Understanding Credit and APR

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Questions and Answers

What is credit?

Money that is borrowed

What does it mean to default on a loan?

A borrower fails to pay money back.

What are the Four Cs of Credit used by lenders?

Collateral, Character, Capacity, Conditions

In the context of credit, what is collateral?

<p>Something pledged against the loan</p>
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What does 'Character' refer to in the Four Cs of Credit?

<p>A lender's opinion as to a borrower's personality, general credibility, and trustworthiness.</p>
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What does 'Capacity' refer to in the Four Cs of Credit?

<p>Ability to repay</p>
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What do 'Conditions' refer to in the Four Cs of Credit?

<p>The current state of the economy and the specific terms of the loan.</p>
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What does APR stand for and what does it represent?

<p>Annual Percentage Rate; the percentage cost of using credit on a yearly basis.</p>
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What is an Introductory APR?

<p>A typically low interest rate charged with a new credit card which only lasts a short time before increasing.</p>
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What is the role of a co-signer on a loan?

<p>Someone who legally agrees to take over payments for someone else if they default on a loan.</p>
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What is a credit bureau?

<p>An organization that collects credit information about individual consumers.</p>
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What is credit history?

<p>A record of a consumer's credit use and payment behavior.</p>
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What is a credit limit?

<p>The maximum amount a person may borrow on a line of credit, based on income level and overall credit record.</p>
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What information does a credit report contain?

<p>A summary of an individual's existing and past lines of credit.</p>
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What is a credit score and what does a higher score typically mean?

<p>A numerical score created by credit bureaus to assess an individual's creditworthiness; a higher score generally means access to lower loan interest rates.</p>
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What is another common name for a credit score?

<p>FICO Score</p>
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What are the main factors that determine credit scores?

<p>Overall debt, payment history, types of credit used, and length of credit history.</p>
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Which of the following actions can help maintain a high credit score? (Select all that apply)

<p>Ensuring your credit report is accurate (A), Paying bills on time (C), Paying off all debt when possible (D), Only applying for credit when needed (E)</p>
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What is a creditor?

<p>Someone who provides credit.</p>
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What is debt?

<p>The entire amount owed to any lender.</p>
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What is a debtor?

<p>Someone who receives credit or owes money.</p>
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What protection does the Equal Credit Opportunity Act provide?

<p>It prohibits creditors from denying credit based on factors like gender, race, age, religion, national origin, marital status, or receipt of public assistance.</p>
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What does the Fair Credit Billing Act require creditors to do?

<p>It requires creditors to promptly credit payments and correct billing mistakes.</p>
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What is an over-the-limit fee on a credit card?

<p>A fee charged when exceeding the spending limit on a credit card.</p>
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What is a balance transfer fee?

<p>A fee charged for transferring any part of a card balance to another card.</p>
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What is an annual card fee?

<p>A flat-rate fee charged to a credit card once a year.</p>
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What is a cash advance on a credit card?

<p>An option that allows cardholders to withdraw a certain amount of cash using their credit card.</p>
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What is a cash advance fee?

<p>The amount a credit card company charges for making a cash advance.</p>
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What is a secured credit card?

<p>A credit card that requires a cash security deposit, which typically determines the credit limit.</p>
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What distinguishes an unsecured credit card?

<p>It is a credit card with no collateral (security deposit) requirement.</p>
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What is non-installment credit?

<p>The simplest form of consumer credit, typically short-term and requiring full repayment by a specific date.</p>
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In the context of a loan, what is the principal?

<p>The initial amount borrowed.</p>
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What is revolving, open-end credit?

<p>A type of credit that allows consumers to borrow up to some preset maximum amount and repay it over time.</p>
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True or False: A secured loan typically has a higher interest rate than an unsecured loan.

<p>False (B)</p>
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What defines an unsecured loan?

<p>A loan granted without requiring collateral.</p>
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What does the 'term' of a loan refer to?

<p>The amount of time the borrower has to pay back the loan.</p>
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Why is it important to read the fine print of credit agreements?

<p>It contains important details about terms, fees, interest rates, and penalties that could result in owing more money or other negative consequences.</p>
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Besides interest, what are some common types of fees associated with loans?

<p>Late fees and loan origination fees.</p>
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What is credit?

<p>Money that is borrowed.</p>
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What does it mean to default on a loan?

<p>Failure by a borrower to repay a loan according to the agreed terms.</p>
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Which of the following lists the Four Cs of Credit?

<p>Collateral, Character, Capacity, Conditions (C)</p>
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What is collateral in the context of a loan?

<p>Something of value pledged as security for repayment of a loan, to be forfeited in the event of a default.</p>
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What does 'character' refer to in credit assessment?

<p>A lender's assessment of a borrower's trustworthiness, reliability, and history of meeting financial obligations.</p>
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What does 'capacity' mean in relation to credit?

<p>The borrower's ability to repay the loan, typically assessed by comparing income against recurring debts (debt-to-income ratio).</p>
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What do 'conditions' refer to in a credit context?

<p>The economic conditions at the time of the loan application (e.g., state of the economy, interest rates) and the intended purpose of the loan.</p>
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What does APR stand for and what does it represent?

<p>Annual Percentage Rate; it represents the annual rate charged for borrowing, expressed as a percentage that includes interest and certain fees.</p>
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An introductory APR is typically a low interest rate that lasts for the entire life of the credit card.

<p>False (B)</p>
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What is a co-signer?

<p>Someone who legally agrees to take responsibility for repaying a loan if the primary borrower fails to make payments (defaults).</p>
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Which of the following is a major credit bureau in the United States?

<p>Experian (A)</p>
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What is credit history?

<p>A record of a borrower's responsible repayment of debts.</p>
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What is a credit limit?

<p>The maximum amount of credit that a financial institution extends to a client through a line of credit or credit card.</p>
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What is a credit report?

<p>A detailed summary compiled by a credit bureau of an individual's credit history, including existing and past lines of credit and payment habits.</p>
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A higher credit score generally means you will qualify for higher interest rates on loans.

<p>False (B)</p>
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What is another common name for a credit score?

<p>FICO score</p>
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Which of the following is NOT typically considered a primary factor in determining credit scores?

<p>Your annual income (D)</p>
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Which action is recommended to help maintain a high credit score?

<p>Paying bills consistently on time (D)</p>
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Who is a creditor?

<p>An entity (person, company, or institution) that extends credit by lending money or providing goods/services with the expectation of future payment.</p>
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What is debt?

<p>The entire amount of money owed to lenders.</p>
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Who is a debtor?

<p>An entity (person, company, or institution) that owes money to a creditor.</p>
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The Equal Credit Opportunity Act (ECOA) allows creditors to deny credit based on an applicant's race or gender.

<p>False (B)</p>
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What does the Fair Credit Billing Act (FCBA) require creditors to do?

<p>It requires creditors to promptly credit payments and correct billing mistakes when properly notified.</p>
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What is an over-the-limit fee?

<p>A fee charged by a credit card issuer when the cardholder makes a purchase that exceeds their established credit limit.</p>
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What is a balance transfer fee?

<p>A fee charged by a credit card issuer for transferring an existing balance from another credit card.</p>
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What is an annual card fee?

<p>A flat-rate fee charged by some credit card issuers once per year simply for having the card.</p>
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What is a cash advance on a credit card?

<p>A service provided by credit card issuers that allows cardholders to withdraw cash, often through an ATM or bank, up to a certain limit.</p>
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What is a cash advance fee?

<p>A fee charged by the credit card company when a cardholder takes out a cash advance.</p>
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A secured credit card requires the cardholder to provide collateral, usually a cash deposit.

<p>True (A)</p>
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An unsecured credit card requires the cardholder to pledge collateral, like a car or house.

<p>False (B)</p>
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What is non-installment credit?

<p>Credit that is typically extended for a short term and expected to be repaid in a single lump sum by a specific date.</p>
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What is the principal of a loan?

<p>The original amount of money borrowed, excluding any interest or fees.</p>
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What is revolving, open-end credit?

<p>A type of credit that allows borrowing up to a preset maximum amount (credit limit) and does not have a fixed number of payments.</p>
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A secured loan typically has a higher interest rate than an unsecured loan.

<p>False (B)</p>
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What is an unsecured loan?

<p>A loan that is issued and supported only by the borrower's creditworthiness, rather than by any type of collateral.</p>
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What does the 'term' of a loan refer to?

<p>The amount of time the borrower has to repay the loan in full.</p>
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Why is it important to read the fine print on credit agreements and loan documents?

<p>The fine print contains crucial details about fees, interest rates (including potential increases), penalties, and other terms and conditions that could significantly impact the total cost of borrowing or have other negative consequences.</p>
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What are some common types of fees associated with loans?

<p>Common fees include late payment fees (charged for missing a payment deadline) and loan origination fees (charged for processing the loan application).</p>
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What is credit?

<p>Money that is borrowed.</p>
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What does it mean to default on a loan?

<p>A borrower fails to pay back the borrowed money.</p>
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Which of the following are known as the 'Four Cs of Credit' used by lenders?

<p>Collateral, Character, Capacity, Conditions (B)</p>
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What is collateral in the context of a loan?

<p>Something pledged as security against the loan.</p>
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How is 'Character' evaluated in a credit assessment?

<p>It is a lender's opinion of a borrower's personality, general trustworthiness, and credibility.</p>
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What does 'Capacity' refer to in creditworthiness?

<p>The borrower's ability to repay the loan.</p>
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What do 'Conditions' refer to in the Four Cs of Credit?

<p>The current state of the economy or specific loan terms.</p>
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What does APR stand for and what does it represent?

<p>Annual Percentage Rate; the percentage cost of using credit on a yearly basis (D)</p>
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What is an Introductory APR?

<p>A typically low interest rate charged with a new credit card, which only lasts a short time before increasing.</p>
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What is the role of a co-signer on a loan?

<p>Someone who legally agrees to take responsibility for loan payments if the primary borrower defaults.</p>
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What is a Credit Bureau?

<p>An organization that collects credit information about individual consumers.</p>
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What is a credit history?

<p>A record of an individual's credit use and payment behavior.</p>
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What determines a credit limit?

<p>The maximum amount a person may borrow, based on their income level and overall credit record.</p>
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What information is contained in a credit report?

<p>It summarizes an individual's existing and past lines of credit, payment history, and related public records.</p>
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What is a credit score and what does a higher score generally mean?

<p>A numerical rating created by credit bureaus to assess an individual's creditworthiness; a higher score typically means access to lower loan interest rates.</p>
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Which factors are typically used to determine credit scores? (Select all that apply)

<p>Payment history (A), Types of credit used (C), Length of credit history (E), Overall debt (amounts owed) (F)</p>
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Which of the following are recommended ways to maintain a high credit score?

<p>Pay bills on time, pay off debt when possible, only apply for credit when needed, ensure credit report is accurate (A)</p>
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What is a creditor?

<p>Someone or an entity (like a bank) that provides credit or lends money.</p>
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Define 'debt'.

<p>The entire amount of money you owe to any lender.</p>
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What is a debtor?

<p>Someone who receives credit or owes money.</p>
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What protection does the Equal Credit Opportunity Act (ECOA) provide?

<p>It prohibits creditors from denying credit based on factors like gender, race, age, marital status, religion, or national origin.</p>
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What does the Fair Credit Billing Act (FCBA) require creditors to do?

<p>It requires creditors to promptly credit payments and correct billing mistakes.</p>
Signup and view all the answers

What is an over-the-limit fee?

<p>A fee charged when spending exceeds the established credit limit on a credit card.</p>
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What is a balance transfer fee?

<p>A fee charged for transferring any part of a credit card balance to another credit card.</p>
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What is an annual card fee?

<p>A flat-rate fee charged to a credit card account once per year.</p>
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What is a cash advance on a credit card?

<p>A feature that allows cardholders to withdraw a certain amount of cash using their credit card.</p>
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What is a cash advance fee?

<p>An amount the credit card company charges for making a cash advance.</p>
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What is a secured credit card?

<p>A type of credit card backed by a cash deposit from the cardholder, which serves as collateral.</p>
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What is an unsecured credit card?

<p>A credit card issued without requiring collateral from the cardholder.</p>
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What is non-installment credit?

<p>A form of consumer credit where the borrowed amount is typically repaid in a single lump sum within a short period.</p>
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What does 'principal' refer to in a loan?

<p>The original amount of money being borrowed.</p>
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What is revolving, open-end credit?

<p>A type of credit that allows consumers to borrow up to a preset maximum amount and repay the balance over time.</p>
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What characterizes a secured loan?

<p>A loan backed by collateral, which typically results in a lower interest rate.</p>
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What is an unsecured loan?

<p>A loan granted without requiring collateral.</p>
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What does 'term' mean in the context of a loan?

<p>The amount of time the borrower has to repay the loan.</p>
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Why is it important to read the fine print in loan or credit agreements?

<p>It contains important details about fees, interest rates, penalties, and terms that could result in owing more money or other negative consequences.</p>
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Which of the following are common types of fees associated with loans (distinct from credit card fees like annual or balance transfer fees)?

<p>Late payment fees and loan origination fees (D)</p>
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Flashcards

Credit

Money that is borrowed and needs to be paid back, usually with interest.

Default

Failure to repay a loan according to the agreed terms, leading to negative consequences.

Four Cs of Credit

A lender's evaluation of a borrower's creditworthiness based on collateral, character, capacity, and conditions.

Collateral

An asset pledged by a borrower to secure a loan, subject to seizure if the borrower defaults.

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Character (in credit)

A lender's assessment of a borrower's trustworthiness and reliability based on their history and reputation.

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Capacity

A borrower's ability to repay a loan based on their income, expenses, and debt obligations.

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Conditions (in credit)

External economic factors that may affect a borrower's ability to repay a loan, such as job market trends or industry downturns.

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APR

Annual Percentage Rate; the annual cost of a loan to a borrower, including interest and fees, expressed as a percentage.

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Introductory APR

A temporarily reduced interest rate offered on a new credit card to attract customers.

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Co-signer

Someone who agrees to be responsible for another person's debt if they default on the loan.

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Credit Bureau

An organization that collects and compiles credit information about individual consumers.

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Credit History

A record of a borrower's past borrowing and repayment behavior.

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Credit Limit

The maximum amount a borrower can charge on a credit card or line of credit.

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Credit Report

A detailed report summarizing an individual's credit history, including credit accounts, balances, and payment history.

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Credit Score

A numerical assessment of an individual's creditworthiness, based on their credit history.

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Another name for a credit score

Another name for a credit score is FICO score.

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Factors determining credit scores

Overall debt, payment history, types of credit you have, length of credit history

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Ways to keep your credit score high

Pay bills on time, pay off all debt when possible, only apply for credit when needed, ensure credit report is accurate

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Creditor

An individual or institution that extends credit to borrowers.

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Debt

The total amount of money owed to lenders.

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Debtor

An individual or entity that borrows money from a lender.

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Equal Credit Opportunity Act

U.S. federal law that prohibits discrimination in credit transactions based on gender, race, age, religion, or national origin.

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Fair Credit Billing Act

A U.S. federal law that protects consumers from unfair billing practices and errors on their credit accounts.

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Over-the-limit fee

A fee charged when a credit cardholder exceeds their credit limit.

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Balance transfer fee

A fee charged for transferring a balance from one credit card to another.

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Annual card fee

A fee charged annually to credit cardholders for the privilege of using a credit card.

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Cash advance

Allows credit cardholders to withdraw a certain amount of cash.

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Cash advance fee

Fee charged for withdrawing cash from a credit card.

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Secured credit card

A type of credit card that requires the borrower to provide collateral, such as a cash deposit.

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Unsecured credit card

A credit card that does not require the borrower to provide collateral.

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Non-installment credit

Simplest form of consumer credit (short term).

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Principal

The original amount of a loan, not including interest or fees.

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Revolving, open-end credit

Allows consumers to borrow up to some preset maximum amount.

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Secured loan

A loan backed by collateral. If the borrower defaults, the lender can take possession of the asset.

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Unsecured loan

A loan that is not backed by any collateral.

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Term (in credit)

Amount of time that you have to pay back a loan

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Importance of reading fine print

Details that could make you owe more money or cause you to lose something

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Types of fees in loans

Late fees, loan origination fees are examples

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Study Notes

  • Credit is borrowed money.
  • Default occurs when a borrower fails to pay back borrowed money.

Four C's of Credit

  • Collateral refers to something pledged against a loan.
  • Character is a lender's assessment of a borrower's personality, reputation, and credibility.
  • Capacity is the borrower's ability to repay a loan.
  • Conditions refer to the current state of the economy.
  • The Four C's of Credit: Collateral, Character, Capacity, and Conditions

APR

  • APR (Annual Percentage Rate) is the percentage cost of using credit.
  • Introductory APR is a typically low interest rate charged with a new credit card, lasting only a short time before increasing.
  • A co-signer legally agrees to take over loan payments if the original borrower defaults.

Credit Reporting

  • A credit bureau is an organization that collects credit information about individual consumers.
  • Credit history is a record of credit usage and payments.
  • A credit limit is the amount a person may borrow, based on income level and overall credit record.
  • A credit report summarizes an individual's existing and past lines of credit.
  • A credit score is created by credit bureaus to assess an individual's creditworthiness; a higher score means lower loan rates.
  • Credit scores are also named N/A.
  • Credit scores are determined by overall debt, payment history, types of credit, and length of credit history.
  • Ways to maintain a high credit score include paying bills on time, paying off debt when possible, applying for credit only when needed, and ensuring the credit report is accurate.

Credit and Debt

  • A creditor is someone who provides credit.
  • Debt is the entire amount owed to any lender.
  • A debtor is someone who receives credit or owes money.

Regulations

  • The Equal Credit Opportunity Act prohibits creditors from denying credit based on gender, race, age, etc.
  • The Fair Credit Billing Act requires creditors to promptly credit payments and correct billing mistakes.

Fees

  • An over-the-limit fee is charged when the spending limit on a credit card is exceeded.
  • A balance transfer fee is charged for transferring any part of a card balance to another card.
  • An annual card fee is a flat-rate fee charged to a credit card once a year.
  • A cash advance allows cardholders to withdraw a certain amount of cash.
  • A cash advance fee is the amount a credit card company charges for making a cash advance.
  • Types of fees in loans: late fees, loan origination fees

Credit Types

  • A secured credit card is a prepaid card that goes toward building a credit score.
  • An unsecured credit card has no collateral component.
  • Non-installment credit is the simplest form of consumer credit and is short term.
  • Revolving, open-end credit allows consumers to borrow up to a preset maximum amount.
  • A secured loan has a lower interest rate.
  • An unsecured loan does not have collateral.
  • The term refers to the amount of time available to pay back a loan.
  • Principal refers to the amount borrowed.
  • Reading the fine print of loans is important because include details that could increase debt or cause loss.

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