6.4 Credit and Consequences

Credit Credit is the promise to repay borrowed money (principle) with interest over a certain period of time. Credit cards, mortgages, car loans, student loans, etc. would be examples of credit. Credit is given by a lender to a borrower, also known as a debtor.

Credit Cards People may also consume, but postpone spending the money by using credit cards. However, these have high interest rates. The better your credit, the better interest rate you could receive on a credit card.

Principal Principal is the amount that one borrows. For example, if one borrows $100,000, the principal amount is $100,000. Interest is calculated over the principal (and often over unpaid interest that accumulates).

Interest Interest is a fee paid by a borrower of a loan or credit to the owner as a form of payment for the use of the assets. Interest is most commonly the price paid for the use of borrowed money, or money earned by deposited funds.

Annual percentage rate (APR) Interest is compensation to the lender, for a) risk of principal loss, called credit risk. The term annual percentage rate (APR) describes the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate.

Annual fee An annual fee is charged on a yearly basis. One of the most common forms of an annual fee is the fee that is charged by some credit card companies to their credit card holders, simply for having the credit card. This fee is charged regardless of anything else (the amount or value of purchases with the credit card, for example).

Credit limit Credit limit is the amount of credit that a financial institution extends to a client. Credit limit also refers to the maximum amount a credit card company will allow someone to borrow on a single card. Credit limits are usually determined based on information contained in the application of the person seeking credit, or that person's credit rating.

Finance charge Finance charge is a fee charged for the use of credit or the extension of existing credit.  It may be a flat fee or a percentage of borrowings, with percentage-based finance charges being the most common.

Origination fee An origination fee is an up-front fee charged by a lender for processing a new loan application, used as compensation for putting the loan in place. Origination fees are quoted as a percentage of the total loan and are generally between 0.5% and 1% on mortgage loans in the United States.

Loan term A loan’s term can refer to two things. First, it tells you how long the loan will exist. Secondly, it can refer to requirements and specifics of the loan agreement.

Grace period Grace period is a provision in most loan and insurance contracts which allows payment to be received for a certain period of time after the actual due date. During this period no late fees will be charged, and the late payment will not result in default or cancellation of the loan.  A typical grace period is 15 days.

Collateral Banks help ensure that loans will be repaid by requiring borrower to give collateral. Collateral is something of value the borrower loses if the loan is not repaid.

National Debt The National Debt is the amount of money owed by the federal government. As the government represents the people, government debt can be seen as an indirect debt of the taxpayers. The debt in the United States is roughly $16.3 trillion. Trillion, Trillion, Trillion!!!!!!

The National Debt is still climbing!

Identity theft Identity theft is the crime of obtaining the personal or financial information of another person for the sole purpose of assuming that person's name or identity in order to make transactions or purchases.

Credit report A credit report is a detailed report of an individual's credit history prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness, including: 1. Personal data 2. Summary of credit history 3. Detailed account information 4. Inquires into applicant's credit history 5. Details of any accounts turned over to credit agency 6. Information on how to dispute any of the above information. 

Credit history Credit history is a record of a consumer's ability to repay debts and demonstrated responsibility in repaying debts. A consumer's credit history consists of information such as: number and types of credit accounts, how long each account has been open, amounts owed, amount of available credit used, whether bills are paid on time, and number of recent credit inquiries.  It also contains information regarding whether the consumer has any bankruptcies, liens, judgments or collections. This information is all contained on a consumer's credit report.

Credit score A credit score is a statistically derived number of a person's creditworthiness that is used by lenders to access the likelihood that a person will repay his or her debts.  A credit score is based on a person's past credit history.  It is a number between 300 and 850 - the higher the number, the more creditworthy the person is deemed to be.