Chapter 5

Question 1

Credit

Answer 1

Receiving goods, services, money based on an agreement between lender and borrower

Question 2

Pros of credit cards

Answer 2

Convenience
Take advantage of sales/interest free promotions
Accumulate rebates, points, gifts, other benefits
Identification
Emergencies/big ticket items
Simplifying record keeping
Insurance benefit: purchase protection, travel insurance etc.

Question 3

Cons of credit cards

Answer 3

Overextending
High interest/finance charges
Add on fees
Lost cards
loss of privacy
loss of freedom

Question 4

What qualifies as overextending on credit cards?

Answer 4

If over 20% of monthly take home pay goes toward paying off debt

Question 5

Five C’s of credit

Answer 5

Capacity: current and potential income (ability to pay off debt)
Capital: measure of your net worth
Character: past credit history and reliability
Collateral: property you own to secure the loan (what lender can take)
Conditions: economy at time of loan

Question 6

Establishing credit

Answer 6

Open checking and savings
Use credit by opening one or two charge accounts
Make payments when due
Pay off existing loans
Get steady job
Buy or rent and stay for year or more: establish stability

Question 7

Application process for opening an account

Answer 7

Applications: name, address, sources of income, amount of income, bank info
Credit investigation: references and credit bureau

Question 8

Credit bureau

Answer 8

Reporting agency that collects, stores, and sells information to potential lenders
Equifax: atl, GA
Trans-Union corp: PA
Experian: TX
All transactions immediately informed to all 3

Question 9

How to manage credit:

Answer 9

1. Use only when necessary
2. Know what the agreement says
3. Make payments on time
4. Pay off in full each month
5. Inform creditors if you cannot make all or part of payment

Question 10

How many cardholders actually pay off their credit card charges in full each month?

Answer 10

36%

Question 11

FICO score

Answer 11

Fair Isaac Company: algorithm for score (300-850)
Built on past history for many years
Measure of how much risk you are to lender/employer
- good score >720
- median 623
-

Question 12

When does personal financing start?

Answer 12

At birth when your social security number is established

Question 13

Affinity card

Answer 13

Marketed to students
Credit cards offered by institutions and organizations (school or charity) that lend their names for percentage of return
Generally high interest rate
Good if you pay in full

Question 14

how much credit is affordable?

Answer 14

10-15%

but can also depend on the persons risk

Question 15

debt safety ratio

Answer 15

total monthly consumer credit obligations: monthly take home

Question 16

types of credit

Answer 16

open-ended: pre approved limit (i.e. credit card/charge account)
Installment credit: agreement that requires FIXED, REGULAR payments of principal and interest (car loan)
noninstallment: RARE- single payment due at the end of loan period

Question 17

cash advance
credit limit
credit statement

Answer 17

cash advance: a loan that can be obtained by cardholder at any participating financial institution through a credit card
credit limit: set max limit that can be charged to credit card
credit statement: monthly statement listing all transactions charged to the card

Question 18

What is a good interest rate?

Answer 18

the lowest one you can find that also offers services and benefits that you want
ranges 4-21%
bank CC’s typically lower than retail CC’s

Question 19

usury laws
prime rate
grace period

Answer 19

usury law: some states limit interest rates to certain maximum
prime rate: rate that a bank uses to determine loans to individuals and small businesses
grace period: amount of time to pay for purchases without incurring finance charges

Question 20

How do issuers keep up with changes in prime rate?

What must be disclosed to cardholder?

Answer 20

they adjust interest rate quarterly and provide a range with the prime rate within it (i.e. prime rate of 10% with minimum of 13% and max of 20%)
These ranges MUST be disclosed to cardholder
any changes MUST be disclosed to current cardholder

Question 21

what are additional fees that lenders/issuers make extra money off of?

Answer 21

annual fees
cash advance/loan fees
transaction fee
overrun fee: if you exceed cash limit

Question 22

annual percentage rate

Answer 22

actual or true rate of interest paid over the life of credit
- lenders must disclose rate of interest that they charge
- lower the APR the lower the cost of credit
- I=PRT
I: interest
P: principal
R: rate of interest
T: time

Question 23

4 variations of Average Daily Balance Method

Answer 23

ABD excluding new purchases: pay interest on left over from last month
ABD including new purchases with grace period: left over from prev. month and any charges made during billing cycle (grace period can exclude those new charges if balance from prev. cycle was zero)
ABD including new purchases without grace period: left over balance from prev. moth and charges made during billing cycle
Two cycle ABD including new purchases: no grace period on new purchases during billing cycle and no grace period for previous month each time account carries a balance.

Question 24

how to find the best deal of Credit card

Answer 24

RATE OF INTEREST: most important
rebates and gifts
fees
length of grace period
method of calculating balances
consumer credit legislation

Question 25

Right of rescission

Answer 25

the right to cancel a contract or agreement after it is signed.
3 business days to rescind

Question 26

personal loan
collateral
cosigner
defaults
liens

Answer 26

personal loan: person borrows cash then uses it to make purchases or investments or pay off debt
collateral: property that lender can take in the event you cannot pay back loan
cosigner: person who agrees to repay a loan if the borrower defaults
Defaults: walking away, not paying a loan
liens: legal rights to take and hold property or sell it until the borrower pays off loan

Question 27

Average person has __ credit cards

Answer 27

10 credit cards