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Financial Literacy: Credit

Terms

Credit Words and Definitions

Good credit

You always repay the money that you owe, and you make your loan payments on time. Because you have good credit, it is easier to borrow money when you need to.

Bad credit

You haven't been able to make your loan payments on time. You have been late in paying your credit card bill. When you have bad credit, it is difficult to borrow money. Also it can be more expensive, because banks charge a higher interest rate to people with bad credit.

Variable interest

A loan with a changing interest rate, based on a formula in the loan contract. This is the opposite of a fixed rate loan, when the interest rate stays the same.

APR

The annual percentage rate. This includes the interest rate and the fees, and tells you the total cost of your loan each year.

Asset

Something that is valuable that you own. Cars and houses are assets. Businesses also have assets, such as machines, buildings or products for sale.

Collateral

Property or assets used to secure a loan. If the bank lends you money to buy a house, but you can not repay the loan, then the bank can take back the house as collateral.

Foreclosure

The legal process when a bank takes back a house from a borrower who can't pay the home loan, or mortgage.

Unsecured loan

Some loans don't have any security or collateral for the lender. For example, when you use a credit card this is an unsecured loan.

Equity

The amount of equity you have in your home is the total market value of your home minus the debt that you owe on the house.