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Financial Education: Charge It Right

Charge It Right

Charge It Right

Using a credit card can be both a convenience and a necessity. However, many people get into trouble by not using a credit card wisely.

Credit cards are a convenient form of borrowing. People generally use credit cards to purchase goods and services. Credit cards represent a revolving line of credit. This means you can make an unlimited number of purchases, up to a pre-approved dollar limit. You must pay a portion of the balance every month. Before you decide to apply for a credit card, decide what it will be used for. Keep in mind a credit card is not free money. It is a loan you must repay.

When you decide to apply for a credit card, it is very important to read all disclosures and understand the terms of your credit card agreement. When you have completed this course, you will be able to describe the costs and benefits of using a credit card. You will know:

Card Types

Card Types

Credit cards are a convenient form of borrowing. People generally use credit cards to purchase goods and services.

Credit cards represent a revolving line of credit. This means you can make an unlimited number of purchases, up to a pre-approved dollar limit, such as $3,000. You must pay at least a portion of the bill every month. This is called a minimum payment. It is often a percentage of your balance.

Charge cards are used like credit cards, but you must pay the entire balance every month. In this course we focus on credit cards rather than charge cards.

Most credit cards are unsecured. This means you do not have to provide collateral. Collateral is what you promise to give the bank if you do not repay the loan. Examples of items that can be used as collateral include homes, cars or savings and investment accounts. However, you might want to consider a secured credit card if you have no credit history or have had credit problems in the past.

To get a secured card, you generally need to pledge a bank savings account as collateral. This means the bank holds the savings account as security for repayment. For example, if you want a credit card with a $500 limit, the bank might require you to keep $500 in a bank savings account. You will not be able to withdraw money from that account. The $500 account assures the bank you will pay the credit card bill.

Once you establish a good history by paying your credit card bills on time, you will have a better chance of getting an unsecured credit card.

Usually, gold and platinum cards are credit cards with higher credit limits. These types of cards usually require a good credit history and higher income. However, not all gold and platinum cards have the same favorable terms. Be sure to carefully read your disclosures.

Many airlines and hotels offer rewards cards. When you use these credit cards, you earn points towards goods or services. You are usually charged annual fees for rewards cards.

You can apply for a credit card at:

Retail stores - many department, clothing and jewelry stores offer credit cards that can be quickly approved. Retail credit cards usually have lower credit limits and higher interest rates than bank credit cards. Banks - you can find bank credit cards offers at your local bank, in newspapers or on the Internet.

Banks and other financial institutions offer both secured and unsecured credit cards with varying credit limits and rates.

Before accepting any offer, always remember to look at all the terms. Pre-approved credit offers are subject to verification of income, employment and credit history. Remember to shop for the best deal. You should always be sure to read the credit agreement carefully. There may be limitations or conditions not obvious in the advertisement. For example, credit card issuers might encourage you to transfer balances from other credit cards (balance transfers). There might be hidden costs with these transactions.

Before you decide to apply for a credit card, decide what it will be used for. Keep in mind, a credit card is not free money. It is a loan you must repay.

Now that we've reviewed some of the credit card basics, let's look at how you can find the best credit card deal .

Card Shopping

Credit Card Shopping

Shopping for Credit Cards

Not all credit cards have the same terms. This can be confusing when you are shopping for credit cards.

Here are some important credit card terms you should look for.

Annual Percentage Rate or APR: The APR represents the rate of interest you are charged plus fees, expressed as a yearly rate. If you plan to keep a balance on your credit card account, you want to look for a low APR. If you expect to pay your bills in full each month, it will be more important to compare the annual fee and other charges.

Fees: Check how much you will pay for annual fees, late fees or over-the-limit fees.

Grace period: The grace period is the number of days you have to pay your balance before a creditor starts charging interest.

Balance computation method: This will determine how your interest is calculated. There are a variety of methods. The most common is the average daily balance.

Sample Disclosure:

Annual Percentage Rate (APR) 19.4%
Grace Period 25 days
Annual Fee $35.00
Minimum Interest Charge None
Method of Computing the Balance for Purchases Average Daily Balance
Late payment fee - $29.00; Over-the-limit-fee - $29.00; Returned check fee - $20.00; ATM transaction fee - $2.00. The grace period does not apply to cash advances. The annual percentage rate for cash advances is 19.9%.

It is important for you to understand these credit card terms.

Interest rates can be fixed or variable. Fixed rate means the interest rate will not change. Variable rate means the rate can increase or decrease. You need to understand how your payment is affected by the interest rate.

When looking at different credit card offers, use this Comparison Chart so you can compare each offer side-by-side.

When shopping for a credit card, consider the following:

You should now recognize some of the terms to look for when shopping for a credit card. Next, let's look at how to apply for a credit card.

Applying for Credit Cards

Applying for Credit Cards

The applicant is the person applying for credit, that's you. The card issuer is the person approving the credit, the creditor.

Individual credit is based on your own assets, income and credit history. You are responsible for paying the credit card bill.

Joint credit is based on the assets, income and credit history of both people who apply. Married couples often apply for joint credit. You might obtain more credit this way. Both applicants are responsible for the credit card bill, no matter who makes the charges on the credit card.

Another requirement is that you must be 18 years old and have a regular source of income to qualify for a credit card.

Giving false information about your income or any other item on a credit application is a crime. It is fraud. You have to demonstrate you are a good risk before credit is granted. The proof is in your credit report.

A credit report is a collection of credit information. It is how creditors predict whether you will make regular payments on your loans.

Your credit report is kept on file with three major credit reporting agencies. Financial institutions report information about borrowers to the credit reporting agencies who compile information about you, the consumer. Banks in turn ask the credit reporting agencies for this information when you apply for a loan.

The three credit reporting agencies are:

Equifax
P O Box 740241
Atlanta GA 30374-0241
1-800-997-2493


Experian
P O Box 949
Allen TX 75013
1-888-397-3742


TransUnion
760 West Sproul Rd P O Box 390
Springfield PA 19064-0390
1-800-888-4213


You can contact any of these three credit reporting agencies to obtain a copy of your credit report. You might want to get copies of your report from each credit reporting agency. Each one could have slightly different information since lenders might not report to all three.

Basic information found in your credit report includes:

Identifying information: This includes your name, Social Security number, current and previous addresses, telephone number, birth date, current and previous employers and your spouse's name.

Credit history: This is your account record with different creditors. It shows how much credit has been extended and how you have repaid it.

Public record information: This includes items that are matters of public record including collection accounts, bankruptcies, foreclosures, tax liens, civil judgments and late child support payments.

Inquiries: This is a list that identifies creditors and other authorized parties who have requested and received your credit report.

Credit history and public record information demonstrate your willingness to repay your debts.

How do you think creditors decide whether to offer you credit?

Most credit card issuers use some form of credit scoring to help decide whether to make a loan.

The score is calculated using a scoring model or a mathematical equation that evaluates your employment data and payment history. The score is based on information contained in your credit report.

What should you do if your application for a credit card is turned down?

You will receive a denial notice, sometimes called an adverse action notice , that lists reasons for denying your application. If you don't receive this notice, ask your creditor. Reasons for denial might include:

  • You have a bad credit history
  • You haven't been at your current address or job long enough or
  • Your income does not meet the lender's criteria.

Different credit card issuers have different criteria.

If you are denied credit because of information on your credit record, federal law requires the creditor to give you the name, address and telephone number of the credit bureau that supplied the information. If you contact the credit bureau within 60 days of receiving the denial, you are entitled to a free copy of your credit report.

You have a right to dispute any inaccuracy in your credit report with the credit reporting agency and also with the company that furnished the information to the credit reporting agency. It is important to review all three credit reporting agencies to ensure they have correct information.

Let's imagine you have applied for and been approved for a credit card. The next important responsibility is paying your credit card bill.

Paying Your Bill

Paying Your Credit Card Bill

If you are approved for credit, the credit card company or issuer will set a credit limit. This is the maximum balance you can carry on your card. Each card issuer has its own standards for setting credit limits.

With a credit card, you have to pay at least the minimum amount due.

The example below shows what happens if you make only minimum payments on your credit card bill.

Item Price APR Interest Paid How Much
You Really Pay
Total Years
to Pay Off
TV $500 18% $439 $939 8
Computer $1,000 18% $1,899 $2,899 19
Furniture $2,500 18% $6,281 $8,781 34
*This chart assumes you are not making additional purchases and you are making your payments on time.

The table below shows how much you can save by paying more than the minimum payment.

Original
Balance
APR Monthly
Payments
Total Number
of Monthly
Payments
Total
Years to
Pay Off
Total of
Payments
$2,500 18% Minimum Pmt 404 34 $8,781
$2,500 18% $50 94 8 $4,698
$2,500 18% $100 32 3 $3,163
*This chart assumes you are not making additional purchases and you are making your payments on time.

You can see why it is a good idea to pay more than the minimum each month. Of course, the best way to save money and avoid paying interest charges is to pay off your balance in full when you first get your bill.

Obviously it is important to pay your credit card bill, but how will you know if your bill is accurate? for the next step, let's review a credit card statement and learn how to keep good records.

Keeping a Record

Keeping a Record of Your Credit Card

If you have a credit card, you will receive a monthly billing statement. Understanding the billing statement is important. The bill lists detailed activity from your account billing cycle.

The reverse side of your bill usually describes some of the basic terms of your credit card agreement, including how the interest is calculated and where to call with billing questions.

Here are some of the terms found on a credit card statement:

New Balance: Your previous balance, plus any purchases, cash advances and late fees, minus any payments and credits. If you pay your credit card bill in full each month, the new balance will be equal to your new purchases and cash advances.

Credit Line: The maximum dollar amount you can borrow on the card at one time.

Minimum Payment Due: The minimum dollar amount that must be paid each month. This is usually two to three percent of the amount owed and is often based on the balance at the billing date.

Credit Available: This is the amount of credit remaining on your card after your balance and your current charges are subtracted from your total credit line.

Payment Due Date: The date your payment must be received by the credit card issuer -- not the date it is postmarked.

Previous Balance: This is the amount you owed at the end of the previous billing period. Any payments, credits to your account or new purchases are not included.

Interest Charge: This is the cost of credit. It includes interest, service charges and transaction fees. This charge is calculated on your balance using different methods.

Let's walk through an example of a interest charge calculation.

Assume:

  • Your billing cycle is the same as the calendar month;
  • On April 1, you got a cash advance of $180 and were charged a $20 fee. Interest started accruing immediately;
  • At the beginning of May, you receive your April billing statement. Your average daily balance for the month of April is $200 since you made no additional charges or payments.

The interest charge is calculated using a periodic rate. The periodic rate is the interest rate or cost of credit in relation to a specific period of time.

Let's assume the annual percentage rate or APR for your credit card is 18%. This means your daily periodic rate is 0.0493% or 18% divided by 365 days.

 $200.00 (Average Daily Balance)
x 0.0493% (Daily Periodic Rate)
= $0.10 per day (for each day you have the $200 balance)

$0.10 x 30 days = $3 (interest charge)

You should always keep your credit card receipts to compare them with your monthly statements. Be sure to check your monthly statement for mistakes.

If you find a discrepancy, take steps to resolve it right away. To be fully protected, you must report a discrepancy to your credit card in writing within 60 days from the day the bill was sent to you.

Now let's look at using a credit card responsibly so you don't get into trouble.

Responsible Use

Using Your Credit Cards Responsibly

When you get a credit card, start slowly with one credit card with a low limit and use it responsibly. Starting small will help you establish a credit history and keep you from getting into debt problems.

  • Pay your bills on time to keep finance and other charges to a minimum.
  • Keep your receipts to compare charges when your monthly bill arrives.
  • Protect your credit card and account numbers to prevent unauthorized use. Draw a line through blank spaces on charge slips so the amount cannot be changed. Tear up carbon copies of your receipts.
  • Keep a record of your account numbers, expiration dates and the phone numbers of each credit card issuer - in a safe place, separate from your credit card - to quickly report a loss.
  • Carry only the credit cards you think you will use.
  • Pay off your total balance each month. If you can't pay the total balance, try to pay more than the minimum amount.
  • Read the fine print. Low advertised interest rates might not last as long as you think. You might not have a grace period with balances you have transferred from other credit cards.
  • After you have established a good credit history, ask the credit card issuer to waive the fee or lower the interest rate.

Too many cards make overspending tempting. Many people don't control their spending or manage their finances wisely. Many financially responsible people can become overwhelmed by expenses or reduced income triggered by a serious illness, a job loss or some other unexpected event.

There are, however, good reasons to have more than one card, especially if your credit limit is not high enough on one card to cover an emergency.

Many experts agree that two or three credit cards should be enough for the average family. Even with a few credit cards, you can still run into credit problems. As always, be careful.

To correct credit card problems, you can:

  • Reduce your expenses by paying off the balance on your highest rate loans first. These are usually credit cards.
  • Pay for future purchases using cash or a check.
  • Turn to a reliable credit counselor. Some of these can help you for little or no cost.
  • If your credit card is lost or stolen, immediately notify your credit card company. Do the same thing if you spot something wrong in your monthly billing.

Never give your card number, confidential personal identification number or PIN, or similar personal information over the phone unless you have placed the call to someone you know is legitimate.

Under federal law, if a thief uses your credit card or card number, the most you are liable for is $50 per card if the creditor is notified immediately. If you contact your card company before any unauthorized charges are made, you are not responsible for any unauthorized charges.

Credit fraud is a national problem and one reason interest rates are higher on credit cards than on other types of loans. You have certain rights as a credit card consumer. If you think you are a victim of credit card fraud, immediately contact your credit card issuer. There are other organizations you can contact for help such as the Federal Trade Commission and the National Fraud Information Center.

For Further Information:

Federal Deposit Insurance Corporation (FDIC)
Division of Compliance and Consumer Affairs
550 17th Street, NW
Washington DC 20429
1-877-ASK-FDIC (1-877-275-3342)
Email: consumer@fdic.gov
www.fdic.gov

Federal Trade Commission
Consumer Response Center
6th and Pennsylvania Avenue, NW
Washington DC 20580
1-202-326-2222
1-877-FTC-HELP (1-877-382-4357)
Email: consumerline@ftc.gov
www.ftc.gov

National Fraud Information Center
1-800-876-7060
www.fraud.org

Congratulations!
You've completed the Charge It Right course. A lot of information was covered including:

  • Credit card characteristics
  • Shopping for the best credit card deal
  • Applying for a credit card
  • Paying your credit card bill
  • Keeping good records
  • Examples of responsible credit card use

You should now be able to describe the costs and benefits of using a credit card.

Glossary

Glossary of Credit Terms

- A -

Account Verification
Before opening an account, most banks will review your history of using checking accounts through companies such as TeleCheck or ChexSystems. Some banks will run a full credit report to determine the level of risk.

The account information is collected from financial institutions. If you have a history of bouncing checks or misusing your accounts, financial institutions may not open an account for you.

Annual Fee
A yearly fee charged by credit grantors for the privilege of using credit.

Annual Percentage Rate (APR)
The cost of credit expressed as a percentage per year.

Annual Percentage Yield (APY)
APY is the amount of interest you will earn on a yearly basis expressed as a percentage. The APY includes the effect of compounding. When comparing different accounts, you should compare the APYs of the savings products, not the interest rates. The higher the APY, the higher the interest you will receive. The interest you earn is considered income and is taxable.

Applicant
A person applying for credit privileges, employment or some other benefit.

Asset
Any item you own that has economic value or use.

Attachment
A lien against personal property.

Automated Teller Machines (ATM)
This is a computer where you can deposit, withdraw, or transfer money from one account to another 24 hours a day. Use of an ATM requires a card issued by the bank and a personal identification number (PIN). A PIN is a special password or set of numbers to use your debit or ATM card. The PIN is used for security purposes, so no one else can access your account.

Authorized Account User
The person authorized by the contractually responsible party to use the account.

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- B -

Balance
Balance is the amount of money you have in your bank account.

Balance Computation Method
This will determine how your interest is calculated. There are a variety of methods. The most common is the average daily balance.

Balloon Mortgage
A balloon mortgage is one with a large payment at the end of your loan term. This is often after a series of low monthly payments. A balloon mortgage generally offers very low rates for an initial period of time (usually 5, 7 or 10 years). After the period ends, the entire balance is due. Many borrowers pay the balance by refinancing their mortgage.

Bank
A bank is a business that offers you a place to keep your money and uses it to make more money. Banks offer you different services for keeping your money.

Bankruptcy
A legal declaration of insolvency. A proceeding in U.S. Federal Court that may legally release a person from repaying debts owed. The law contains several chapters which relate to different methods of relief:

  • Chapter 7 - Straight Bankruptcy (total liquidation of assets)
  • Chapter 11 - Business Reorganizations
  • Chapter 12 - Farm Debt Bankruptcy
  • Chapter 13 - Wage Earner Repayment Plan

Bankruptcy Discharged
A court order terminating bankruptcy proceedings on old debts.

Bankruptcy Dismissed
A court order that denied a bankruptcy petition making the debtor still liable for all debts.

Bonds
When you purchase a bond, you are essentially loaning money to a corporation or to the government for a certain period of time, called a term. The bond certificate promises the corporation or government will repay you on a specified date with a fixed rate of interest.

Branch Manager
A branch manager is the person who supervises the bank operations and helps fix problems that cannot be solved by other bank employees.

Broker
A mortgage broker helps a prospective borrower shop around for the best rate and terms in obtaining a mortgage loan.

Budget
A financial plan for saving and spending money.

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- C -

Caps
Caps are provisions of an adjustable rate mortgage, which limit how much the interest rate can change at each adjustment period or over the life of the loan. A payment cap limits how much the payment due on the loan can increase and decrease.

Cashier's Check
For a cashier's check, you provide cash or money from your account in the amount of the check plus a service charge (usually form $2 to $5). You also tell the institution who is receiving the check. The institution writes a check (also called a bank check or teller's check) for you. This check is guaranteed not to bounce. A cashier's check is available from financial institutions.

Certified Check
A certified check is a check you write and take to your financial institution. The bank will mark it "certified" for a fee (usually $2 to $5) and place a hold on the money in your account until the check is processed. A certified check is guaranteed not to bounce.

Charge Card
A card which requires payment in full upon receipt of the statement.

Charge Off
Accounting term to indicate that the creditor has removed a loan from its balance sheet because collection is unlikely.

Checking Account
A checking account is an account that lets you write checks to pay bills or to buy goods. The financial institution takes the money from your account and pays it to the person named on the check. The financial institution sends you a monthly record of the deposits made and the checks written.

Closing Costs
Closing costs are various charges associated with the transfer of property. The lender must disclose these costs to you. Different costs can be found on the Mortgage Shopping Worksheet.

Collateral
Property acceptable as security for a loan or other obligation.

Collection Account
An account that has been transferred from a routine debt to a Collection Department of the creditor's firm or to a separate professional debt collecting firm.

Compensating Factors
Compensating factors are favorable factors that might outweigh the negative factors. For example, a borrower has high ratios, but he or she balances this with good credit history and extra cash in a savings account.

Condominium
A condominium is an apartment building or multiple-unit housing area in which the living units are owned individually.

Consolidation Loan
A loan usually obtained for the purpose of reducing the amount of the payments of bills owed by consolidating the bills into one loan payment. The consumer pays off several bills with the proceeds from one loan and is left with one consolidated monthly payment.

Consumer
Person who uses and/or buys goods and services for family or personal use.

Consumer Credit Counseling Service
Organizations which help consumers find a way to repay debts through careful budgeting and management of funds. These are usually nonprofit organizations, funded by creditors. By requesting that creditors accept a longer payoff period, the counseling services can often design a successful repayment plan.

Convenience Checks
A convenience check is a cash advance that is used like a regular check. However, the money is charged against your credit limit. There is usually a grace period and the interest charge is usually higher than for purchases.

Conventional Loan
A conventional loan is a mortgage that is not guaranteed, insured, or made by the federal government.

Co-Signer
Person responsible for repaying a debt if the borrower defaults.

Credit
A trust or a promise to pay later for goods or services purchased today.

Credit Card
A rectangular piece of plastic used instead of cash or checks authorizing payment for goods and services.

Credit Grantor
Person or business that loans money or furnishes consumer goods and/or services on credit.

Credit History
Record of how a consumer has paid credit accounts in the past, used as a guide to determine whether the consumer is likely to pay accounts on time in the future.

Credit Limit
The maximum amount of money that can be charged on a particular credit account.

Credit Repair Companies
Individuals or Companies that promise to "clean-up" or "erase" a consumer's bad credit and give him/her a fresh start. Also known as Credit Clinics.

Credit Report
A record or file to a prospective lender or employer on the credit standing of a prospective borrower, used to help determine credit worthiness.

Credit Reporting Agency
A company that gathers, files and sells information to creditors and/or employers to facilitate their decisions to extend credit or to hire.

Credit Union
A nonprofit financial institution owned by people who have something in common. You have to become a member of the credit union to keep your money there.

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- D -

Debit Card
A debit card is a plastic card sometimes called a "Check Card". The debit card has a MasterCard® or Visa® logo and a magnetic strip on the back that allows you to pay for goods and services at stores and other businesses that accept MasterCard or Visa credit cards.

The debit card also functions as an ATM card. With ATM Cards, you can make deposits to or withdrawals from your checking account at ATMs. Most debit cards require a PIN if you use the card as an ATM card.

Debt-to-Income Ratio (DTI)
DTI is the ratio of monthly debt payments to monthly gross income. Lenders use DTI ratio to determine whether a borrower's income qualifies him or her for a mortgage.

Deposit Products
Deposit Products are bank accounts that allow you to add money to the account. Checking and savings accounts are two examples of deposit products.

Direct Deposit
Direct Deposit is one method your employer or a government agency might choose to give you your paychecks or benefits checks. With direct deposit, your paychecks or benefits checks are electronically transferred and directly deposited into your account. The amount of money is immediately available Some banks will not charge the monthly fees if direct deposit is used.

Diversification
Diversification means you spread the risk of loss in a variety of savings and investment options. It is the concept of "don't put your eggs in one basket."

Down Payment
The down payment is the portion of the home's purchase price the buyer pays in cash.

Duplex House
A duplex is a house divided into two living units.

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- E -

Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

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- F -

401(k) and 403(b) Retirement Plans
401(k) plans are retirement plans that some private corporations offer their employees. A 403(b) plan is similar to a 401(k), but is offered to employees of some nonprofit organizations. In both types of plans, you choose to deduct part of your paycheck and place it into the investment strategy you design.
The plan allows you to choose different types of investments, depending on how much risk you want to take. The money you place into the account lowers your taxable income. The employer usually matches a portion of your contribution, sometimes up to 50 percent. The funds grow tax-free until the money is withdrawn during retirement.

Fair Credit Reporting Act
A federal law, established in 1971, and revised in 1997, which enables consumers to learn what information Credit Reporting Agencies have on file about them, and to dispute inaccurate data in the file. It also establishes specific permissible purposes for which credit reports may be requested, and places time limits on how long adverse information may be reported.

Fees
Financial Institutions may charge you different fees for different services. For example, a monthly maintenance fee might be charged for keeping your account open. In addition, you might also be charged a penalty fee if you misuse your account, such as by bouncing a check.

Fixed Rate Loan
A fixed rate loan has an interest rate and payment amount that stays the same throughout the term of the loan.

Foreclosure
A legal proceeding initiated by a creditor to take possession of collateral that secured a defaulted loan.

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- G -

Garnishment
A process initiated by a court order through which a lender can obtain money owed to a borrower who has defaulted on a loan, directly from a third party.For Example, a borrower's employer can be required to pay a portion of the borrower's paycheck directly to creditors that have obtained a judgment against the borrower.

Good Faith Estimate of Settlement Costs (GFE)
A process initiated by a court order through which a lender can obtain money owed to a borrower who has defaulted on a loan, directly from a third party.For Example, a borrower's employer can be required to pay a portion of the borrower's paycheck directly to creditors that have obtained a judgment against the borrower.

Government Mortgages
A government mortgage is insured by HUD (through the Federal Housing Administration (FHA)) or guaranteed by the Department of Veteran's Affairs or the Rural Housing Service.

Grace Period
The period allowed to avoid any interest charges by paying off the balance in full before the due date.

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- H -

Home Equity Loan
A loan that can typically be used for any purpose that is secured by a mortgage on the borrower's home.

HUD-1 Settlement Statement
A HUD settlement statement is a summary of all the costs paid by the buyer and seller in a mortgage transaction.

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- I -

Index
The index is a base interest rate used to calculate the interest rate that will be charged on a variable rate loan. The rate you will pay on a variable rate loan is usually a set percentage rate above the base rate, or index.

Individual Development Account (IDA)
An IDA is a matched savings account. When an account is matched it means that another organization, such as a foundation, corporation, or government entity agrees to add money to your account.

Individual Retirement Account (IRA)
An IRA is a retirement account that lets you save and invest money tax-free until you withdraw it when you retire. You can contribute up to $2,000 a year. There are different types of IRAs including traditional and Roth IRAs

Installment Loan
A credit account in which the amount of the payment and the number of payments are predetermined or fixed.

Interest
Interest is the extra money in your account that the bank pays you for keeping your money. One of the main advantages of having a deposit account is the interest you earn.

Interest Charge
The interest charge is the cost of credit. It includes interest, certain service charges and transaction fees. This charge is calculated on your balance using different methods.

Investment
A savings option purchased for future income or financial benefit.

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- J -

Judgment
The official court decision of an action or suit. This public record may be listed on a credit report in matters of money and debts owed.

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- K -

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- L -

Lease
A written document containing the conditions under which the possession and use of real and/or personal property are given by the owner to another for a stated period and for a stated consideration.

Lien
A legal hold or claim of one person on the property of another as security for a debt or charge. The right given by law to satisfy debt.(A lien must be paid and released).

Line of Credit
A commitment by a bank to lend funds to a borrower up to a specified amount over a specified future period.

Liquidity
Liquidity refers to the ease with which an asset (a thing of value) can be turned into cash without losing its value. For example, cash is the most liquid; a certificate of deposit (CD) may be liquidated, but you pay an early withdrawal penalty; a house might be your least liquid asset because it takes time to sell.

Loan Officer
The loan officer is the person who takes applications for loans offered at the bank. The officer can answer questions for you, provide written information explaining loan products and help you fill out a loan application.

Loan Origination Fees / Underwriting Fees
These are fees charged by the lender for processing or evaluating the loan application and are often expressed as a percentage of the loan amount.

Loans
A loan is money you borrow from a bank with a written promise to pay it back later. Banks charge fees and interest. This is extra money you pay to borrow the money. You can talk to the customer service representative for more information about loans offered at a bank.

Loan to Value (LTV)
LTV is the amount of money you borrow compared to the value of the property you are buying.

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- M -

Minimum Payment
The minimum payment is the minimum dollar amount that must be paid each month. On a credit card account, the minimum payment can be as little as two to three percent of the amount owed and is often based on the balance on the billing date.

Money Order
A money order is similar to a check. It is used to pay bills or make purchases when cash is not accepted. Many businesses sell money orders for a fee. If you need to use a money order, it is best to shop around for the best price.

Mortgage
A security interest in real property given by the buyer to the lender as security for money borrowed. 1st Mortgage-Also known as the "primary" mortgage-has priority over the claims of subsequent lenders for the same property. 2nd Mortgage-Also know as the "secondary" mortgage-is a loan secured by mortgage or trust deed, which lien is "junior" to another mortgage or trust.

Mutual Funds
A mutual fund is a professionally managed collection of money from a group of investors. A mutual fund manager invests your money in some combination of various stocks, bonds and other products. The fund manager determines the best time to buy and sell the products in the fund. by combining your resources with other investors in a mutual fund, you can diversify even a small investment, which should reduce risk.

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Non-deposit Products
Many banks also offer non-deposit products and services that are not insured by the FDIC. Stocks, bonds, and mutual funds are examples of non-deposit investment products.

Bank personnel are supposed to provide a written explanation that the FDIC does not insure these products and the money you invest might lose value. You can find out more about these non-deposit products at your bank.

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Periodic Rate
The periodic rate is an interest rate applied to your balance to calculate the finance charge. For example, the monthly periodic rate for a card with an 18% APR is 1.5% (18% divided by 12 months). If your monthly balance were $1,000, you would multiply it by 1.5% to get your monthly interest charge of $15 ($1,000 x 1.5%=$15). The daily periodic rate for the same 18% APR is 0.04932% (18% divided by 365 days).

Permissible Purposes
As defined in section 604 of the Fair Credit Reporting Act, only the named reasons for requesting a credit report are deemed "permissible". Requests not meeting these criteria must be denied.

Personal Line of Credit
The maximum amount one can owe at any time, based on income, debt and credit history.

Personal Loan
A loan based on a consumer's income, debt and credit history.

Point
A point is the amount equal to one percent of the loan amount. It is a fee paid to the broker or lender for the loan, often linked to the interest rate.

Previous Balance
The previous balance is the amount you owed at the end of the previous billing period. Payments, credit and new purchases during the current billing period are not included. Some creditors also exclude unpaid interest charges.

Principal
The outstanding balance of a loan, exclusive of interest and other charges.

Principle, Interest, Taxes andInsurance (PITI)
PITI are the factors included in the standard mortgage payment.

Private Mortgage Insurance (PMI)
A risk-management product that protects lenders against loss if a borrower defaults.

Public Record
Information obtained by the Credit Reporting Agency from court records, such as liens, bankruptcy filings and judgments. Public records are open to any person who requests them.

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Rate Lock
A rate lock is the time period, usually 30 to 60 days, that a mortgage lender agrees to hold the mortgage rate and points payable by the borrower to the rate quoted by the lender on a given day.

Repossession
Forced or voluntary surrender of collateral as a result of the borrower's failure to repay a loan. There are several types and descriptions of repossession actions.

Revolving Account
A credit account that usually requires at least a specified minimum payment each month plus a Interest charge on the balance. As the balance declines, the amount of the Interest charge, or interest, may also decline.

Risk versus Return
This means that the more risk you take in your investment, the higher the expected return on that investment. However, there is also a higher risk that you might lose the entire amount you invested.

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Savings Accounts
A savings account is an account that always earns interest. You cannot write checks on a savings account. You can open a savings account with a few dollars, but you might pay a monthly fee if the balance is below a certain amount. The bank will help you keep track of your account by either sending you a statement or providing you with a booklet called a passbook.

Secured Credit Card
A credit card secured by a savings account that has been established in advance by the borrower. The amount in the account usually determines the limit on the credit card. These accounts present limited risk for creditors and are, therefore, much easier to obtain than unsecured credit.

Settlement Costs/ Closing Costs
Fees associated with the transfer of property to a purchaser and recording the mortgage lien on the property deed by the bank financing the transaction. This may include application fees, title examination, abstract of title, title insurance, and property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorney's fees; recording fees; and notary, appraisal, and credit report fees.

Smart Card
An electronic prepaid cash card, usually sold at banks and exchanged at face value.

Stocks
When you buy stocks (shares), you become part owner of the company. If the company does well, you might receive periodic dividends. Dividends are part of a company's profits it gives back to you when you own stock in the company. If the company does poorly, you might lose your money.

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Telephone Banking
Telephone banking allows you to:

  • Check your account balance by phone
  • Transfer money between accounts
  • Obtain account history, such as most recent deposits or withdrawals
  • Stop payment on a check
  • Obtain information on branch hours or other information, and
  • Report a lost, stolen, or damaged card

Teller
The teller is the person behind the counter who takes money, answers questions, cashes checks, or refers you to the person who can help you. You can go to any teller in the bank.

Thrift
A thrift is a savings bank or savings and loan association that is similar to a bank. Thrifts were created to promote home ownership and must have a majority of their assets in housing-related loans.

Title
The title indicates the right of ownership in the property.

Title Insurance
Title insurance protects the buyer and lender against losses arising from disputes over the ownership of property.

Townhouse
A townhouse is one of a row of houses connected by common side walls.

Trans Union
One of the three major Credit Reporting Agencies.

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U.S. Savings Bonds
Savings bonds are one type of Treasury securities. They are a long-term investment option backed by the full faith and credit of the U.S. government. Purchasing these bonds is an easy way to save small amounts of money and are often purchased for a child's education; however, they may be used for any purpose. Savings bonds can be purchased at a financial institution for as little as $25 or through payroll deduction.

U.S. Treasury Securities
U.S. Treasury securities are debt instruments. When you purchase a Treasury security, you are loaning money to the government. Treasury securities are backed by the full faith and credit of the U.S. government, which means the government guarantees interest and principal payments will be paid on time. Treasury securities include:

  • Savings bonds, which can earn interest for up to 30 years, but can be cashed after 6 months.
  • Treasury bills, which mature in one year or less from their issue date.
  • Treasury notes, which mature in more than a year, but not more than 10 years from the issue date.
  • Treasury bonds, which mature in more than 10 years from the issue date.

Treasury bills, notes and bonds are transferable, which means you can buy or sell them in the securities market. You can buy Treasury bills, notes and bonds for a minimum of $1,000.

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Variable Rate Loan
A variable rate loan has an interest rate that might change during any period of the loan as written in the contract (loan agreement). Variable rate mortgages are often referred to as adjustable rate mortgages (ARMs).

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Wire Transfer
A wire transfer is a method of electronically transferring money from one bank to another.

Withdrawal
A withdrawal is the process of taking money from your bank account. You do this by writing a check, using an ATM, or by giving a teller a withdrawal slip. A withdrawal slip looks similar to a deposit slip, except you are taking money out rather than adding money to your account.

You need to be sure you do not withdraw more money than you have in your account. If you do, you will be overdrawn, or bounce a check, and be charged a fee.

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