Types of Credit - Vocabulary #3

What is a Fixed-Rate Mortgage?

• A mortgage with a fixed interest rate for the entire term of the loan

• A loan with a variable interest rate

• A short-term loan with no interest

• A loan with decreasing interest rates over time

Answer explanation

A Fixed-Rate Mortgage is defined as a mortgage with a fixed interest rate for the entire term of the loan, ensuring consistent monthly payments and stability for borrowers.

What does the term "Grace Period" refer to in credit terms?

• The time between a statement date and payment due date without accruing interest

• The period when interest rates are highest

• The time when late fees are applied

• The duration of a loan term

Answer explanation

The term "Grace Period" refers to the time between a statement date and payment due date during which no interest is accrued on the balance, allowing consumers to pay without incurring extra charges.

What is an Installment Loan?

• A loan for a specific purchase with regular payments of interest and principal

• A loan with no fixed repayment schedule

• A loan that requires full payment at the end of the term

• A loan with interest-only payments

Answer explanation

An installment loan is specifically designed for a purchase, requiring regular payments that include both interest and principal, making it distinct from loans with no fixed schedule or those requiring full payment at the end.

How is Interest Rate usually expressed?

• As a percent of the amount borrowed

• As a fixed dollar amount

• As a monthly fee

• As a yearly subscription

Answer explanation

Interest rates are typically expressed as a percent of the amount borrowed, indicating the cost of borrowing relative to the loan amount. This allows borrowers to understand the financial implications of their loans.

What is an Introductory APR?

• A low rate charged during the introductory period of a credit account

• A high rate charged after the introductory period

• A fixed rate for the entire loan term

• A rate that decreases over time

Answer explanation

An Introductory APR is a low rate charged during the initial period of a credit account, making it more attractive for new customers. This option is correct as it highlights the temporary nature of the low rate.

What is a Late Payment Fee?

• A fee charged if your payment is received after the due date

• A fee for paying early

• A fee for paying the exact amount

• A fee for paying in cash

Answer explanation

A Late Payment Fee is specifically charged when a payment is received after the due date, making the first answer choice correct. The other options do not accurately describe this type of fee.

What is a Loan?

• An agreement where you are credited with a fixed amount of money for a fixed period

• A gift of money with no repayment

• A payment plan for services

• A subscription service

Answer explanation

A loan is defined as an agreement where a borrower is credited a specific amount of money for a predetermined period, which must be repaid, distinguishing it from gifts or payment plans.

What is the Minimum Payment on a credit card bill?

• The smallest amount a credit card holder must pay during a billing cycle

• The full balance of the credit card

• The interest amount only

• The late fee amount

Answer explanation

The minimum payment on a credit card bill is the smallest amount a credit card holder must pay during a billing cycle to avoid penalties. It is not the full balance, interest, or late fee.

What is a Penalty APR?

• A lower interest rate for early payments

• A higher interest rate triggered by being late with or missing a credit card payment

• A fixed interest rate for all credit card users

• A reward program for frequent credit card use

Answer explanation

A Penalty APR is a higher interest rate that is applied when a credit card payment is late or missed, making it more expensive to carry a balance. This option correctly identifies the consequence of late payments.

What is a Balance Transfer?

• Moving debt from one credit card to another, usually to take advantage of a lower interest rate

• Paying off a credit card balance in full

• Transferring money from a savings account to a checking account

• Switching from a fixed-rate mortgage to a variable-rate mortgage

Answer explanation

A balance transfer involves moving debt from one credit card to another, typically to benefit from a lower interest rate, making it a strategic financial move to save on interest payments.