What is credit? What does it mean to be “creditworthy”?? Unit 2C - Finance What is credit? What does it mean to be “creditworthy”??

Vocabulary Promissory Note – an agreement that you sign that states the conditions of the loan Principal – the amount you borrow Annual Percentage Rate (APR) – the interest rate per year Truth in Lending Act – information the creditor must tell the borrower…principal, monthly payments, APR, number of payments, interest to be paid, due dates for payment, and late fees

Vocabulary Cont. Lending institutions – organizations that give loans (or lend money); these businesses make money by charging interest on the loans a. Banks – usually need good credit b. Credit Unions – usually have to be a member and need good credit c. Pawnshops – usually bad/no credit. Small, quick loans. The borrower leaves a personal belonging, called collateral, with the pawn shop in exchange for a loan. Loans are usually for 30 days and are at a high interest rate. When the borrower returns, they pay the loan + interest and the collateral is returned to them. Late charges are usually extremely high. If the borrower does not return within a certain amount of time, then the collateral can be sold (or pawned) by the pawn shop

Creditworthy – five key factors Payment history Amount owed to current creditors Length of credit history Types of credit used Number of open accounts These factors are compiled on a person’s credit report, with an overall credit score.