A basic financial education can provide young people with the ability to manage their money when they become adults, according to the FDIC. A major hindrance to adults when managing their finances is debt. Teaching the young to avoid the pitfalls of debt and the proper use of credit can help them build their finances to a point that allows them to retire comfortably in the future.
What is the Difference Between Credit and Loan?
Ask the young if they know the difference between "credit" and "loan." Credit is the ability of a person to borrow money and load is the amount of money you borrow. The key that young people should understand is the dollar amounts of the loans you take affects the credit limits of the loans you apply for.
What is the Difference Between Secured and Unsecured Loans
Young people should understand the difference between secured and unsecured loans. Credit cards, payday loans and some finance company loans are examples of unsecured loans that the borrower does not have to provide collateral for. Mortgages and automobile finance agreements are examples of secured loans where the lender can repossess the item that the loan is paying for.
What are Credit Scores?
Credit scores are what lenders use to determine the credit-worthiness of an individual applying for credit. Three companies track all of the financial data of individuals such as late payments, court judgments and garnishments and formulate a credit score. This score affects the interest rate that borrowers pay and can prevent them from receiving approval for loans.
What are Interest Rates?
Explain to children that interest rates are the amount of money that they will pay lenders to borrow money. Young people should understand that the amount of interest that they pay depends on the type of credit that they are applying for and their credit score. Normally, secured loans will have lower interest rates--although they may have longer payment terms--and unsecured loans will have a higher interest rate.
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