Purpose of Credit
What is the primary purpose of credit in personal finance?
To borrow funds for purchases or expenses when cash isn’t available.
What type of credit requires no collateral?
Unsecured credit
What’s a pro of secured credit?
Lower interest rates.
What does APR stand for?
Annual Percentage Rate
What increases the cost of unsecured credit?
Higher interest rates.
Name one major purchase credit often finances.
Homes, cars, or education.
Which type of credit is tied to an asset like a house or car?
Secured credit
What’s a risk of carrying a credit card balance?
High interest charges.
What’s the term for the cost of borrowing expressed as a percentage?
Interest
What’s a financial risk of defaulting on a secured loan?
Loss of collateral (e.g., car or home).
What does a healthy credit rating improve access to?
Better loan terms and lower interest rates.
What’s an advantage of credit cards as revolving credit?
Flexible spending or rewards programs.
How do student loans benefit borrowers long-term?
Investment in education increases earning potential.
What’s the penalty for missing a payment deadline?
Late fees
What’s a cost associated with credit cards if the balance isn’t paid off?
Finance charges
Which element of creditworthiness reflects a person’s repayment history?
Character
Name a con of payday loans.
High interest rates or debt traps.
What’s a major risk of mortgages?
Foreclosure if payments are missed.
What’s the name of the interest rate applied after missing payments?
Default rate
How does a long repayment term affect student loans?
Increases total interest paid.
List three of the five elements of creditworthiness.
Character, Capacity, Capital, Collateral, Conditions (any three).
What’s a key difference between installment loans and revolving credit?
Installment loans have fixed payments; revolving credit allows reuse of the credit limit.
Why are payday lenders considered predatory?
They charge exorbitant interest rates (e.g., 300%+ APR) and target vulnerable borrowers.
What are the fees paid at the end of securing a mortgage called?
Closing costs
What makes predatory loans especially risky for money management?
Rapid debt escalation due to extreme interest rates and short repayment periods.