Credit Basics
The ability to borrow money or access goods and services with the understanding that payment will be made in the future.
What is Credit?
A plastic card issued by a financial institution that allows the holder to borrow funds to pay for goods and services.
Credit Card?
A numerical representation of a person's creditworthiness based on their credit history,
Credit Score
An amount of money borrowed by one party from another, which must be paid back, typically with interest.
Debt?
The agreed-upon time period during which a borrower must repay a loan, typically expressed in months or years.
Loan Term
The cost of borrowing money, usually expressed as a percentage of the principal, which is paid to the lender.
Interest?
A loan used to purchase or maintain a property, with the property serving as collateral for the loan.
Mortgage
Credit Score goes from ___ to _____
300 to 850?
A financial measure that compares an individual's monthly debt payments to their monthly gross income, used by lenders to assess creditworthiness.
DTI?
A valuable asset pledged by a borrower to secure a loan, which can be seized by the lender if the borrower defaults on the loan.
Collateral
The maximum amount of credit that a financial institution extends to a borrower on a credit card or line of credit.
Credit Limit?
A type of loan used to finance the purchase of a vehicle, often requiring monthly payments over a set loan term.
Auto Loan?
Name one factor that impacts your credit score.
1. Payment History, 2. Amount Owed, 3. Length of Credit, 4. Applying for Credit, 5. Type of Credit
A debt repayment strategy where you pay off your smallest debts first, regardless of interest rate, to build momentum and increase your sense of financial achievement.
Debt Snowball Method
A person who agrees to be legally responsible for repaying a loan if the primary borrower fails to do so, often used to help someone with limited credit history obtain a loan.
Cosigner
The yearly interest rate charged on borrowed money or earned through an investment, expressed as a percentage.
APR
Money borrowed for personal reasons (vacation, medical bills, etc); to be repaid within a specific time frame and with added interest
Personal Loan
One reason why credit score matters.
Lenders will lend you money and give it to you at better interest rates
A debt repayment strategy where you focus on paying off the debt with the highest interest rate first, potentially saving more money in interest over time while reducing overall financial burden.
Highest Interest First Method
Making monthly payments for a fixed period of time to use the car, but then you must return it without owning it (renting a car)
Leasing
A friend uses a credit card to pay for a $1,200 purchase, makes only the minimum payments for a year at an APR of 18%. Explain qualitatively (no calculation required) how interest and minimum payments affect how long it will take to pay off the balance.
It will cost them more money since they are only making monthly minimum payments
Describe why one loan is an example of bad debt.
Teacher preference
One reason one should someone check their credit report yearly.
Fraud, managing credit, etc
Describe why one loan is an example of good debt.
Teacher preference
A loan under which a property owner uses the property as collateral and borrows the value (equity) of their home, normally used for home repairs, education, and other personal reasons
Home Equity Loan