Chapter 6 Flashcards
(36 cards)
Define and describe credit.
Credit is the ability to borrow money or access goods or services with the agreement to pay later.
Define and describe the two types of credit. Under what conditions might a consumer find each type useful?
Installment credit (fixed repayment) is useful for large purchases like cars, while revolving credit (variable repayment) is useful for ongoing access to credit, like with credit cards.
What are the advantages and disadvantages of using credit?
Advantages: Convenience, building credit history, rewards. Disadvantages: Interest costs, debt accumulation, credit score impact.
Explain credit history.
Credit history is a record of a person’s borrowing and repayment activity, used by lenders to assess creditworthiness.
What does the personal loan process involve?
The process involves applying for a loan, credit evaluation, agreeing to terms, and making regular payments.
Name the two major credit bureaus. What information do credit reports provide?
Equifax and TransUnion. Reports include personal information, credit accounts, payment history, and public records.
What eight major areas of information may be included on your credit report?
Personal details, credit accounts, payment history, credit inquiries, public records, collections, bankruptcies, and liens
What is a credit score? What five factors are used to determine your credit score? Describe the importance of each factor.
A credit score is a numerical representation of creditworthiness. Factors: payment history (35%), credit utilization (30%), length of credit history (15%), new credit (10%), and credit mix (10%).
Will both bureaus always produce the same credit score? What is the impact of differing credit scores between the two bureaus?
No. Lenders may base decisions on the lower score, which can impact loan approvals and terms.
What is the credit score range? What is a good score? If you have good credit, will you automatically be approved for a loan?
Scores range from 300 to 900. A score of 700+ is considered good, but loan approval also depends on income and debt levels.
What is the main cause of a poor credit score? How long will a poor credit score appear on your credit report? How do you improve a poor credit score?
Late payments are a primary cause. Negative information typically stays for 7 years. Improving score involves paying on time and reducing debt.
Why is it important to review your credit score on a regular basis?
It helps identify errors, detect identity theft, and monitor credit health for financial planning.
What are seven advantages of using a credit card? What are the disadvantages?
Advantages: Convenience, rewards, credit-building, fraud protection, emergency funds, record-keeping, and travel perks. Disadvantages: High interest, debt risk, fees.
How do credit card companies, such as MasterCard and Visa, generate revenue?
Through interest charges, fees, merchant transaction fees, and late payment penalties.
Define and describe a prestige card.
Prestige cards offer premium services and perks, like travel rewards and higher credit limits, often with annual fees.
Define and describe a retail credit card.
Retail cards are issued by stores for use at specific retailers, offering perks like discounts but often with higher interest rates.
What is the main purpose of student, U.S. dollar, and secured credit cards?
Student cards help build credit for new users. U.S. dollar cards prevent exchange fees on U.S. purchases. Secured cards are for rebuilding poor credit.
What is a credit limit? How can you increase your credit limit?
A credit limit is the maximum amount you can borrow. You can request an increase by demonstrating responsible use and income growth.
What are the advantages and disadvantages of overdraft protection on credit cards?
Advantage: Avoids declined transactions. Disadvantage: Fees or higher interest may apply.
How might you eliminate the annual fees charged by some credit cards?
Look for no-fee cards, or negotiate with the issuer by demonstrating good credit behavior.
Discuss how credit card companies offer incentives to use their cards. How else might credit card companies reward cardholders with excellent credit ratings?
Companies offer points, cashback, and perks. Excellent credit may lead to lower interest rates and higher credit limits.
What is a grace period? Describe how you can use it to your advantage.
A grace period is the time between a purchase and when interest begins. Pay the full balance within this period to avoid interest.
What is a cash advance? How is it commonly obtained? Discuss interest rates and grace periods with respect to cash advances.
A cash advance is borrowing cash from your credit card. It incurs immediate interest, often at higher rates, with no grace period.
When is a finance charge applied to credit purchases? What are teaser rates? What is the common range of interest rates on credit cards?
Finance charges apply when a balance isn’t paid in full. Teaser rates are temporary low rates. Common rates range from 15% to 29%.
