Credit Fundamentals
Credit is needed when...
When renting homes, buying a car, and qualifying for credit cards or loans.
Why do banks charge interest on credit cards?
Interest is a form of “rent” you pay to use the bank’s money. This compensates for the risk of lending.
What is a credit card?
A plastic/metal card that allows the user to temporarily borrow money.
What is a late fee?
A penalty charged when payment is received after the due date.
The “golden rule” of using credit cards to avoid debt
Spend only what you can pay off in full, every due date.
What is credit?
The ability to borrow money with the idea of paying it back over a select period of time.
The acronym APR stands for...
APR stands for annual percentage rate; the yearly interest rate charged on loan balances.
Standard, Student, and Balance Transfer cards.
The difference between a cash advance fee from purchasing something normally.
Cash advances are different due to their upfront fees for withdrawing cash. Once withdrawn, that interest rate accrues immediately.
Why is the length of credit history important?
It proves to lenders that you have a long-term track record of being responsible with money.
Credit that is paid in full once a month.
Open Credit
Imagine you have a credit card in which you only pay the minimum payment each month. What happens to the interest?
It compounds, meaning you pay interest on your interest, increasing your total debt substantially.
The credit a standard credit card is associated with.
Revolving Credit
Aside from a fee, what is the biggest danger of a maxed out credit card?
A maxed-out credit card damages credit score by increasing your credit utilization ratio.
Is it better to close an open, but old credit card you don’t use, or leave it open?
Keeping it open is better. Closing a credit card can shorten credit history and reduce your total available credit.
Credit that has to be paid back after taking a loan out.
Installment Credit
True or False:
If you pay your statement in full by the due date, you pay $0.00 in interest.
True. This is known as the grace period.
Debit pulls directly from money you currently have in your bank account; credit cards use money borrowed from the bank within a credit limit that must be paid back.
Penalty APR
An extremely high interest rate triggered by a late payment that can last indefinitely.
How does your credit score affect your car insurance or cell phone plan?
Companies use it to set your premiums or deposits. Lower scores often mean higher monthly bills.
Label the FICO ranges: 300-579, 580-669, 670-739, 740-799, 800-850.
Poor: 300-579
Fair: 580-669
Good: 670-739
Very Good: 740-799
Exceptional: 800-850
If you have a $1,000 balance and 20% APR and make zero payments, will you owe $1,200 after a year?
No! You will owe more due to monthly (or daily) compounding interest.
What is a balance transfer card, and why do people get one?
A card that allows people to move debt from a high-interest card to a low-interest card to save money on interest while paying it off.
Two ways defaulting can impact your life for 7 years.
Denied loans
Difficulty finding housing
Potentially being rejected for certain jobs
Explain the 30% rule when it comes to credit utilization.
To keep a high score, you should never use more than 30% of your total available credit limit.