Personal Finance Chapter 6 Flashcards
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Questions and Answers

What is credit?

An arrangement to receive cash, goods, or services now and pay for them in the future

What is consumer credit?

The use of credit for personal needs

What is a creditor?

An entity that lends money

What is close-end credit?

<p>Credit as a one-time loan that you will pay back over a specified period of time in payments of equal amounts</p> Signup and view all the answers

What is open-ended credit?

<p>Credit as a loan with a certain limit on the amount of money you can borrow for a variety of goods and services</p> Signup and view all the answers

What is a line of credit?

<p>The maximum amount of money a creditor will allow a credit user to borrow</p> Signup and view all the answers

What is a grace period?

<p>A time period during which no finance charges will be added to your account</p> Signup and view all the answers

What is a finance charge?

<p>The total dollar amount you pay to use credit</p> Signup and view all the answers

What is net income?

<p>The income you receive</p> Signup and view all the answers

What is the annual percentage rate (APR)?

<p>The cost of credit on a yearly basis, expressed as a percentage</p> Signup and view all the answers

What is collateral?

<p>A form of security to help guarantee that the creditor will be repaid</p> Signup and view all the answers

What is simple interest?

<p>The interest computed only on the principal, the amount that you borrow</p> Signup and view all the answers

What is the minimum monthly payment?

<p>The smallest amount you can pay and remain a borrower in good standing</p> Signup and view all the answers

What is a credit rating?

<p>A measure of a person's ability and willingness to make credit payments on time</p> Signup and view all the answers

What does cosigning a loan mean?

<p>You agree to be responsible for the loan payment if the other person fails to make them</p> Signup and view all the answers

What is bankruptcy?

<p>A legal process in which some or all the assets of a debtor are distributed among the creditors because the debtor is unable to pay debts</p> Signup and view all the answers

Explain the concept of consumer credit.

<p>Consumer credit is the use of credit for personal needs.</p> Signup and view all the answers

Differentiate between open-ended and close-end credit.

<p>Closed-end credit is a one-time loan paid back with fixed payments; open-end credit allows borrowing up to a limit for various expenses.</p> Signup and view all the answers

Identify the 5 C's of credit.

<p>Character, capacity, capital, collateral, and credit history</p> Signup and view all the answers

Discuss factors to consider when choosing a loan or credit card.

<p>Length of the loan, amount of monthly payments, and interest rate</p> Signup and view all the answers

What steps should you take if your identity is stolen?

<p>Contact all your credit card companies, close and open new bank accounts, and change all PINs.</p> Signup and view all the answers

Explain the role of consumer counseling services.

<p>Manage debt problems by contacting creditors and/or debt counseling services.</p> Signup and view all the answers

Study Notes

Credit Fundamentals

  • Credit allows immediate access to cash, goods, or services with payment deferred to a later date.
  • Consumer credit is specifically used for personal needs.

Key Entities and Types of Credit

  • Creditors are entities that lend money to individuals or businesses.
  • Close-end credit is a one-time loan repaid through equal payments over a set period.
  • Open-ended credit allows borrowing up to a specified limit for various purchases.

Credit Management Terms

  • A line of credit represents the maximum borrowing amount allowed by a creditor.
  • A grace period allows time without accruing interest on a credit account.
  • Finance charge is the total cost incurred from using credit, expressed in dollar amounts.

Income and Rates

  • Net income refers to the income received after taxes and deductions.
  • The annual percentage rate (APR) indicates the yearly cost of credit as a percentage.

Loan Security and Interest

  • Collateral serves as a security measure to assure repayment of a loan.
  • Simple interest is calculated solely on the principal borrowed amount.

Payments and Ratings

  • The minimum monthly payment is the least amount required to maintain good standing on a loan.
  • Credit ratings assess an individual's capacity and reliability in making timely payments.

Loan Responsibilities

  • Cosigning a loan involves accepting responsibility for the repayment if the primary borrower defaults.

Debt Consequences

  • Bankruptcy is a legal process for asset distribution among creditors when a debtor cannot repay debts.

Consumer Credit Concepts

  • Consumer credit allows addressing personal financial needs with deferred payment.
  • Differentiation between open-ended credit (flexible limits) and close-end credit (fixed payments) is crucial for financial planning.

Five C's of Credit

  • The five C's: character, capacity, capital, collateral, and credit history, are vital for creditors when evaluating loan applications.

Loan and Credit Card Selection

  • Considerations in selecting a loan or credit card include loan duration, monthly payment amounts, and applicable interest rates.

Identity Theft Recovery Steps

  • In the event of identity theft, promptly contact all credit card companies, close compromised accounts, and adjust PINs. Notify authorities and credit bureaus for assistance.

Role of Consumer Counseling Services

  • Consumer counseling services assist in managing debt through negotiations with creditors, with bankruptcy being a final option for resolution.

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Test your knowledge on key terms from Chapter 6 of Personal Finance with these flashcards. Each card provides essential definitions of credit-related concepts, helping you understand the foundations of personal finance. Perfect for students looking to reinforce their learning!

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