Interest, Payments, and Credit

Interest What is interest? Payment people receive when they lend money or allow someone else to use their money What types of things might you receive interest for? What types of things might you pay interest for?

Credit Borrowing $ to pay for something now while promising to repay it later Lender- Person who loans someone the money to buy an item Borrower- person who receives the loaned money

Annual Percentage Rate The annual cost of credit expressed as a percentage of the amount borrower Represents the actual yearly cost of funds over the term of a loan Includes any fees or additional costs associated with the transaction Example: a credit card may charge 1% a month, and its APR is 1% x 12 months, or 12%.

Credit Rating Evaluation of the likelihood of a borrower to default on (or be unable to repay) a loan

Collateral Property (like a house, car, or other valuable item) that a borrower pledges as security for a loan If a borrower fails to repay a loan, the lender can take the collateral as payment

Credit Score 3 digit number that tells how likely you are to repay your debt FICO is tight-lipped about exactly how the scores are calculated. But they do give the weights of various criteria that they look at: 35% payment history, 30% amount owed, 15% length of history, 10% new credit, 10% types of credit used.

Bankruptcy The inability to pay debts It remains on your credit rating from 7-10 years Makes it extremely hard to get a loan or receive credit

Sources of Credit Credit cards Mortgages Car loans

Benefits of Credit It allows you to obtain something you want without waiting until you can save the entire purchase price Making monthly payments on time can teach your financial discipline

Drawbacks of Credit People may get in over their heads- bought more than they can afford Bankruptcy Bad credit score-makes it hard to get loans

Responsibilities of a Borrower Have a plan to makes all the payments Understand all aspects of the agreement