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| Photo by philokazaki |
Larry is wearing a helicopter helmet and aviators. He is sitting in an office chair and holding a joystick. An obviously green screened background of an American city firmly establishes the illusion that Larry is in a real helicopter cockpit. "Hi, Larry the Lexicon Llama here to teach you about two new financial terms. These are words that we have heard before, but when we are talking about money they take on a different meaning. First lets talk about revolving credit. These helicopter blades are revolving at 672 feet per second*. In this definition revolving means to rotate around a central axis." Larry holds up a credit card up next to his face. "This credit card gives me access to revolving credit. In this definition revolving means that as I pay back the money I owe on the card the money becomes available for me to spend again."
Larry's "helicopter" takes us to a shopping mall. Stock footage of a mall slowly pans by behind us to create the illusion that we are flying by. I guess we are supposed to be flying really close to the ground? "Lets say I take my credit card to my local shopping mall to buy a new bow tie. I have my full $500 credit limit available to spend. I buy a fancy bow tie for $50. Now I have $450 in available credit and I owe a balance of $50." Larry straightens his clip on bow tie that he clearly did not pay $50 for. "Next I take my credit card with me to the food court."
The background changes to a bunch of big pretzels. We must be out of the helicopter now. Except Larry is still wearing his helmet. Maybe we are flying through a bread twister. Or we are in the galaxy of giant pretzels now. "I swipe my credit card to buy a giant pretzel for $5. I now owe a balance of $55 which leaves me an available credit limit of $445. The more I spend the less I have available to use on other purchases." That is a seriously giant pretzel for five bucks. Way to find a bargain Larry. "Next I'm going to take my credit card with me to the video game store."
The background changes to a space invaders game. Clearly after making our way through the pretzel galaxy we have encountered hostile space aliens that are trying to harvest the salt from the giant pretzels for their own nefarious purposes. So earth has created a multi national space force to protect the pretzels for justice and stuff. "When I go to the video game store I see a new console that I want to buy. It costs $475. I only have an available credit limit of $445. In order to raise my available credit limit I can make a payment on the card. If I pay $30 that will lower my balance owed to $25 and raise my available credit to $475. Now I have enough to buy my new video game console." Larry gives a cheesy thumbs up as the space invader ship destroys the big boss. You'll never take our salt you shifty space aliens. "After purchasing the console I have a balance owed of $500 and available credit of $0. I need to make another payment on my credit card before I can use it again. With revolving credit you get charged interest based on the balance owed, not the credit limit. With lines of credit or cash advances the interest will start accruing immediately. With credit card purchases you can avoid paying interest by paying the statement balance in full every month. As you pay the money back the card remains open and the money becomes available for you to use again. Having a large percentage of your revolving credit available for use has a positive impact on your credit score."
The background changes to the parking lot fly by of a correctional institution. Ok, you lost me Larry. Are we throwing the alien boss in super jail? "Let's talk about our next vocabulary term...term credit. The term term has many different definitions including being the very thing that is being defined. The banking term is more similar to the definition of term that means something has a predetermined amount of time, like a prison term." Larry the Lexicon Llama takes off his sunglasses and tries his best to look hard. He does not succeed. "A common example of a term credit account would be a car loan."
The background changes to a car stealership. Watch out Larry you almost flew into that car! This is why you shouldn't fly so close to the ground. You're a loose cannon Larry! "Term credit accounts have a fixed interest rate and a fixed term with a fixed monthly payment. Let's say I buy a car with a 3 year term. This means that if I pay the minimum payment each month on the due date for 3 years that I will pay off the loan. When I take out a term loan the money is given to me all up front. I pay back the money over time. I can pay down the loan early by making extra principal payments. This will decrease the interest that I pay over the life of the loan. The money does not become available for me to use again as I pay it back. When I pay off the loan it is automatically closed out. Closed accounts do not benefit your credit score in the same way as open accounts."
Larry is in what appears to be his own room. He's still sitting in the same office chair, but he isn't wearing the helmet anymore. "Thanks for joining us today to learn about revolving credit and term credit. I hope you enjoyed the journey as much as I have." Larry has this goofy grin on his face that says you couldn't have possibly had as much fun as he did.
*205 meters per second for anyone living literally anywhere except for America.
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