Untitled Flashcard Set
Credit Card
A plastic card issued by a financial institution that allows consumers to borrow funds up to a certain limit to pay for goods and services. It creates a revolving account and typically has a grace period before interest is charged on new purchases. You must pay back the borrowed amount, usually with interest if not paid in full by the due date.
Types of Credit Cards
Rewards credit cards: Offer points, miles, or cash back on purchases.
Secured credit cards: Require a cash deposit as collateral, often used by people building or rebuilding credit.
Student credit cards: Designed for college students, often with lower limits and specific perks.
Balance transfer credit cards: Offer introductory 0\% APR on transferred balances for a period.
Travel credit cards: Offer rewards related to travel, like airline miles or hotel points.
Low-interest credit cards: Designed to offer lower ongoing APRs.
Types of Savings
Savings account: A basic interest-bearing account good for short-term savings.
Money market account (MMA): Offers higher interest rates than regular savings accounts, often with check-writing capabilities, but usually requires a higher minimum balance.
Certificates of Deposit (CDs): A type of savings account that holds a fixed amount of money for a fixed period of time (e.g., 6 months, 1 year, 5 years) and usually earns a higher interest rate than a regular savings account. There's often a penalty for early withdrawal.
High-yield savings accounts: Online savings accounts that often offer significantly higher interest rates than traditional bank savings accounts.
Retirement accounts (e.g., 401(k), IRA): Long-term savings for retirement, often with tax advantages.
Investment accounts (e.g., brokerage accounts): For investing in stocks, bonds, mutual funds, etc., for longer-term growth.
Interest: What it is and How it Works
Interest is the cost of borrowing money or the return on saved money.
When borrowing: It's the fee paid by the borrower to the lender, typically expressed as a percentage of the principal (the amount borrowed). For example, if you borrow 1000 at 5\% interest, you pay 50 in interest per year.
When saving: It's the money earned by the saver from the financial institution for depositing funds. The interest rate on savings accounts determines how much your money grows over time.
Credit Score
A numerical expression, generally ranging from 300-850, based on an analysis of a person's credit files, to represent the creditworthiness of an individual. Lenders use it to assess the likelihood of an individual repaying their debts.
APR (Annual Percentage Rate) Rate
The annual rate charged for borrowing or earned by investing, expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan or income earned on an investment. It includes not only the interest rate but also other fees or additional costs associated with the transaction.
Balance Transfer
The process of moving debt from one credit card account to another, often to a card with a lower introductory APR. This can help reduce interest payments and consolidate debt.
Rent to Own
An agreement where you rent a property for a period, with the option to buy it before the lease expires. A portion of your rent payments may be applied towards the purchase price.
Installment Agreements
A loan that is repaid over time with a fixed number of scheduled payments. Each payment (or installment) is usually a fixed amount, and includes both principal and interest. Examples include car loans and mortgages.
Layaway
A purchasing agreement where a retailer sets aside an item for a customer, who makes a series of payments over time. The customer receives the item only after the full price has been paid. No interest is usually charged, but fees might apply.
Loss Aversion
A cognitive bias where the pain of losing something is psychologically more powerful than the pleasure of gaining the equivalent thing. People are more motivated to avoid a loss than to achieve an equivalent gain.
Endowment Effect
A cognitive bias in which people ascribe more value to things merely because they own them, regardless of their objective value. For example, a person might demand more to sell a mug they own than they would be willing to pay to buy an identical mug.
Anchoring Bias
A cognitive bias where an individual relies too heavily on an initial piece of information (the "anchor") when making decisions. Subsequent judgments are made by adjusting away from this anchor, but often remain biased towards it.
Present Bias
A cognitive bias that describes the tendency of people to overvalue immediate rewards and undervalue future rewards. This can lead to procrastination or making choices that benefit the short term but harm the long term.
SMART Goals
A framework for setting effective goals. SMART stands for:
Specific: Clearly defined and focused.
Measurable: Quantifiable criteria for tracking progress.
Achievable: Realistic and attainable goals.
Relevant: Aligns with broader objectives.
Time-bound: Has a target date or deadline.
Payday Loans
Short-term, high-interest loans, typically for small amounts, designed to be repaid on the borrower's next payday. They are notorious for extremely high APRs, often leading to debt cycles.
Title Loans
Short-term, high-interest loans where the borrower uses their vehicle title as collateral. If the borrower defaults, the lender can repossess the vehicle. Similar to payday loans, they carry very high interest rates.
Debt to Income Ratio (DTI)
A financial metric that compares an individual's total monthly debt payments to their gross monthly income. Lenders use DTI to assess a borrower's ability to manage monthly payments and repay debts.
Formula: \frac{\text{Total Monthly Debt Payments}}{\text{Gross Monthly Income}}
Revolving Credit
A type of credit that allows you to borrow up to a certain limit, repay the borrowed amount, and then borrow again. There's no fixed end date, and payments fluctuate based on the outstanding balance. Credit cards are a prime example.
Installment Credit
A type of loan where a fixed amount of money is borrowed and repaid over a set period of time through regular, equal payments (installments). Once the loan is paid off, the account is closed. Examples include car loans, mortgages, and personal loans.
Secured Loans
Loans backed by collateral; if the borrower defaults, the lender can seize the collateral.
Mortgage: A loan used to purchase real estate, with the property itself serving as collateral.
Auto loan: A loan used to purchase a car, with the vehicle serving as collateral.
Home equity loan: A loan that allows homeowners to borrow against the equity in their home, using the home as collateral.
Pawn shop loan: A loan where personal property (e.g., jewelry, electronics) is used as collateral. If the loan is not repaid, the pawn shop keeps the item.
Unsecured Loans
Loans not backed by collateral. The lender relies solely on the borrower's creditworthiness and promise to repay.
Personal loans: General-purpose loans that can be used for various needs, often unsecured.
Credit card: While some credit cards are secured, most common credit cards are unsecured, meaning no collateral is required beyond your promise to pay based on your credit history.
Secured Credit Card
A type of credit card that requires a cash deposit as collateral. This deposit serves as the credit limit and reduces the risk for the issuer. It's often used by individuals with poor or no credit history to build or rebuild their credit.
APR (Annual Percentage Rate) Details
Fixed interest rate: An interest rate that remains the same for the entire duration of the loan.
Variable interest rate: An interest rate that can change over the life of the loan, typically in response to market interest rates (e.g., prime rate).
Grace period: A period, typically 21-25 days, during which no interest is charged on new purchases made with a credit card, provided the previous month's balance was paid in full by the due date.
Introductory Interest Rates
Promotional interest rates, often 0\% or very low, offered for a short period (e.g., 6-18 months) at the beginning of a new credit card or loan. After the introductory period, the rate reverts to a higher, regular APR. These are "short-term deals."
Snowball Method (Debt Repayment)
A debt reduction strategy where you pay off debts in order from smallest balance to largest balance, regardless of the interest rate. Once the smallest debt is paid off, you take the money you were paying on that debt and add it to the payment of the next smallest debt. This method provides psychological wins.
High Rate Method (Debt Repayment, also known as Debt Avalanche)
A debt reduction strategy where you pay off debts in order from highest interest rate to lowest interest rate. This method saves the most money on interest costs in the long run.
Debt Consolidation
The process of combining multiple debts into a single, larger loan, often with a lower interest rate or a more favorable repayment plan. This can simplify payments and potentially reduce overall interest paid.
Debt Settlement
An agreement between a borrower and a lender for the borrower to pay a portion of the total amount due, and the remainder of the debt is forgiven. This usually negatively impacts credit scores and may result in tax implications on the forgiven amount.
Bankruptcy
A legal process for individuals or businesses who can't repay their debts. It provides a legal fresh start but severely damages credit for many years. There are different types, such as Chapter 7 (liquidation) and Chapter 13 (reorganization).
Amortization Schedule
A table detailing each periodic payment on an amortizing loan (like a mortgage or car loan). It shows how much of each payment is applied to the principal and how much to interest, with the interest portion decreasing and the principal portion increasing over the loan's term.