2. Read to Learn
Explain one major difference between credit cards, installment loans, and mortgages.
Indicate at least three ways to maintain a good credit rating.

3. The Main Idea
There are several similarities between credit cards, installment loans, and mortgages. There are also differences. Keeping a good credit rating is important if the consumer is interested in getting loans at a reasonable cost.

4. Key Concepts
Understanding Loans and Mortgages
Keeping a Healthy Credit Record

5. Key Terms
variable rate
an interest rate that fluctuates or changes over the life of the loan
fixed rate
an interest rate that stays the same over the life of the loan

6. Key Terms
a portion of the total cost that is paid when a product or service is purchased
down payment
the amount of borrowed money that is still owed and on which interest is based
principal

7. Key Terms
finance charge
the total amount it costs the borrower to have the lender finance a loan
secured loan
a loan that is backed by collateral

8. Key Terms
unsecured loan
a loan that is not backed by collateral
a court order to take all or part of a debtor’s paycheck if he or she stops making payments
garnishment of wages

9. Key Terms
repossess
taking back an item

10. Understanding Loans and Mortgages
Loans and mortgages allow consumers to borrow money that will be paid back with interest.

11. How Installment Loans and Mortgages Work
A loan is money lent by one party to another with interest, usually requiring collateral.
A mortgage is a loan agreement secured by property, usually the item that the mortgage is for, such as a home.

12. How Installment Loans and Mortgages Work
Installment or mortgage loans can have a variable rate of interest or a fixed rate of interest.
variable rate
an interest rate that fluctuates or changes over the life of the loan
fixed rate
an interest rate that stays the same over the life of the loan

13. How Installment Loans and Mortgages Work
Installment and mortgage loans usually require the applicant to give a down payment.
down payment
a portion of the total cost that is paid when a product or service is purchased

14. How Installment Loans and Mortgages Work
On a simple interest loan, interest is based on the original principal alone.
principal
the amount of borrowed money that is still owed and on which interest is based

15. How Installment Loans and Mortgages Work
A finance charge includes the interest and any other charges, such as the application fee.
finance charge
the total amount it costs the borrower to have the lender finance the loan

16. How Installment Loans and Mortgages Work
A mortgage is an example of a secured loan.
A credit card debt is an example of an unsecured loan.
secured loan
a loan that is backed by collateral
unsecured loan
a loan that is not backed by collateral

17. How Installment Loans and Mortgages Work
Secured loans usually carry a lower interest rate.

18. Keeping a Healthy Credit Record
To continue using credit or to get new credit, you need to maintain a good credit rating score.
To get the best credit rating, you need to pay your bills on time.

19. Factors That Affect Your Credit Score
Figure 26.1
Factors That Affect Your Credit Score

20. Staying Within Your Income Limits
Experts say consumers should not use more than 20 percent of their income for credit payments.

21. Graphic Organizer No Remember
Your Income
$2,000 per month
$1,500 after taxes
Your Debt
$120 for Student Loans
$160 for Car Payments
What You Want
A new entertainment center for $50 per month for three years
Can You Afford It? No
You should not use more than 20 percent of your income for credit payments.
Remember
Your total payments each month would be $330, or 22 percent of your take-home pay.

22. Signs of Credit Trouble
Graphic Organizer
Signs of Credit Trouble
You cannot make monthly loan payments and minimum monthly payments on your credit cards.
You receive second and third payment-due notices.
You get calls from bill collectors.

23. Signs of Credit Trouble
Another sign of credit trouble is when a creditor arranges a garnishment of wages.
garnishment of wages
a court order take all or part of a debtor’s paycheck if he or she stops making payments

24. Signs of Credit Trouble
Another sign of credit trouble is when a creditor is forced to repossess an item you purchased.
repossess
taking back an item

25. Which type of loan usually carries a lower interest rate—a secured loan or an unsecured loan?
a secured loan because it is backed by collateral and, therefore, involves less risk

26. What is the maximum percentage of your income that you should allocate to credit payments?

27. What is a garnishment of wages?
a court-ordered act of taking back all or part of a debtor’s paycheck if payments are stopped

28. End of