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Economics Unit 6
| Term | Definition |
|---|---|
| Fees | Charged to the credit card user for different actions or missteps during use of their card |
| Annual Fee | Fee charged for just having a card. Can range from $100 to $500 dollars, but some providers don’t charge a fee |
| Interest Charges | Interest charged in money not paid off each billing cycle (depends on APR) |
| APR | Percentage rate paid on credit card debt |
| Late Payment Fee | Charged when you pay your credit card bill late ($15-50) |
| Over the Limit Fee | Charged for exceeding your credit limit (have to opt into) |
| Grace Period | Time between billing cycle end and due date for interest fee payments |
| Installment Loans | - Used to finance specific purchases for a specific amount of time - Regular payments are made to pay the interest and the principal |
| Revolving Credit | - An open line of credit that can be used for any purchases as long as you’re under the credit limit - Payment amounts vary each pay period based on the size of the debt |
| Secured Debt | Debt is tied to a specific asset that can be used as collateral and repossessed if borrower doesn’t make payments |
| Unsecured Debt | - Debt is not tied to a specific asset - There is no collateral that can be repossessed if borrower defaults |
| Variable Rate | Interest rate can change during the duration of the loan based on the prime rate or an index rate |
| Fixed Rate | Interest rate remains constant during the duration of the loan |
| Collateral | Item you put at risk in case you can’t make loan payments |
| Repossession | Retaking possession of something when you can’t make a payment |
| Foreclosure | Taking possession of a mortgaged property when mortgage payments fail to keep up (They take your house if you can’t pay) |
| Credit Report | A statement with information about your credit activity (loan history, credit accounts, etc.) |
| Credit Score | Numerical value calculated based on your credit report |
| FICO | - Fair Isaac Corporation - Most commonly used company to determine score |
| Hard Credit Inquiry | When a lender accesses your credit file to determine your creditworthiness for opening a line of credit (Affects credit score for short period of time) |
| Soft Credit Inquiry | When you or someone else checks your credit file unrelated to a specific application for a credit line (Does not impact credit score) |
| Predatory Lending | Causes people to fall into a cycle of debt due to their short repayment terms, high interest rates, and hefty fees |
| Payday Loan | Most common form of predatory lending, small, short-term cash loans |
| Bankruptcy | When a borrower legally states they are unable to pay their debts and other obligations |
| Liquidation | To turn something into immediately usable cash |
| What are some common fees associated with credit cards? | - Annual fee - Interest charges - Late payment fee - Over the limit fee |
| What are some reasons why credit is important? | Builds a credit history which allows you to take out larger loans for when you need to pay for larger purchases |
| What is the credit cycle? | Expansion → Peak → Contraction → Trough |
| What is the minimum grace period length? | 21 days |
| What are some common expenses people use credit to buy? | - Cars - Homes - College - Expensive - Purchases |
| What is the difference between installment loans and revolving credit? | - Installment loans are used for a specific purchase - Revolving loans are used for multiple purchases |
| What is the difference between secured and unsecured debt? | - Secured debt is tied to a specific asset - Unsecured debt is tied to nothing |
| Example of secured debt? | Mortgage |
| Example of unsecured debt? | Credit card |
| What are four questions you should ask yourself before using credit? | - Is it necessary? - Is the item worth the cost + interest? - Will the payment fit in my monthly budget - Could I wait to buy it later instead of using credit now? |
| Why is it important to check your credit score? | Helps you manage your credit and know your current credit position |
| Can scores differ from place to place? | Yes |
| What impacts your credit score? | - Payment history - Current unpaid debt - Length of credit history - % of credit used - New application for credit |
| What are the three credit bureaus? | - Equifax - Experian - TransUnion |
| How many free credit reports do you get from the bureaus each year? | One |
| What are the five Cs of credit? | - Character - Capacity - Capital - Collateral - Conditions |
| What does character mean? | - Credit history - Essentially a borrowers track record when it comes to credit history |
| What does capacity mean? | - Debt to income ratio - Total monthly debt payments divided by gross monthly income - Lower DTIs are better (36% rule) |
| What does capital mean? | - Money the borrower has - More money for a down payment equals less likely to default on payments |
| What does collateral mean? | An asset that can be used for loan security |
| What does conditions mean? | - Purpose of the loan - Amount of money - Interest rates |
| What are the five Cs of credit used for? | Used to determine the creditworthiness of borrowers |
| Examples of hard inquiries? | - Application for a new credit card - Purchasing a new car - Buying a house - Renting an apartment - Applying for a personal loan |
| Examples of soft inquiries? | - Checking your own credit - Requesting utilities - Background checks - Loan pre approval |
| What is the FCRA and what does it do? | - Fair Credit Reporting Act - Law that promotes accurate, honest, and privately stored credit information in credit reporting agencies |
| What are some consequences of unpaid debt? | - Foreclosure - Repossession - Wage garnishment - Lawsuit |
| What is the debt snowball? How does it work? | - Method to reduce debt quicker - Prioritizes paying off debts with the smaller balance |
| What is the debt avalanche? How does it work? | - Method to reduce debt quicker - Prioritizes paying off debts with the higher interest rate |
| What is the goal of each of the debt management methods? | Reduce debt quickly |
| Which method is most effective based on studies? | Avalanche method is most effective |
| What is the most common form of predatory lending? | Payday loans |
| How does a payday loan work? | Loans are small, short-term cash loans that are due by next paycheck |
| Why are payday loans so bad? | Loans can have interest rates as high as 780% |
| What is a cycle of debt? | When borrowers that are unable to repay the loan, take out new loans or rollover the old one |
| What are the six types of identity theft? | - Social Security ID Theft - Tax ID Theft - Medical ID Theft - Employment ID Theft - Child ID Theft - Criminal ID Theft |
| What are the three types of bankruptcy we learned in class? | - Chapter 7 - Chapter 11 - Chapter 13 |
| Which type of bankruptcy is most common? | Chapter 7 |
| What are the downsides of bankruptcy? | - Major hit on credit report - Collateral seizure on secured loans - Makes future borrowing very difficult |
| Why do people file for bankruptcy? | Debts could be forgiven by the state |
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