Credit – Part 2Vocab, Bankruptcy and Laws

Credit Vocabulary

Acceleration ClauseO Entire debt is immediately due if you

miss a single payment.

Annual FeesO Membership or participation fees.O Not all credit card companies charge

this.O Look for one that doesn’t charge a

fee.

Balance TransferO Moving an unpaid credit card debt

from one issuer to another.O Card issuers offer teaser rates to

encourage balance transfers.

Balloon PaymentO The final payment is much larger

than the regular payments.

CapitalO Dollar amountO What you ownO Should be more than what you owe

Charge CardO Requires payment in full every monthO Doesn't have a preset limitO Purchases get approved based on spending

and payment history, financial resources and credit record.

O There is no interest rate or minimum paymentO If the bill is not paid on time, late fees and

other penalties may ensueO Categorized as Open 30-day accountsO Example: American Express

CollateralO Personal property given to lender to

secure a loan.

Credit CardO Allowed to carry over portions of

your balance from month to month.O Interest is charged if balance is not

paid off.

PrincipalO Actual dollar amount of the

purchases madeO Is also the balance that remains on

your loan or credit card account or loan.

O Example: O When you charges $50 dollars, that is

the principal.O If you still owe $23,900 on your home,

that amount is the principal as well.

Prime RateO The interest rate that commercial

banks charge their most credit-worthy customers.

O Set by the Federal Reserve.O Important for retail customers,

directly affects the lending rates for mortgage, small business and personal loans

Secured LoanO Loan in which borrower pledges

collateral to assure repayment.O Item is seized if there is a default on

the loan.

Revolving CreditO Option of paying in full each month

or making partial payment,.O Categorized as Open Ended CreditO Examples: Credit Cards – Visa,

MasterCard, Discover, Best Buy, Victoria Secrets, etc…

Installment CreditO Used to pay for expensive itemsO Debt is divided into equal amounts

for repaymentO Item purchased serves as collateralO Categorized as Closed Ended credit

Installment Purchase Agreement

O Contract defining repayment of installment credit

O Includes:O PrincipalO Interest rateO Fees involvedO Repayment schedule

O Binding contract

APRO Annual Percentage RateO Cost of credit expressed as a YEARLY

rate.O Can change at any time by lender,

as long as consumer is notified in advance.

O Different APR rates charged for different services from cards.O Cash Advances have much higher

interest rate than regular purchases

Introductory or Teaser Rate

O Low rate for financingO Offered for a limited timeO Usually only applies to certain

aspects of credit—balance transfers or new purchases.

Co-SignerO Person who pledges to repay the

debt if the borrower fails to do so.

Rates…O Fixed APR: Rate doesn’t change for

the life of the loan.O Variable APR: changes over time

because of the prime lending rate.

Service CreditO Having a service performed and

paying for it later.O Example:

O Telephone/utilityO DoctorsO LawyersO Repair shops

Make No Payments for 3 years interest free….

O Agreement in which no payment has to made for period of time.

O No interest is accumulatedO Payments can be made, but not

requiredO Balance is due at end of time periodO If entire balance is not paid at due

date…O Loan is refigured from the beginning

with all interest added in.

Bankruptcy

BankruptcyO Legal process whereby you are

declared legally insolvent.O Having insufficient funds to repay you

debt.

Bankruptcy ProcedureO File with bankruptcy courtO Notice is given in newspaper – must be

public knowledgeO Creditors are notifiedO Creditors files claimsO Court may sell property as needed to

repayO In most cases, bankruptcy can be

claimed every 6 years.O Must go through debt counseling first

Classes of Bankruptcy

Chapter 11 BankruptcyO Existing management retains control

of businessO Main purpose is to reorganize the

business’ debt structureO Also known as Reorganization

Bankruptcy

Chapter 7 BankruptcyO Past the stage of reorganization and

must sell off any un-exempt assets to pay creditors

O Also known as liquidation bankruptcy

Chapter 13 BankruptcyO Allows creditors to get some of their

money backO Debtor keeps property and repays

debt over time.

Discharged DebtsO Debts set aside by the courtO Debtor no longer responsible for

payment of certain debtO Creditors can no longer seek

payment

Is All Debt Discharged??

O NO! Some debts still must be repaid.O Child supportO Alimony or maintenanceO Income taxes and penaltiesO Student loansO Court ordered damages

Causes of BankruptcyO Foolish/emotional spendingO Failure to budget and planO Business failureO ForeclosuresO Catastrophic injury or illnessO Natural disasters

Credit Laws

Fair Credit Reporting Act

O Gives individuals the right to examine their own credit history.

O Allows the consumer to find out:O If information in your file has been

used against you.O What is in your credit fileO What your credit score isO To dispute incomplete or incorrect

information.

Truth in Lending ActO Federal lawO Requires lenders to fully disclose the

terms and conditions of a mortgage.O APR must be told up front

Fair Credit Billing ActO Protects consumers from billing

errors or other unfair practices from credit card companies

Fair Debt Collection Practices Act

O Eliminate abusive practices in the collection of consumer debt.

O Includes:O Contacting third partiesO Threats O Calling at unpredictable timesO Using false claimsO Informing your employer

Equal Credit Opportunity Act

O Credit applications be considered on the basis of actual qualification for credit – the Three C’s

O Cannot be rejected because of:O AgeO GenderO Marital statusO Race, colorO ReligionO National originO Receive public incomeO Sexual orientation

Credit CARD Act

OCredit Accountability Responsibility Disclosure Act

O 2009O Credit Card ReformO Among other changes, it restricts

card issuance to students under age 21 must prove they have the means to repay, or must have a co-signer.

Credit Card No-Brainers