Credit & Borrowing Money Concepts

Credit & Borrowing Money

• Debt: Debt is money owed.
• Credit: Credit is borrowing money.
• Insufficient Funds/Overdraft: Insufficient funds occur when there are not enough funds in an account to cover a transaction. An overdraft occurs when you withdraw more money than you have in your account.
• Principal, Interest, and Term Definitions: Principal is the amount borrowed. Interest is the cost for borrowing money. The term is the length of time the loan is for.
• 5 C's of Credit: Characteristics used to assess creditworthiness.
• Credit Score: A numerical representation of creditworthiness, calculated based on credit history.
• Secured/Unsecured Loans: Secured loans require collateral (something of value pledged if the loan isn't repaid), while unsecured loans do not. Examples of secured loans are mortgages and car loans, while examples of unsecured loans are credit cards and personal loans.
• Cosigner: A person who agrees to be responsible for repaying a loan if the primary borrower defaults. This is important because cosigners are equally responsible for the debt.
• Consequences of Missed Payments: Consequences of missing payments may be very costly and may negatively impact credit scores, lead to debt collection actions, damage the credit reputation and lead to difficulties in getting future credit.
• Buy Now Pay Later (BNPL): Allows customers to buy items now and pay for them later, in installments.
• Debt Repayment Methods: Snowball method (pay off smallest debts first), Avalanche method (pay off debts with the highest interest rates first), and Consolidation method (combine several debts into one loan).

Buying VS Renting/Leasing

• Mortgage Qualification: A typical mortgage application for a home is often 30% of your monthly income.
• Advantages/Disadvantages of Owning a Home: Owning a home presents benefits such as building equity, while also having cost implications associated with maintenance, property taxes and insurance.
• Mortgages (Fixed vs Variable Rate): Fixed-rate mortgages have a constant interest rate, while variable-rate mortgages can fluctuate.
• Mortgage Debt Repayment: Faster methods may involve paying extra principal, leveraging mortgage refinancing options, or applying certain amortization techniques.

This quiz covers essential concepts related to credit and borrowing, including definitions of debt, principal, interest, and the types of loans. It also discusses the 5 C's of credit and the importance of credit scores. Test your understanding of financial principles that impact borrowing decisions.