Personal Finance Chapter 6 Flashcards

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.