Chapter 5: Introduction to Consumer Credit Flashcards
What is consumer credit?
Credit is an arrangement to receive cash, goods, or services now and pay later. Consumer credit is specifically used for personal needs.
What are the three ways to finance a purchase?
- Use savings
- Use current earnings
- Borrow against future income
What are the advantages of consumer credit?
- Immediate use of goods/services
- Helps during financial emergencies
- Convenience in shopping
- Safer than cash
- May offer rewards and rebates
- Can build a good credit rating
What are the disadvantages of consumer credit?
- Increases cost due to interest
- Encourages overspending
- Ties up future income
- Can lead to financial difficulties
What are the two types of consumer credit?
Consumer Loans – One-time loans with fixed payments over a set time.
Revolving Credit – A continuous line of credit where the borrower is billed periodically.
What is a credit limit?
The maximum amount a lender allows a borrower to charge.
What percentage of Canadian households carry credit cards?
Nearly 89% of households have at least one credit card.
What are common costs associated with credit cards?
- Late payment fees
- Over-limit fees
- Cash advance fees
- Foreign transaction fees
- Membership fees
What are benefits of using credit cards?
- Short-term no-interest loan if paid in full monthly
- Rewards, rebates, and points
- Fraud protection
- Emergency access to funds
What are the steps to take if your credit card is stolen?
- Suspend card activity via banking app.
- Call the issuer’s toll-free number.
- Cancel the stolen card.
- Request a new account number and card.
- Monitor future statements.
- Report any unauthorized transactions.
What are common credit fraud tactics?
Phishing – Fake emails requesting sensitive information.
Pharming – Redirecting users to fake websites.
Shoulder Surfing – Watching someone enter their PIN.
Dumpster Diving – Retrieving personal info from trash.
Skimming – Stealing credit card data with hidden devices.
How can you protect yourself from credit fraud?
- Sign new cards immediately
- Keep cards secure
- Shred documents with account numbers
- Monitor transactions and credit reports
What is a Home Equity Line of Credit (HELOC)?
A revolving credit line based on home equity, allowing borrowing up to 65% of the appraised value of the home.
What is a debt-payments-to-income ratio?
A measure of how much monthly income goes toward debt payments. It should not exceed 20% of net income.
What is the debt-to-equity ratio?
A comparison of total liabilities to net worth. A ratio close to 1 means you may be overextended in debt.
What are the Five Cs of Credit?
Character – Your credit history and trustworthiness.
Capacity – Your ability to repay.
Capital – Your assets and net worth.
Collateral – Assets pledged for loan security.
Conditions – Economic factors affecting repayment
What are the two major credit bureaus in Canada?
- Equifax Canada
- TransUnion Canada
What factors influence your credit score?
- 35% Payment history
- 30% Amount owed
- 15% Length of credit history
- 20% Other factors
What is the recommended maximum percentage of gross income spent on mortgage payments?
No more than 32% (Gross Debt Service ratio).
What should you do if your credit application is denied?
- Ask why you were denied.
- Review your credit report for errors.
- Dispute any inaccuracies with the credit bureau.
