Credit Types
What is the difference between secure and unsecured credit?
Secure credit has collateral and unsecured credit does not
What is "interest"?
Interest is the amount of money a creditor or lender charges you to borrow money. Usually calculated as a percentage of the amount loaned to you.
What is a minimum payment?
The smallest amount you need to pay back to avoid additional fees on top of the interest.
Does paying your bills late lower your credit score?
Yes.
What are the 3 types of Unsecured Credit?
Credit Card, payday loan and line of credit.
How can you avoid paying large overdraft fees on your bank account if you spend more than what is in your account?
Set up your account with Overdraft Protection. Lower interest rate and lower fees. (paying $1-$5 vs $20-$50). Without Overdraft Protection, you pay a large fee even if you just go $1 under $0 in your bank account.
What is a credit line or credit limit?
The maximum you can spend on a credit card.
2 consequences of having bad credit or a low (or no) credit score:
1. Harder to get new loans/credit
2. Higher interest rates
What is a co-signer and what is the risk?
A co-signer is the security or collateral for the loan. If the person who got the loan cannot make their payments, then it is legally up to the co-signer to pay the loan back. If the co-signer can't pay the loan, then their credit score is damaged, potential lawsuits, wage garnishment, and debt collectors.
Which option offers the lowest interest and allows you to pay back a $1000 loan the fastest while making the minimum payment?
A) Regular Credit Card: 19.99% compounding interest
B) Line of Credit: 5.25% compounding interest
C) Payday loan: 29.99% compounding interest
D) It doesn't matter, you are paying back the same amount in the end
B) Line of Credit. Total paid back is $1083.25 over 3 years, 1 month
Both Payday Loan and Credit Cards have you paying hundred more and takes years longer to pay it off. Payday Loan: $2175.66 over 6 years 1 month Credit Card: $1471.41 over 4 years 2 months.
What are finance charges?
Interest charges which are based on what you did not pay on your previous balance.
If you have a bad credit score or no credit score, should you build credit before applying for loans or additional credit cards? Why or why not?
Yes, this will make it more likely to get approved, lower the amount of hard checks on you, get you better interest rates and larger loans/credit limits.
Why is a line of credit better than a credit card, a payday loan or a regular loan?
Low interest, only pay for what you use and no grace period
Why is compound interest more dangerous than regular interest?
If you do not pay the FULL amount of what you owe (including interest), then the interest is calculated on the ORIGINAL amount you owe AND the interest that has been added.
What happens if you pay off your credit card AFTER the payment due date?
You are still charged interest and late payment fees on your next statement based on the ENTIRE amount you just paid.
Will applying to multiple credit cards or bank loans affect your credit score? Why or why not?
Yes, multiple applications will lower your score since the creditor will have to do a Hard Check on you. Multiple Hard Checks give lenders red flags.
Name 4 of the 5 types of "secure credit"
Mortgage, car loan, secured credit card, cellphone or co-signer.
Why can it be risky to accept a credit increase on a credit card?
Credit companies will offer credit limits that are far beyond your spending limits to try to trick you into spending more, so they can charge you more interest. Only accept credit limit increases if you make enough money to pay it off quickly. Ex: if you make $3000 and your credit limit is $1000 it could be smart to increase it to $2000, but not $6000 since you cannot pay back $6000 quickly.
If your previous balance was $1000 and you made a payment of $250, bought $100 worth of stuff and were charged $50 in interest charges and fees what is your new balance?
$900 ($1000 - $250 + $100 + $50 = $900)
If you have a low credit score or no credit history, name 4 ways you can increase your score?
Pay credit bills on time (ideally in full), call the lender if you are having trouble paying (they can come up with a plan that will make it easier to pay back without affecting your credit score), use less than 50% of your total credit limit, don't go over your credit limit, have a longer credit history, don't transfer your balance to anothe card, limit the number of applications etc.