Personal Finance Vocabulary

Vocabulary

• Amortization: The process of paying off a debt in regular installments over time.
• Minimum Payment: The smallest amount you can pay each month to keep your credit card in good standing. It's recommended to pay the balance in full each month.
• Variable-Rate Loan: A loan with an interest rate that changes based on the market, causing monthly payments to fluctuate.
• Payday Loan: A risky loan option for emergency cash with a high interest rate that needs to be repaid by your next paycheck.
• Mortgage: A loan taken out to purchase a home.
• Authorized User: Someone added to a credit card account who can build credit history under supervision.
• Collateral: An asset that backs a loan. If payments are not made, the lender can seize the collateral (e.g., a car in a car loan).
• Down Payment: The percentage of the car's price paid upfront when buying a new car.
• Principal: The amount of money borrowed from a lender.
• Interest: The amount charged to borrow money.

Auto Loan Considerations

• Large Down Payment: Decreases the monthly auto loan payment.
• Longer Term: Increases the total interest paid over the loan's life, but may decrease the monthly payment
• Low Credit Score: Increases the monthly auto loan payment.
• High APR: Increases the monthly auto loan payment.

Payday Loans and Debt Cycle

• Payday loans can cause a cycle of debt because they have high fees and short terms, making them hard to repay on time.

Accessibility of Payday Loans

• Payday loans are easier to get than traditional bank loans because they have fewer requirements and lenders don't check credit scores or require extensive financial history.

Buy Now Pay Later (BNPL)

• Definition: BNPL offers an installment plan where you can pay in installments.
• Advantage: Offers flexibility and allows you to buy things immediately.
• Disadvantage: Can lead to overspending and debt.

Credit Report Review

• Things to look for: Errors in personal info, incorrect account details, payment history mistakes, fraud.
• Actions to take if you find an error: Report to the credit bureau, provide proof to support your claim, follow up to ensure it gets corrected.

Importance of Credit Report

• Lenders, landlords, employers, and other parties look at your credit report to assess financial responsibility.
• It helps them decide on loan approvals, rental agreements, job offers, and utility services.

Credit Score Factors and Weighting

• Payment History: 35%
• How Much You Owe: 30%
• Length of Credit History: 15%
• Credit Mix: 10%
• New Credit: 10%

Credit Cards vs. Cash or Debit Cards

• Credit cards can offer rewards for continuous use.
• You don't have to pay as you go; you have time to pay every 30 days.
• Using a credit card builds credit history and score.

Building Credit History for Young People (Under 21)

• Open a credit card account.
• Become an authorized user on someone else's credit card.
• Get a secured credit card.

Credit Card Advice for Sam

• Bad Advice: Look for a card with a very high annual fee.
• Good Advice: Prioritize getting a credit card with a low APR (Annual Percentage Rate).
• Good Advice: Look for a credit card that has a long grace period (the time before interest accrues).

Credit Card Management

• Making only the minimum monthly payment will result in paying way more in interest.
• Paying more than the minimum saves the most money.

Loan Terms and Interest

• A loan with a longer term will have lower monthly payments, but you will pay more in total interest.

Amortized Loans

• An amortized loan has fixed payments that cover both principal and interest.
• Early on, most of your payment goes toward interest, but over time, more goes toward the principal.
• Paying more than the amortized payment on a loan reduces the principal faster.

Credit Bureaus

• Experian is one of the three major credit bureaus that collects and maintains individual credit information and provides it to lenders.

Federal Trade Commission (FTC)

• The Federal Trade Commission is a government agency that ensures banks, lenders, and other financial companies treat you fairly.

Net Worth

• Net worth is used to indicate the amount everything someone has is worth.
• Calculated as total assets minus total liabilities (debt).
• $Net Worth = Assets - Liabilities$

Types of Loans and Credit

• Auto Loan: Installment, Secured
• Student Loan: Installment, Unsecured
• Personal Loan: Fixed, Unsecured
• Mortgage: Secured, Fixed
• Adjustable-Rate Mortgage: Variable
• Credit Card: Revolving

Debit, Credit, and Prepaid Debit Cards

Key Vocabulary (Continued)

• Term: How long you have to pay the money back, with interest, to the lender.
• Credit Limit: The maximum amount of money that can be charged to a credit card.
• Debt Snowball Method: List debts from smallest to largest and focus on paying off the smallest first.
• Hard Inquiry: When a lender checks your credit report, it may temporarily lower your credit score.
• Credit History: Lenders look at your credit history to determine how reliably you have managed borrowing and repaying money in the past.
• Credit Utilization Rate: Keeping credit card balance low relative to the credit limit helps improve credit score.
• Thin File: Having very little credit history makes it difficult for lenders to assess risk.
• Payment History: An important factor that contributes to your credit score, it records how timely you have been in paying off different lines of credit.
• FICO Score: A 3-digit number, typically between 300-850, that potential lenders, landlords, and other parties may refer to.