Credit Basics
What is the ability to acquire money, goods, or services from others without immediate payment?
Credit
What type of credit allows you to borrow money repeatedly up to a set limit?
Revolving credit
What do lenders use to analyze a borrower’s creditworthiness?
Credit evaluation procedures (including credit scores, repayment history, collateral)
Name two types of personal bank accounts used to manage money.
Checking account, savings account
Which employer-sponsored plan allows individuals to save for retirement and defer taxes?
401(k) plan
Credit is considered both a privilege and a ______.
Convenience
Name the three main types of loans based on time.
Short-term, intermediate-term, long-term
What is the credit score range that indicates the best interest rates?
700-850
Why is it important to have an emergency fund?
Provides a financial cushion for unforeseen expenses or emergencies
Name two types of stocks and how they differ.
Common stock (voting rights, last to receive dividends); Preferred stock (no voting rights, first to receive dividends)
Name two ways credit allows people to make purchases without cash.
Buy now and pay later; pay for large purchases in installments; take out a loan
Which type of loan is typically used to buy a house and lasts over ten years?
Long-term loan or mortgage
Name three things that do not affect your FICO score.
Race, age, gender, income, employment, address
What is the main difference between a traditional IRA and a Roth IRA?
Traditional IRA contributions are tax-deductible, but withdrawals are taxed; Roth IRA contributions are taxed, but withdrawals are tax-free
What is collateral and why is it important for loans?
Property or assets pledged to a lender to secure a loan; it protects the lender in case of default
What is a legally binding contract that outlines terms like credit limits, fees, and APR?
Credit agreement
What type of loan is often used to finance depreciable assets like cars or furniture?
Intermediate-term loan or installment loan
What are two steps a borrower can take to improve their credit score?
Pay bills on time; keep credit card balances low; avoid opening unnecessary accounts; dispute errors
List two advantages of using a certificate of deposit (CD).
Higher interest rates than savings accounts; fixed interest rate; provides predictable income
How does a money market account differ from a savings account?
Money market accounts often earn higher interest and allow limited check-writing; savings accounts earn interest but have stricter withdrawal limits
List three risks or disadvantages of using credit.
Can lead to debt if not managed, usually costs interest or fees, not always available to everyone
Explain the difference between installment loans and revolving credit accounts.
Installment loans have fixed payments over a set period; revolving credit can be used repeatedly up to a limit and payments vary
Explain how negative information like bankruptcy can affect your credit report and for how long.
Bankruptcy can stay on your credit report for up to 10 years, lowering your credit score and affecting loan approval and interest rates
Explain how the national unemployment rate can affect personal financial planning.
Low unemployment increases savings potential due to higher income and economic growth; high unemployment may reduce income and saving ability
Explain how banks use interest rates on loans and CDs to manage risk and attract customers.
Banks charge interest on loans to cover risk and make profit; offer competitive CD rates to attract deposits and encourage saving