Credit Vocab
What does character refer to?
A borrower's history of paying obligations
Transaction Fees
A charge for making a transaction. Transaction fees may be a percentage of the total amount or a flat rate regardless of size
Installment Plan
A credit system where payment for goods is made with fixed payments over a period of time
Revolving Credit
A credit system whereby the borrower can make periodic purchases and payments
Fair Credit Reporting Act
A federal law governing the activities of credit bureaus and creditors. It requires creditors to furnish accurate and complete information to borrowers; it also establishes a process consumers may use to correct inaccuracies in credit reports
Fair Debt Collection Practices Act
A federal law that bars collection agencies from using threats, harassment or abuse in their efforts to collect debts
Fair Credit Billing Act
A federal law that requires creditors to mail out bills at least 14 days before payment is due and also establishes procedures for resolving billing errors on credit accounts
Open-end Credit
A loan where a total amount is set and the borrower can use any or the entire loan, repaying it over time, also known as a line of credit
Closed-end Credit
A loan where the entire amount is loaned at the beginning and all repayment and interest must be repaid by a specific date
Bankruptcy
A process whereby a debtor may liquidate or adjust their debts. Bankruptcy may be considered when an individual's debts exceed their assets
Layaway
A system where period payments are made on goods and upon final payment, the goods are delivered
What should individuals do before applying for credit or when denied credit?
Access their own credit reports
Penalty Charges
Additional charges to an account for late payment, missed payment or exceeding the credit limit
What can poor credit do?
Adversely affect one's ability to get a job, rent an apartment, obtain a car loan, obtain a security clearance-- and may even bring an increase in car insurance
Credit Card Accountability, Responsibility and Disclosure Act (CARD)
An act of Congress that establishes responsibilities of card issuers and protections for cardholders regarding interest rates, grace periods, pay-off times and other information
Equal Credit Opportunity Act
An act of Congress that makes it unlawful for a credit grantor to discriminate on the basis of race, color, religion, national origin, sex, marital status, or age (provided the applicant is legally able to enter into a contract)
Rent-to-Own
An arrangement whereby consumers rent something (often furniture), making regular rental payments, and become owners of the rented object(s) after a specified period of time--sometimes automatically and sometimes with an additional payment. A legal business but very costly to consumers
What should be consulted for legal advice on when and how to file for bankruptcy?
An attorney
What does collateral refer to?
Assets the borrower has that could be taken by the lender if the borrower fails to repay
Credit Card Accountability, Responsibility, and Disclosure (CARD) Act
Bans unfair rate increases and unfair fees, requires that credit card contract terms be presented to consumers in clear language, and ensures accountability from credit card issuers and regulators
What should be done to secured and unsecured loans with regard to the costs and conditions of the loan?
Be analyzed
What are the 2 most common types of bankruptcy?
Chapter 7 and Chapter 13
What 5 things are factors that determine creditworthiness?
Character, capacity, capital, conditions and collateral
Secured Loan
Credit with collateral (For example, a house or a car) for the lender
Unsecured Loan
Debt without collateral; credit card debt, for example
Float
Deferred payment
Do secured loans have the same or different requirements than unsecured loans
Different
Good credit scores may what?
Enhance one's ability to borrow and the interest rate charged
What does making payments on time do?
Establishes and maintains an individuals good credit
Credit scores also do what?
Help decrease one's insurance rates and improve employment options
Capacity
In the context of credit transactions, capacity is one of the Cs of Credit. It is an indicator of how creditworthy a prospective borrower is likely to be, as determined by the borrower's current and future earnings relative to current debt. High earnings and low debt, for example, indicate a strong capacity to make payments on the loan in question
Capital
In the context of credit transactions, capital is one of the Cs of Credit. It is an indicator of how creditworthy a prospective borrower is likely to be as determined by the borrower's current financial assets and net worth
Character
In the context of credit transactions, character is one of the Cs of Credit. It is an indicator of how creditworthy a prospective borrower is likely to be, as determined by the borrower's handling of past debts and his or her stability in jobs and residences
Compound Interest
Interest that is earned not only on the principal but also on the interest already earned
What should the consumer reporting company then do?
Investigate the issue and correct the error
Are secured loan amounts longer or shorter?
Longer, and the time to repay may be longer
What is an unsecured loan?
Made without the borrower offering any assets and is based on the borrower's credit rating alone
What is a secured loan?
One in which the borrower risks loss of an asset (e.g., automobile, house) if unable to repay
Equifax
One of three credit reporting agencies
Experian
One of three credit reporting agencies
TransUnion
One of three credit reporting agencies
What does bankruptcy affect?
One's ability to obtain credit for a period of time and may affect employment
What does capacity refer to?
One's ability to repay and is usually measured by a current income and level of outstanding debt
What does conditions refer to?
Other circumstances that may impact the ability to obtain credit (e.g., economic conditions)
Rewards
Points or cash-back offers that can be used to redeem for products. Airlines, hotels and some retailers offer rewards. These rewards often raise the total cost of a card in terms of annual fee or a higher interest rate
Fair Debt Collection Practices Act
Prevents abusive and deceptive practices by debt collectors
Equal Credit Opportunity Act
Prohibits creditors from discriminating against a credit applicant on the basis of race, color, religion, national origin, sex, marital status, or age or because the applicant receives public assistance
Fair Credit Billing Act
Protects consumers against inaccurate and unfair credit billing and credit card practices and provides consumers with a mechanism for addressing billing errors
Promotional Incentives
Rates or payment options used to induce consumers to apply for certain types of credit cards. Included are low or zero-interest rate cards (sometimes called teaser rates) that last only for a short period. Also used are "no interest" if paid within a certain time period
Fair Credit Reporting Act
Regulates consumer reporting agencies and the use of consumer credit information
What does capital refer to?
Savings and other assets one can use to repay
Collateral
Something of value (often a house or a car) pledged by a borrower as security for a loan. If the borrower fails to make payments on the loan, the collateral may be sold; proceeds from the sale may then be used to pay down the unpaid debt
What should you do to correct errors in one's credit report?
Tell the consumer reporting company, in writing and with supporting documents, what information is inaccurate
What is Chapter 7?
The chapter of U.S. Bankruptcy Code providing for "liquidation" (i.e., the sale of a debtor's nonexempt property and the distribution of the proceed's to creditors)
What is Chapter 13?
The chapter of U.S. Bankruptcy Code providing for adjustment of debts of an individual with regular income. (Allows a debtor to keep a property and pay debts over time, usually 3-5 years)
Conditions
The general state of the economy. In periods of slow economic activity, lenders may be reluctant to lend out of fear that the borrower will be unable to pay
Credit Line
The maximum amount of money that will be extended to a person by a financial institution or credit-card issuer. Also known as credit limit
Minimum Payments
The minimum amount a credit cardholder is required to repay each billing period on an open balance
Annual Percentage Rate (APR)
The percentage of the principal of a loan to be paid as interest in one year. Differs from an add-on rate in that an APR is calculated on the declining balance of the loan. The Truth in Lending Act requires lenders to disclose APRs to prospective borrowers
Interest Rates
The price paid for using someone else's money, expressed as a percentage of the amount borrowed
Finance Charges
The total cost of credit, including interest and transaction fees
Annual Fee
The yearly charge for having a credit card or credit account
Do individuals file for bankruptcy voluntarily or involuntarily?
Voluntarily; however, creditors can force debtors into involuntary bankruptcy
Consumers should consider the impact on personal financial planning of credit card features;
• Annual percentage rate (APR) • Annual fees • Compound interest • Penalty charges • Credit line • Promotional incentives • Account disclosure statement • Minimum payments
Some costs and conditions to consider with secured and unsecured loans include
• Annual percentage rates • Finance charges • Monthly payments • Annual rates • Transaction fees • Length of time to repay the loan • Total amount required to pay off the loan • Loss incurred should the loan not be repaid on time
When considering sources of assistance for debt management, individuals should
• Distinguish between discrimination and legitimate credit denial • Ensure the right to appeal a credit denial • Apply knowledge of laws' protection of consumers who have credit problems • Review the ramifications of bankruptcy • Check telephone directories and internet sites for credit counseling services and commercial debt-adjustment firms that can help clients address credit problems, manage debt and rebuild credit • Evaluate sources for reliability and effectiveness
The benefits of using credit cards include
• Float (deferred payment) • Convenience • Compatibility to conduct online transactions • Rewards • Purchase protection • Fraud protection • Payment over time • Establishing credit
The most common causes of bankruptcy are
• Illness or injury • Failure to plan and budget • Small business failure • Job loss • Impulse, emotional spending • Economic downturn
Signs that a consumer is getting into credit trouble include
• Inability to pay bills • Making only the minimum payment • Using one credit card to pay other credit card balances • Receiving collection agency calls
Some methods of financing a purchase
• Installment plan • Layaway • Secured and unsecured loans
The costs of using credit cards include
• Interest • Fees (e.g., late, annual, over-the-limit) • Risk of identity theft • Risk of borrowing beyond the ability to repay • Length of time to pay off the balance when paying only the minimum payment
Some strategies for effective debt management include
• Maintaining accurate financial records • Making payments on time to avoid penalties and other debt problems (e.g., liens, foreclosures, garnishment, repossessions, evictions) • Using early payoffs, if advantageous • Ensuring against identity theft
Some types of credit are
• Open-end credit • Closed-end credit • Service credit • Revolving credit • Secured loans • Unsecured loans
Consumers of credit should compare
• Percentage rates • Annual fees • Transaction fees • Finance charges • Risk of losing assets
Some sources of financing are
• Retail stores • Banks and credit unions • Finance companies • Pawn shops • Payday loans • Title loans • Private lenders
Consumers should consider costs and benefits of various sources, including
• Retailers • Banks • Credit unions • Finance companies • Risk-based lending companies (e.g., payday loan services, pawnbrokers, title loan services)
