. His credit limit is $3,000. Is Cole using credit responsibly or irresponsibly?

irresponsibly

Nicholas makes $2,000 per month. He spends $300 on credit card payments and $350 on an auto loan. What is his debt-to-income ratio?

32.5 percent

all the fees a credit card may have.

annual fee

balance transfer fee

cash advance fee

late fee

overdraft fee

over-the-limit fee

three strategies for avoiding credit problems.

Look for alternatives before using a credit card

Always pay off debts and loans right away

Look for low interest rates.

How does a lender use a credit report?

He uses it to keep track of how much money is spent.

the ability to make payments based on amount of income and other bills

capacity

your net worth; the value of the items you own and the cash you have available

capital

how responsible you have been in the past with credit; information from your credit report

character

a piece of property that a person promises to give to the lender if a loan is not paid

collateral

a person who signs a loan with another individual

co-signer

an interest rate that remains the same throughout the entire loan repayment period

fixed rate

a loan that is repaid in equal monthly payments for a specific period of time

installment loan

the time it will take to repay the loan

loan repayment period

a loan in which the individual offers collateral; if the loan is not paid back as agreed, the individual gives up the collateral to the lender

secured loans

a loan in which the individual does not offer collateral; sometimes called personal or signature loans

unsecured loans

an interest rate that may change during the repayment period

variable rate

The difference between a secured loan and an unsecured loan is _____.

a secured loan requires collateral and an unsecured loan does not

If the principal on one loan is $1,000 more than another loan, the total cost of the loan is $1,000 more.

False

Ramon took out a car loan with an interest rate of 10 percent and paid $100 in loan application fees. What term describes the amount of interest Ramon will pay?

APR

Which of the following loans will have a higher total cost?

A loan for $5,000 at 3.5 percent over a loan period of four years.

A loan for $5,000 at 3.5 percent over a loan period of six years.

A loan for $5,000 at 3.5 percent over a loan period of six years.

What are the 4 C's of lending?

capacity

capital

character

collateral

If you must apply for a loan, you should _____.

visit a loan officer at a financial institution and complete an application

Adjustable Rate Mortgage; a mortgage that has a fixed rate for a certain amount of time and then has a variable rate that changes periodically

ARM

a short-term mortgage in which small payments are made until the completion of the term, at which time the entire balance is due

balloon mortgage

an account with a financial institution used to pay taxes and insurance

escrow

a government-backed loan, which makes it easier for some people to qualify

FHA loan

a loan used to buy a home

mortgage

Private Mortgage Insurance; insurance you must pay on most loans when you make a down payment of less than 20 percent

PMI

a government-backed loan for veterans

VA loan

A traditional loan has a variable interest rate.

false

An account with a financial institution used to pay taxes and insurance is called _____.

an escrow account

the most popular mortgage that has a fixed interest rate and a loan period of thirty years

traditional mortgage

a loan with an initial fixed interest rate that then becomes variable

ARM

a short-term loan with low interest rates; when the term is up, the entire balance of the loan is due

balloon mortgages

FHA and VA loans

government-backed mortgages

each of the factors you should consider when shopping for a mortgage

APR

interest rate

loan period

fixed or variable rate

three of the costs that make up a mortgage payment

property taxes

broker and attorney fees

inspection fees

Free Application for Federal Student Aid; an application to obtain financial aid such as grants or student loans

FAFSA

money used to support students with the costs of higher education

financial aid

money awarded to a variety of students that does not need to be repaid

grants

the value invested in a home; the amount owed for the home subtracted from the total value of the home

home equity