Credit Flashcards
(17 cards)
What is credit and how are repayments of credit segmented ?
Credit is funds provided by a creditor to a borrower that the borrower will repay with interests or fees in the future.
Repayments of credit are segmented into principal repayments and interests
What are the 2 types of credit
- Instalment loans
- Revolving Open-End credit
What are instalment loans ?
Loan provided for a specific purchase. Interests are charged on the borrowed amount and repaid on a regular basis.
What are Revolving Open-End credit ?
Credit provided up to a maximum amount based on:
- income
- credit debt
- credit history
Interest is charged each month on the outstanding balance ( a minimum amount is due or the entire amount can be repaid at anytime)
Why should you use credit ?
(Credit advantages)
- helps establish a good credit history
- helps build a good credit score
- create the capacity to access credit for future larger purchases (ex: home)
- eliminates the need to carry cash
- useful when cash is not an option ( ex: online purchases )
- many credit cards offer additional benefits (ex: air miles )
What are the disadvantages associated with a credit ?
- Difficulty making payments
- temptation to make impulse purchases
- you can damage your credit rating if you do not make the minimum required repayment
- large credit payment hinder one’s ability to save
- you may need to withdraw from savings to cover net cash flow deficiencies
What is a credit history and how can it be maintain favorable ?
Represents your history with credit instruments such as credit cards, retail credit cards, lines of credit, personal loan and leases
A favorable credit history is established by paying bills on time
What involves the credit application process ?
- Filling the application
Hence providing your personal balance sheet, net cash flow statement and proof of income - negotiating interest rates
- negotiating the loan contract
- a credit check conducted by the lender
What are credit reports and who provides them ?
Credit reports are reports provided by credit bureaus (ex: Equifax Canada and TransUnion Canada) that document a person’s credit repayment history
What is provided in a credit report
- the individuals personal information
- consumer statement
- summary of his accounts
- accounts history
- Bank info: accounts closed for derogatory reasons
- Public info: bankruptcies, judgement, secure loans
- the name of creditors who have made account inquiries
- a list of creditor contacts
Why is a credit score and how is it used by creditors.
A rating that indicates a person’s creditworthiness. It is a score on which creditors rely to determine wether to extend a loan or not. (It can affect the interest rate quoted on the loan you request )
By what factors is a credit score affected ( in order from most affect to least )
(35%) payment history
(30%) amount of credit owing
(15%) length of credit history
(10%) type of credit used
(10%) the frequency of you searching and acquiring new credit
Are the credit score the same for all credit bureaus ?
No they can differ because they don’t necessary have access to the same information.
How are interpreted credit scores ?
They range from 300 to 900 with any score above 600 considered good (above 750 is very good)
27% of borrowers are between 750-799
For how long (respectively) does poor credit history and bankruptcy remain on your credit report ?
3 to 10 years for credit history, and 6 to 7 years for bankruptcy
To what is normally due a low credit score and how can it be improved ?
It is normally due to either miss payments or carrying excessive amount of debt. However, it can be improved by catching up on late payments, making at least the minimum payment on time and reducing your debt
