Understanding Credit Cards and Financing

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Questions and Answers

What is one consequence of using a credit card that is often not shown in commercials?

  • How quickly your credit score improves
  • The years of payments you might make (correct)
  • How great life will be with payments
  • The happiness of your parents

A home equity line of credit (HELOC) can only be used for home repairs and renovations.

False (B)

What is the greatest tool to building wealth according to personal finance principles?

Your income

Credit card companies generate significant profits by charging __________ to customers who only pay part of their monthly debt.

<p>interest</p> Signup and view all the answers

Which of the following accurately describes leasing a car?

<p>Making monthly payments but not owning the vehicle (B)</p> Signup and view all the answers

The majority of Americans live paycheck to paycheck.

<p>True (A)</p> Signup and view all the answers

Match the following terms with their descriptions:

<p>Unsecured loans = Loans that do not require collateral Secured loans = Loans that require the borrower to pledge an asset Revolving credit = Credit that can be used repeatedly as debts are paid down Interest rates = The cost of borrowing money expressed as a percentage</p> Signup and view all the answers

Which of the following is part of the formula that determines a person's FICO score?

<p>Their payment history to lenders (C)</p> Signup and view all the answers

What should you regularly check your credit report for?

<p>Errors or signs of identity fraud (A)</p> Signup and view all the answers

Credit cards with flashy rewards often come with high annual fees.

<p>True (A)</p> Signup and view all the answers

What does the debt snowball method involve?

<p>Paying off debts from smallest to largest.</p> Signup and view all the answers

A car is considered a __________ asset.

<p>depreciating</p> Signup and view all the answers

Match the types of fees with their definitions:

<p>Merchant fee = Fee charged to stores for credit card transactions Cash advance fee = Fee charged for withdrawing cash using a credit card Annual fee = Yearly fee for maintaining a credit card account Over-the-limit fee = Fee charged when spending exceeds credit limit</p> Signup and view all the answers

Which option is the smartest way to buy a car?

<p>Pay for it in cash (C)</p> Signup and view all the answers

Loans that help advance one's life, like student loans, are considered acceptable debts.

<p>True (A)</p> Signup and view all the answers

What is the total sum of a car loan, including taxes and fees, called?

<p>Principal</p> Signup and view all the answers

Credit is not a wealth-building tool; it's a business that makes money for __________.

<p>credit card companies, banks, and lenders</p> Signup and view all the answers

When reviewing a credit report, it's crucial to verify that no lines of credit have been opened without your knowledge.

<p>True (B)</p> Signup and view all the answers

Flashcards

Credit Card Company Profits

Credit card companies make the most money by charging interest on the balance that customers don't pay off each month.

Secured Loans

Secured loans require the borrower to put something valuable, known as collateral, at risk if the loan is not repaid. This lessens the lender's risk, which often leads to lower interest rates.

Credit Score

A credit score is a numerical representation of a person's creditworthiness, based on their past history of borrowing and repayment. It's used by lenders to assess the risk of lending to someone and determine interest rates.

Car Leasing

Leasing a car is agreeing to make monthly payments for a set period on a vehicle you don't own. At the end of the lease, you return the car and may have the option to buy it.

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Income and Wealth

Building wealth through your income requires mindful management. This includes saving, investing, and minimizing unnecessary spending. Your income is the foundation of your wealth-building journey.

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Financing a Car

When you finance a car, you're taking out a loan to pay for it. This means you'll pay back more than the sticker price due to interest charges and other financing costs.

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Second Foundation

The Second Foundation in personal finance is about getting out of debt and staying out of debt. It emphasizes managing finances wisely to avoid accumulating unnecessary debt.

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Home Equity Line of Credit (HELOC)

Taking out a home equity line of credit (HELOC) allows you to borrow money against the equity you've built up in your home. Although it's often used for home improvements, the funds can be used for any purpose.

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Why should you check your credit report?

Checking your credit report regularly for inaccurate information, such as unauthorized accounts or incorrect balances, which could indicate identity theft.

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What is the debt snowball method?

The method of paying off debt starting with the smallest balance, regardless of interest rates, to gain momentum and motivation. This approach prioritizes faster debt reduction and can boost confidence.

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Are student loans acceptable debt?

Loans taken out for education, like student loans, are generally considered acceptable debt as they can lead to future financial gain through higher salaries and career advancements.

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Does a credit score measure how well you manage money?

Credit scores primarily reflect your ability to manage debt responsibly, not necessarily your overall financial prudence.

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Why do people tend to overspend when using credit?

Buying with credit can lead to excessive spending because you're not physically handing over cash, making it easier to overspend and accumulate debt.

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What is a merchant fee?

Credit card companies charge businesses a percentage of each purchase made using their cards. This fee contributes to their profits and helps cover the cost of providing credit.

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What is the total amount of a car loan called?

The total amount of the car loan, including taxes and fees, which represents the overall cost of borrowing.

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What does spending reflect?

Spending and financial decisions reflect personal values and priorities. They contribute to your overall financial well-being, shaping your financial future.

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What is a common stipulation in a car lease agreement?

A lease agreement typically includes a mileage limit, and exceeding this limit may result in a penalty charged by the leasing company.

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Why should you review your credit report?

It's important to check your credit report to ensure no unauthorized accounts have been opened in your name, which could be a sign of identity theft and affect your credit score.

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Study Notes

Credit Card Commercials & Reality

  • Credit card commercials often don't show the reality of paying for purchases over months or years.
  • They don't accurately depict the immediate impact on credit scores.
  • They often paint an overly positive picture of the credit card experience.

Home Equity Line of Credit (HELOC)

  • A HELOC can be used for more than just home repairs and renovations.

Credit Scores & Lenders

  • Credit scores are used by lenders to assess the likelihood of repayment.
  • They indicate financial responsibility and loanworthiness.
  • Credit scores aren't necessarily linked to overall financial success or collateral availability.

Credit Card Purchases & Interest

  • Using credit cards involves borrowing money with interest, which can be costly.
  • Interest rates vary, but the use of credit often involves higher rates than other payment options.

Car Financing & Sticker Price

  • Financing a car typically results in paying more than the listed price (sticker price).

Paycheck-to-Paycheck Living

  • Many Americans live on a paycheck-to-paycheck basis.

Wealth Building & Income

  • Your income is a key factor in building wealth.

Secured vs. Unsecured Loans

  • Secured loans require collateral.

FICO Score Components

  • A person's payment history to lenders is a critical component of their FICO score.

Credit Card Necessity

  • Credit cards aren't always essential for everyday transactions.

Car Leasing

  • Leasing allows you to use a vehicle without owning it.

The Second Foundation of Personal Finance

  • The Second Foundation involves building wealth and giving.
  • It doesn't prescribe saving a $500 emergency fund or paying for a car in cash.

Credit Card Profitability

  • Credit card companies make a significant portion of their profit from charging interest to customers who don't pay the full balance.

Appreciating Assets

  • A home is an example of an appreciating asset.

Credit Reports & Identity Fraud

  • Regularly checking your credit report can help detect errors or signs of identity theft.

Credit Card Rewards & Fees

  • Credit cards with attractive rewards often come with high annual fees.

Car Lease Penalties

  • Lease agreements can include penalties for exceeding mileage or other stipulations.

Debt Snowball Method

  • The debt snowball method prioritizes paying off debts from smallest to largest.

Acceptable Debts

  • Student loans can be acceptable debts.

Predatory Lenders

  • Predatory lenders are often criticized for charging excessive fees and targeting those in a vulnerable position.

Credit Score vs. Financial Management

  • A credit score is an indicator of debt repayment ability, not comprehensive financial management.

Credit vs. Cash/Debit Spending

  • Individuals using credit often spend more than with cash or debit.

Best Car Purchase Method

  • Paying for a car in cash is often considered the best option from a financial standpoint. It avoids interest costs.

Avoiding Debt

  • The best way to avoid falling into debt is usually to prioritize buying only what one can afford with cash.

Credit as a Business Model

  • Credit card companies and banks are in the business of making money with credit services and loans..

Depreciating Assets

  • A car is a depreciating asset (its value tends to decrease over time).

Credit Report Checking

  • Reviewing personal credit reports for inaccuracies is important.

Merchant Fees

  • Credit card companies charge a fee to merchants for each credit card transaction.

Car Loan Terms

  • The total amount of a car loan, including taxes and fees, is often referred to as the term or the principal.

Financial Spending

  • How you spend and give money reflects your personal values and is an important consideration in financial management.

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