Do You Know What Sub-Prime Means?

According to the Center for Economic and Entrepreneurial Literacy, many people do not understand what the term "sub-prime" means. It's a term that is frequently heard in the media and read in the newspapers, and is often sighted as the cause for the economic crisis.

But do you understand what it means?

The report shows that:

• 54% of respondents could not identify what a subprime mortgage was.
  
• 56% of respondents could not identify FICO score as the most important factor in getting a loan.
  
• 65% of respondents could not identify what would remain if you subtracted 25% from 8. One in three respondents could not identify what 1% of 50,000 was.
  
• 75% did not know that when in need of short-term emergency cash, bouncing a check costs more than wire transfers, credit card advances, and short-term payday loans.
  
• Half of respondents have overdrafted their checking account at one time, while a third of respondents have paid a bill late
• in the past year.
  
• 35% of respondents admitted to not having a family or personal budget that would allow them to conceivably eliminate their credit card debt by the end of 2009.
  

Econ4u.com states, "...although there is no standardized definition, in the U.S. subprime loans are usually classified as those where the borrower has a credit score below a particular level, e.g. a FICO score below 660." This definition does vary per lender, so subprime qualifications can change. This is just one definition that needs to be understood. Terms like "short sale", "modification", "variable rate", and "prepayment penalty" should also be explored, especially if you have a mortgage where these terms apply.

It is crucial and critical that financial education is not only established in American households, but is made a staple. If we don't take the necessary steps to understand more about the crisis and ways to avoid it, the next wave of foreclosures could severely affect your everyday life.