Credit and Debt Understanding Quiz

Credit and Debt

• Credit and debt are interconnected; people often use credit (e.g., credit cards) to purchase items they can't afford upfront, leading to debt.
• While debt is a common aspect of modern life, it isn't necessary. Debt-free living is possible.
• Corporations profit from credit products like credit cards and loans, promoting them as commonplace, despite the potential consequences of incurring significant debt.
• Understanding credit is crucial to avoid risks associated with various credit facilities (e.g. credit cards, personal loans).
• Being aware of credit scores, reports, and the components that make them up is vital for financial literacy.

Key Financial Terms

• Debt: An obligation to repay borrowed money.
• Revolving Credit: Credit that can be borrowed and repaid multiple times (e.g., credit cards).
• Collateral: An asset pledged as security for a loan; if the borrower defaults, the lender can seize the asset to recover the debt.
• Interest: The cost of borrowing money, typically expressed as a percentage of the principal.
• Lien: A legal claim on an asset as security for debt.
• Appreciating Asset: An asset whose value increases over time (e.g., stock, real estate).
• Equity: The difference between the market value of an asset and the amount owed on it.
• Default: Failure to make required payments on a loan or other debt.
• Installment Credit: Borrowing money that is repaid in fixed amounts over time (e.g., car loans, mortgages).
• Depreciating Asset: An asset whose value decreases over time (e.g., car, appliance).
• Predatory Lender: A lender who engages in exploitative or unethical practices (e.g., exorbitant interest rates or hidden fees).
• Credit Score (FICO score): A three-digit number representing an individual's creditworthiness, based on payment history, amount of debt, length of credit history, new credit, and types of credit.
• Credit Bureau: An agency that collects and maintains credit information on individuals.
• Principal: The initial amount of money borrowed.
• Term: The length of time it takes to repay a loan.
• Depreciation: A decrease in the value of an asset over time.
• Negative Equity: When the amount owed on an asset (e.g. a home) exceeds the asset's current market value.

Credit Decision Factors

• A credit score (like FICO) is a key factor in determining creditworthiness, composed of five factors: type of debt, new debt, duration of debt, debt payment history, and the amount of debt owed.
• Checking your credit report regularly can help you detect potential identity theft.
• Car loans include principal, interest, and term. Paying cash for a car avoids the cost of leasing or financing and interest.
• Managing and avoiding debt are crucial for sound financial planning.
• The debt snowball method is a strategy to pay off debt faster.

This quiz explores the concepts of credit and debt, including their interconnection and the implications of using credit products. It emphasizes the importance of understanding credit scores and terms like revolving credit and collateral for achieving financial literacy.