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Understanding Credit & Debt
Transcript of Understanding Credit & Debt
The ability of a customer to obtain goods or services for payment, based on the trust that payment will be made in the future.
5 C's of Credit:
Character: Sometimes called credit history, the first C refers to a borrower's reputation or track record for repaying debts.
Capacity: Capacity measures a borrower's ability to repay a loan by comparing income against recurring debts
Capacity: Lenders also consider any capital the borrower puts toward a potential investment. A large contribution by the borrower decreases the chance of default.
Collateral: Help borrower secure loans.
Conditions: Influence the lender's desire to finance the borrower.
Benefits of having excellent credit:
Low interest rates on credit cards and loans
Better chance for credit card and loan approval
More negotiating power
Get approved for higher limits
Better car insurance rates
Downfalls of Bad Credit:
Credit and Loan applications may not be approved
Difficulty getting approved for an apartment
Security deposits on utilities
You can't get a cell phone contract
Main type of credit:
Open-end credit is a line of credit that can be used over and over again up to a certain limit.
Examples of open-end credit are credit cards, such as Visa and MasterCard
Closed-end credit is credit given for a specific amount of money or purchase.
Examples of closed-end credit are home, car, and student loans.
How to establish good credit:
Apply for a secured credit card
Apply for a credit- builder loan
Get a co-signer
Become an authorized user on someone else's credit card
Get credit for the rent you pay
Understanding Credit & Debt
10 Credit Terms
Creditor: The person who lends money or provides credit
Debtor: The person who borrows money or receives credit.
Interest: Creditors charge a fee; borrowing money or using credit
Secured Loan: A loan backed up by collateral.
Collateral: Something of value, such as the property purchased, that the creditor can take if the loan is not repaid.
Security Interest: A creditor;s right to take collateral if a loan is not repaid.
Default: Failure to make loan payments on time or live up to the terms of a credit agreement.
Guarantor: Agrees to pay off a debt only if a debtor defaults.
Surety: Agreed to pay off a debt outright, in place of the debtor.
Finance Charge: The total cost of the loan in dollars and cents.