Notes
Credit basics
- Credit is borrowing with a promise to repay, usually with interest. A secured loan has collateral; an unsecured loan does not.
- A credit report lists your accounts and payment history. A credit score summarizes risk. Payment history matters most.
- Utilization $\displaystyle = \frac{\text{balance}}{\text{credit limit}}$. Lower is better.
Credit cards
- APR is the yearly cost. Monthly rate $\displaystyle = \frac{\text{APR}}{12}$. Monthly interest $=$ balance $\times$ monthly rate.
- Paying the full statement balance on time avoids interest on purchases. Paying only the minimum keeps you in debt longer and costs more.
Loans and debt
- Total repaid $=$ monthly payment $\times$ number of payments. Longer terms lower payments but raise total interest.
- Debt-to-income $\displaystyle = \frac{\text{monthly debt payments}}{\text{monthly gross income}}$. The avalanche method pays the highest rate first; the snowball method pays the smallest balance first.
Topics in this unit
Each topic has its own short notes and practice.
Practice
Paying on time carries the most weight.
$\displaystyle \frac{1000}{4000} = 25\%$.
$800 \times 0.01 = 8$.
$150 \times 36 = 5400$.
Paying in full on time generally avoids interest on purchases.
$\displaystyle \frac{300}{2000} = 0.15 = 15\%$.
Free response
Write your answer first, then open the scoring guide.
Free-response question
Chris has a credit card with a $1,000 balance, a $2,500 limit and a 24% APR (2% per month). He makes no new purchases.
(a) Find Chris's credit utilization.
Show the answer and scoring guide
$\displaystyle \frac{1000}{2500} = 0.40$, so 40%.
Check off the points you earned:
(b) How much interest is added in one month, and what is his balance after he pays $100?
Show the answer and scoring guide
Interest is $1000 \times 0.02 = 20$, so $20. Balance before payment is $1,020. After the $100 payment it is $920.
Check off the points you earned:
(c) Explain why paying only a small minimum payment is costly, and name one way Chris could lower his total interest.
Show the answer and scoring guide
With a small payment most of the money covers interest, so the balance falls slowly and more interest builds up over time. He could pay more than the minimum, pay off the highest-rate balance first, or stop adding purchases.
Check off the points you earned: