Taxes and Credit
Lesson 1: Taxes
Vocabulary
tax: is a financial obligation that a person or company is required by law to pay to the government.
Federal taxes: are taxes that are paid to the federal government
federal government: is the central government of the U.S.
Internal Revenue Service (IRS): is the government agency in charge of administering federal taxes.
Federal income taxes: are taxes paid to the federal government on an individual's or company's income.
capital gains tax: is a tax that applies to investments and other personal property.
short-term capital gain: If the investment or property is held for less than a year
long-term capital gain: If the investment or property is held for more than a year
Social Security taxes: are used to provide income for retired and disabled people and their families.
Medicare tax: is used to provide medical benefits for people who are ages 65 and over.
self-employment tax: is a federal tax for people who are self-employed
Federal Unemployment Tax Act (FUTA): provides income for workers who are unemployed.
State taxes: are taxes that are paid to the state government.
Transaction taxes: are taxes charged on sales of products and services.
Sales taxes: are a common type of transaction tax.
Local taxes: are taxes that are paid to a local government within a state, such as a county, city, water or fire management district, school district, or library district.
Property taxes: are taxes charged on property, such as real estate, cars, boats, business inventories, and other properties.
Filing taxes: is when a person or organization completes a tax form that shows how much the person or organization owes in taxes.
tax refund: is when the government pays money back to people or organizations that overpaid on their taxes.
Payroll withholding: is when a company sets aside a specific amount of an employee's paycheck for specific purposes, such as income tax, Social Security tax, Medicare tax, or a retirement fund.
Gross pay: is the full amount of wages or salary that an employer agrees to pay an employee. This is the amount they agree on when the employee accepts the job.
Net pay: is the amount of money that actually gets paid to the employee after payroll withholding.
Estimated tax: is a way for businesses and self- employed people to set aside money toward their taxes four times during the year, instead of paying the full amount due at tax time.
IRS audit: is when the IRS performs an examination of your tax forms to make sure everything you have claimed is accurate.
1040 tax form: is the tax form used by individuals to file their federal taxes.
dependent: is a member of the household who depends on your income, such as a child or relative.
social security number (SSN): is a nine-digit number assigned to a U.S. citizen or resident.
Lesson 2: Establishing Credit
Vocabulary
Credit: is a commitment to pay for something in the future, instead of buying it right away.
Debt: is money that you owe to a person or organization.
Debtor: is a borrower who owes money to another person or organization.
Creditor: is the lender who is owed the money.
Consumer credit: is credit that is used by individual consumers.
Finance charge: The interest rate on a credit card
Credit history: is your history of using credit and making payments on time.
Defaulting: is when a borrower fails to pay what is owed.
Credit bureau: is an organization that keeps credit history records.
Credit score: is a number that tells lenders how likely you are to make payments on time.
Credit card: is a card that looks similar to a debit card, but it is connected to a credit account, instead of a bank account.
Secured credit: is a way to link an asset (something you own that is worth money) to a credit card or loan, so the lender can take the asset if you fail to pay.
Co-signing: is a way to take advantage of someone else's credit history.
Primary borrower: is the main person who uses the credit and is responsible for paying back the money owed.
Co-signer: is a person with established credit who shares responsibility for the debt.
Establishing Credit
Step 1. Open a bank account.
Opening a bank account is a good first step toward establishing credit. You can open a bank account even if you are less than 18 years old.
Your bank account information doesn't get reported to the credit bureaus, but it shows lenders that you are able to manage money.
Creating a relationship with a bank is helpful, because the bank is more likely to give you a credit card if you have a bank account there and use it appropriately.
If you open a bank account and misuse it by spending more money than you have and creating overdraft fees, the bank is less likely to trust you with a credit card.
If you use your bank account wisely and appropriately, the bank is more likely to give you a credit card.
Step 2. Get a credit card.
Credit cards are a form of electronic funds transfer, because the lender transfers money electronically to let you pay for things. You then have to pay the lender back later.
If you are at least 18 years old and are a college student or have savings or a steady income, you may be able to get a standard credit card, such as Visa®, MasterCard®, or American Express®.
If you have a bank account, you may be able to get the card through the bank.
When you have a credit card, use it carefully for purchases that you will be able to pay off right away. Pay off the balance due in full each month.
You do not need to have money owed on your credit card in order to improve your credit score. You just need to use the card to show that it's active.
Paying off the balance in full each month will avoid interest charges, and it will show that you are able to manage your debt well.
If you are unable to get a standard credit card because you haven't established enough credit or because you have bad credit, there are alternate options that can help you establish enough credit to get a credit card.
Step 3. Use credit wisely.
When you have a credit card, use it regularly, but don't charge more than you can afford to pay each month.
It's easy for new users of credit to go overboard and charge more than they can afford to pay back.
Use these tips to avoid going into more debt than you can handle.
Pay all bills on time.
Don't create more credit card debt than you can pay off in a month.
Pay off credit card balances in full each month. Don't just make the minimum payment.
Don't use more than 30% of your total available credit at a time. Less than 10% is best.
Alternate Options
Department store or gas cards are easier to get than standard credit cards.
They usually have lower limits and higher interest rates.
Because the interest rate is high, it's especially important to pay off the balance each month.
Some of these types of cards don't report information to the credit bureaus, so make sure they do before getting the card.
If the information isn't being reported, the card won't help you establish a credit history.
Even if it is reported, this type of card is not as good for your credit score as a standard credit card, but it can help you get enough credit to get a standard credit card.
When you have enough credit history to get a standard credit card, switch to that type of card instead.
If you are unable to get a department store or gas card, you may be able to get secured credit.
There are some untrustworthy lenders offering secured credit, so make sure to use a lender you trust.
Look for a card with no application fee and a low yearly fee. It should convert to a regular credit card after about a year or a year and a half.
Make sure the secured credit information will be reported to the credit bureaus, or it won't help you establish credit.
Lesson 3: Borrowing and Lending
Vocabulary
Loan: is money that you borrow from a person or organization with the commitment to pay back the amount in full.
Principal: the amount of money the lender gives to the borrower
Assets: are valuable things that you own. Lenders often want assets to be linked to the loan, so they can take the assets if you don't pay.
Collateral: is an asset or group of assets that are linked to a loan.
Cash flow: is the flow of cash in and out of a business.
Down payment: is a cash payment made by the borrower of a percentage of the total cost of the asset. Home and car loans usually require a down payment.
Line of credit is a type of short-term credit a lender can offer that includes a maximum amount of credit and a maximum length of time, but that lets the borrower decide how much of that credit to use.
Small Business Financial Exchange: is a source of credit information about small businesses. It is maintained by the Equifax credit bureau.
Installment: is a payment.
Installment credit: is when the borrower owes a specific amount and agrees to pay it in a set number of payments of equal amounts.
Closed-end installment credit: which allows the borrower to take possession of an expensive item and pay off the price of the item in a set number of equal payments at regular intervals, such as monthly.
Noninstallment credit: is credit that is paid all at once, in a single payment.
Single payment loans: are loans that require payment in full on a specific date, either with or without interest.
Revolving credit: is when the borrower is approved for borrowing up to a set credit limit, and the borrower can choose how much of that credit to use and when to pay it off.
Applying for a Loan
Loans are usually made for a specific purpose, such as a car loan, a home loan (mortgage), or a business loan.
Banks are a common provider of loans to individuals and small businesses, but there are many other types of lenders, too.
To get a bank loan, you'll fill out an application. The application will ask for information the lender needs in order to decide whether to give you the loan.
Your credit history and credit score are important factors that lenders will consider.
If you don't have a credit history or credit score, it will be difficult for you to find a lender willing to give you money.
A good credit score will help you get a lower interest rate.
Longer-term loans usually have higher interest rates than short-term loans, because the lender's money is tied up for longer, and the long-term future is less predictable than the near future
Interest rates are also affected by the national and global economy. They rise and fall based on complex economic factors.