Chapter 5 - Intro to consumer credit

Question 1

Advantages of consumer credit

Answer 1

• current use of goods and services
• permit purchase even when funds are low
• use for financial emergencies
• convenient when shopping
• safer than cash
• can take advantage of float time
• may get rebates, airline miles, or other bonuses
• demonstrates financial stability

Question 2

Cons of consumer credit

Answer 2

• purchases are more expensive
• temptation to overspend
• ties up future income
• possible financial difficulties
• damage to family relationships
• slows progress to future goals

Question 3

Benefits of using credit cards

Answer 3

• short term no interest loan if paid in full monthly
• rewards, rebates, points
• insurance on purchases
• protection against fradulent use

Question 4

Costs of using credit cards

Answer 4

• late/overdue payments
• charge for exceeding credit limits
• cash advances (interest on these are expensive)
• transactions on foreign currency
• membership fees

Question 5

credit score - what categories are weighted?

Answer 5

• payment history
• length of credit history
• amounts owed
• types of credit used
• # of recent applications for credit

Question 6

Creditors look for the 5 C’s

Answer 6

Character: borrower’s attitude towards credit obligations
Capacity: borrower’s financial ability to meet credit obligations
Capital: borrower’s assets or net worth
Collateral: valuable assets that is pledged to ensure loan payments
Conditions: the general economic conditions that can affect borrower’s ability to repay a loan