All About Borrowing!

~ Natalie Gonzales

What is credit?

Credit is the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future. In other words, it's the ability to borrow money that you don't have in promise to pay it back later.

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Being Smart With Your Money

Simple interest is money you can earn by initially investing some money (the principal). A percentage (the interest) of the principal is added to the principal, making your investment grow.

Can be calculated using the formula I = PRT

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What is principal?

A sum of money lent or invested on which interest is paid. The amount of a car, house, or loan before any interest is added is called "principal".

Rate refers to...

It can refer to many things, such as, APR, Interest rates, or the rate you pay off a loan.

Amount of time?

Whether it's a car or mortgage loan, credit card payment, or something similar, all companies give you a certain amount of time before they want the money paid back that was borrowed.

MYTHS ABOUT BORROWING

  • All debt is bad - False. Debt can be compared to electricity. It can enhance your life if you use it properly, but if you're not careful it can lead to a disaster. Putting yourself into low debt can help you over time. For example, if you stay on top of your credit card payments, it will help you in the long run when you want to acquire a home mortgage or car loan.

  • Loans are a replacement for income - Never. Loans can be used to unlock other sources of funding. Charities and social enterprises that use loans well, build them into long term plans to generate income.

TIPS FOR BORROWING

  1. Always budget when you borrow money. Failure to make monthly payments on credit cards or loan payments monthly can result in bad credit history which will affect any chance of borrowing in the future.

  2. Understand the terms of any loan before signing. Many different banks and businesses use loans differently. Asking the right questions and becoming aware of all of the circumstances will help you know where your money is going.

  3. Save for a down payment. Using a large amount of down payment can help you have shorter payments whether it be a car or a loan. Remember, the more you put down, the less you need to borrow.

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How does an ammortization schedule work?

A table detailing each periodic payment on an amortization loan (typically a mortgage), as generated by a amortization calculator. Amortization refers to the process of paying off a debt.

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The 5 C's of Credit

  1. Capacity to repay

  2. Collateral, or guarantees

  3. Capital, or the money you already have

  4. Conditions describe the intentions of the loan

  5. Character, the general impression you make

20-10 Rule

Helps you understand how much credit you can afford. Credit cards are loans, so avoid borrowing more than 20% of your annual net income on all of your loans (not including a mortgage). Also, payments on those loans shouldn't be more than 10% of your monthly net income.

FRAUD (What to look for)

  • Try to find a seller’s physical address (not a P.O. Box) and phone number when doing online shopping.

  • Read your monthly statements.

  • After a disaster, give only to established charities.

  • Don't send money to someone you don't know.

  • Don't play a foreign lottery.

Example for Credit Cards

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