Banking and Credit Test

What is a credit score? Why is a credit score important?

Credit score is a numerical score based off your credit score. It is important because your credit score helps lenders decide how likely you are to repay your debts and plays a significant role when securing a mortgage. Late payments will lower your credit score.

What is credit? What are examples of credit?

Credit is the ability to borrow money, access goods or services, with an understanding that you will pay later. Some examples of credit are auto loans, mortgages, appliance loans, payday loans.

Why is it often more difficult for younger people (18-24 year-olds) to get credit than it is for older people?

It's harder for younger people to get credit because in the age ranges of 18-24, you have no financial history. With financial history, you are able to build your credit score, which is why older people have better and maybe worse credit scores.

Longer-term loans usually have _______ interest rates than shorter-term loans. Why?

Longer term loans usually have lower interest rates than short term loans. This is because with a long term loan, you have a longer time period to pay it off, so the interest is lower. The short term loans have higher interest rates so they can be paid off ASAP. This is because you have a certain time period to get the money back to the back.

How can you avoid paying interest on a credit card?

Pay off your balance off every month avoids the interest on the credit card.

Compare savings accounts, money market accounts, and Certificates of Deposit (CDs). How are they similar, and how are they different? Which type of account usually earns more interest (higher APY)? Why?

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What could have a negative impact on a person's credit score? How can a person improve their credit score?

Skipping payments or paying your credit card late can negatively impact your credit score. When it comes to improving your score, you can pay your balances off and keeping the balances low. Things that make up your score are: auto loans, personal loans, mortgages(home loans), rental applications, and job applications build up your score.

How do checking accounts work? What are the important criteria when selecting a checking account?

A checking account is a bank account that allows you to do easy deposits and withdrawals. There are 2 checking accounts that I know of; a highschool one and regular one. When picking your bank, make sure it's FDIC approved, no or little interest fees, make sure you read the fine print, making sure there are no overdraft fees. Make sure you know the minimum balance.

Explain how payday loans and title loans work. Why do so many people use them? Why are payday loans and title loans referred to as "predatory" lending?

A payday loan is a loan that uses your paycheck as collateral. 80% of people renew their payday loans after 2 weeks. When they renew their loans, the fees are also being renewed. The APR for this depends on the state, but it's around 400%. A title loan is a loan that people take out and use your car as collateral. You are only allowed to do this once you own your car. The processing is the same as payday loans with 30 to pay back the loan. The APR depends on the state but is usually 400%. These loans are referred to as predatory lending because these lenders take advantage of people who cannot pay off the balance they owe.

How do banks operate? What services do they provide? How do they make money?

Banks operate by borrowing funds and accepting deposits. Banks borrow from individuals, businesses, financial institutions, and governments. They make their money from interests. Interest rates provide the price for borrowers, lenders, and banks

What are some advantages of using credit cards?

Advantages of using a credit card are: purchasing power, which allows you to purchase things when you physical dont have the money for it, but will have it in the future. Rewards are offered with a lot of companies offering coupons, discounts, and mileage points. Having the credit card is a lot more convenient than carrying cash.

What are the common differences between a regular/traditional bank and an online bank?

Common differences between an online bank and traditional, are with an online bank its online, meaning there is no place to do action with transaction. The online banking allows you to deposit checks, take money out at an ATM with cost, e-security follows with this, but this has become the future of our world, because of our society. With traditional banking, you are able to do transactions, deposits, withdrawals, and other things in person.

How does compound interest work? For retirement savings, is it better to save $20,000 from ages 19-26 or $30,000 from ages 49-56? Why?

Compound Interest is when you put an amount of money in the bank, monthly and are able to watch it grow for an amount of time. When it comes to retirement savings, it's better to save 20,000 dollars from age 19-26, because you can set a goal for yourself when you get that job to put 100 dollars a month, and with interest, that amount will grow by the time you want to access it.

What are some disadvantages of using credit cards?

Disadvantages of using a credit card are: paying high interest rates when paying the month to month balance. Credit damage happens to a lot of people along with credit card fraud. There are annual fees that have to be paid and fulfilled.

How much money do most financial experts recommend that you should have in your emergency fund? Why is this important?

Financial experts say that you should have enough money to cover 3-6 months of living expenses. This is important because everyone has living expenses to take care of and having savings to cover 3-6 months of it puts you in the clear. These are the basic necessities to cover which include food, rent, bills, gas, and car.

What does it mean for a bank to be FDIC insured? Why is that important?

FDIC stands for Federal Deposit Insurance Corporation which is an independent federal agency that insures deposits in US banks and helps keep the bank from going bankrupt. It is important because it promotes confidence in the bank system, by protecting & monitoring the bank. If the bank fails, the FDIC steps in and protects the fund from the bank.

What is the 50-20-30 rule?

The 50-20-30 rule is: 50% goes to basic living expenses, which are rent, food, insurance, car expenses. 20% goes to saving/investments, which is retirement. 30% goes to flexibility which is vacation or an extra bathroom

What are effective strategies for saving money?

There are 4 tips for saving: 1.wait until tomorrow 2.would you rather have the cash 3.convert into hours of work 4.save what didn't spend (put it in savings, reward yourself)

What criteria should you look at before choosing a credit card?

When looking for a credit card, you should keep in mind: your spending habits, the interest rate, credit limit, fees and penalties, APR, minimum repayments, cash back, rewards, and travel deals.

What is the difference between a fixed-rate loan and a variable interest loan? Give examples of each.

With a fixed rate, you can see your payment for each month and the total you will pay over the life of a loan.An example is a car loan or federal loan.With a variable-rate loan, the interest rate on the loan changes as the index rate changes, meaning that it could go up or down. An example is mortgages and credit card payments.

What is the difference between a secured loan and an unsecured loan? Give examples of each.

With a secured loan, the lender can take possession of the collateral if you don't repay the loan as you have agreed. A car loan and mortgage are the most common types of secured loan. An unsecured loan is not protected by any collateral. If you default on the loan, the lender can't automatically take your property.

Which government-run website allows you to download your credit report for free on an annual basis?

annualcreditreport.com