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Published byTyler Reeves Modified over 8 years ago
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Credit Basics
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Open- vs Closed-Ended Credit Open-ended credit is ongoing … you borrow, you repay, you borrow again as long as you do not exceed your credit limit. Also called “revolving” Ex: credit card, home equity line of credit, student loan line of credit Line of credit up to $10,000 Closed-ended … there is an end date to the term of the loan. Ex: personal loan (mortgage, personal loan) Borrow $5,000, repay $100 each month for 50 months. Types of Credit at Investopedia
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Secured vs. Unsecured Secured: The borrower (debtor) offers some property to guarantee the loan. If the loan is unpaid, the creditor (lender) takes the property. Ex: a house is collateral for a mortgage Unsecured: there is no collateral Ex: personal loan See dummies.comdummies.com
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Advantages of Using Credit Cards You don’t have to wait Purchase protection Build credit history Perks (air miles, cash back) See mtscil.org and 360financialliteracy.orgmtscil.org360financialliteracy.org
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Disadvantages of Using Credit Cards Interest and fees if you don’t pay by the due date Credit card fraud Spending money you don’t have See mtscil.org and 360financialliteracy.orgmtscil.org360financialliteracy.org
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Summary of Terms
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Basic Terms Credit – buying with someone else’s money You pay them back later. Debt – what you owe and need to pay back Creditor – a person lending money Debtor – a person borrowing money
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Open vs Closed-Ended Open-ended – borrow and repay and borrow again. Also called “revolving.” Ex: Credit card, line of credit Closed-ended – borrow a certain dollar amount for a specified period of time. If you want to borrow more, you need a new loan. Ex: Car loan, mortgage, student loan.
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Secured loans The creditor (lender) puts a lien (legal hold) on whatever you financed. If you debtor does not repay the loan, the creditor can take the collateral. Ex: car for a car loan, house for a mortgage Note: When you pay cash for a car or a house, there is no collateral because there is no loan.
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Other terms Installment – a payment. Loans that have a regular month payment where you pay the same amount every month are called installment loans. Ex: car loan, mortgage, line of credit Cosigner – someone who shares the financial responsibility with the primary lender. Ex: You may need a cosigner on your student loans as well as electric and other utility bills because you do not yet have an established credit history.
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