Financial Lit - Midterm - Credit

While ALL the information in a Schumer Box is important, which items do you think matter most on a day-to-day basis?

- Annual Percentage Rate (APR) for Purchases. - Minimum Finance Charge - Annual Fees

What factors influence the determination of whether you will get a loan and the interest rate?

- Credit Score - The loan you borrow - Life Situation - Longstanding relationship with financial institution - Cosigner

How do you establish credit without your parents?

- Pay towards your student loans. - Get a secured card like the capital one card. $200 deposit, the bank gives you an extra 100% limit then of $300. Just pay off of your balance.

Why is it important to get on your parents credit card as an authorized user?

- You build your credit early on. - Credit History/Journey 0 Boost your credit score from 0 early on.

Credit Card offers you 0% APR for 6 months, and on month 7 you are charged 18%. What does this mean?

0% introductory rate. After that, you will be charged 18% only if you do not pay the balance off.

What to find in a Schumer Box?

1. APR 2. Other APR's: Balance transfer rates, Cash Advance Rates, Penalty APR. 3. Variable Rate 4. Grace Period 5. Financial Calculation Method 6. Minimum Finance Charge 7. Annual Fees 8. Fee for Foreign Purchases 9. Other Fees: Balance transfer fees, cash advance fees, late fees. 10. Penalty Fees

What to do

1. Avoid quick cash loan with high interest rates (Payday Loans). 2. Be a "Deadbeat" - Pay everything off on your credit card in full each month with no late fees.

Repayment options for a credit card

1. Pay in full 2. Pay a little

Credit Card

A card that is used to make purchases that you want at the moment and then pay back the money usually at the end of the month to your credit card company. Payback what you spent.

What is a cosigner?

A cosigner is a person who signs onto a role taking financial responsibility in the event that the borrower can't pay back their loan. Your parents can go into contract with you to better your odds of getting a line of credit or a loan (Auto, Student).

Revolving Credit

A line of credit that remains available over time, even if you pay the full balance.

Which best describes how a credit card works? A. The credit card company extends you a line of credit. You purchase "stuff" and then have the choice to pay the balance in full or a minimum payment each month. B. The credit card company extends you a line of credit. You purchase "stuff" and the purchase gets directly paid with funds in your checking account. C. The credit card company extends you a line of credit. This is free money that you can use to purchase the "stuff" that you need. D. The credit card company extends you a line of credit. You then pay a small percentage of the cost of those purchases in one annual payment.

A. The credit card company extends you a line of credit. You purchase "stuff" and then have the choice to pay the balance in full or a minimum payment each month.

Line of Credit

An amount of credit that extends to a borrower. When the company lends you an amount of money through your credit and you used it to purchase the stuff that you want at that moment, you will pay back the credit card company later.

APR

Annual percentage rate The yearly rate of interest that is charged for using credit.

What is the advantage of paying your credit card balance in full each month? A. You pay only a small amount of interest. B. You have less of your credit limit available, therefore, less temptation to spend. C. You avoid paying any interest and fees. D. You will incur only a small "paid in full" fee on your next credit card statement.

C. You avoid paying any interest and fees.

Unsecured Debt

Debt created without any collateral promised to the creditor. Higher interest rates.

What happens if you only make the minimum payment on your credit card statement?

If you only make the minimum payment on your credit card statement, then you will be forced to pay more in interest, and it will take longer for you to pay off your balance.

When you go with the Pay a Little option on your credit card, how much can you use the credit card next month?

Line of Credit - Outstanding Balance = What You Can Spend

The loans that were most profitable tended to have the shortest / longest terms and the lowest / highest monthly payments.

Longest Lowest

Secured Loan

Lower Interest Rates. A loan backed by collateral, something valuable such as property. Property will only be taken away if you can't afford the loan.

Fixed Rate

Nice, Constant, Easy to plan for. The rate will stay the same throughout the duration of the loan. Interest are usually a little higher because the loaner has to anticipate that the rates will go up during the loan term.

Which is better, paying off your credit card in full each month or having a balance?

Pay it off in full each month to avoid interest fees.

Which of these transaction types DECREASE how much you owe the credit card company?

Payments

Payday Loan

SO BAD! Extremely high interest rates. It's a small loan that comes with a high interest rate under the promise that it will be paid back when the borrower receives their next paycheck.

Collateral Loan

Something valuable. When a borrower pledges a specific property of value if they can't repay a loan. That property will be used as repayment for the loan.

Principal

The amount that you are borrowing.

What is an outstanding balance?

The amount you still owe after you have made your most recent payment.

What happens if the young adult cannot pay for their loan each month?

The cosigner is responsible/must pay for the loan that is not payed.

Explain the importance of reading through your credit card statement regularly.

The importance of regularly reading through your credit card statement is that you should be aware of everything you are paying for using the credit card.

Why should you NEVER get a payday loan?

The interest rates are extremely high, meaning that you are now paying way more than you originally borrowed.

What is bankruptcy, and does it eliminate all debt including student loan debt?

The legal process where people or entities seek relief from some or all of their debt. Yet, student loan debt is not eliminated. Student loan debt is only eliminated if the borrower dies.

Why is it more difficult to get out of debt when only paying the minimum payment?

The majority of your minimum payment is going toward interest and finance charges and only a small amount toward the principal.

Interest Rate

The percentage that your financial institution charges you for giving you the loan. This is in addition to the principal.

Variable Rate

The rates fluctuate. Based on a chosen index. The higher the index the higher the rate. Interest is a little lower.

Pay a Little option on your credit card

This option is not always the best idea because the easier option makes it harder to get out of debt. You are paying more than what you spent. Interest get added onto your second month payment after the month where you didn't pay in full. So then you would owe the outstanding balance, new purchases, and interest on all of that.

What are the possible consequences of making a late payment?

You may be forced to pay an additional fee on top of what you already owe. Increased APR to the Penalty APR.

Installment Loans

a loan that is repaid over time with a set number of scheduled payments