Chapter 6 Flashcards
What is credit?
Funds provided by a creditor to a borrower that the borrower will repay with interest or fees in the future
repayments of credit is segmented into _____ and ______
principal repayments and interests
What are the types of credit
Instalment loan and Revolving open - end credit
Define the term instalment loan
a loan provided for specific purchases, with interest charged on the amount borrowed and repaid on a regular basis
explain the term revolving open - end credit
Credit provided up to a specific maximum amount based on income, debt level, and credit history; interest is charged each month on the outstanding balance, minimum amount due each month, entire amount can be repaid at any month
List the advantages of using credit
- helps establish good credit history
- helps build a good credit score
- helps create the capacity to access credit in the future for large purchases
- eliminate the need to carry cash
- useful in situations where cash not an option
- a record of past transactions is maintained by card company
List the disadvantages of using credit
- Difficulty making payments
- Temptation to make impulse purchases
- You can damage your credit rating if you do not make the minimum required repayment
- Large credit payments hinder ability to save
- May need to withdraw from savings to cover net cash flow deficiencies
What is the credit application process
Involves filing out the application, negotiating the interest rate, and negotiating the loan contract
Explain the term credit insurance
represents a commitment by some consumers to cover credit card repayments under various circumstances
- payment period is limited to short term
What are credit reports?
Reports provided by credit bureaus that document a person’s credit payment history
What is a credit score
- A rating that indicates a persons creditworthiness
how long does poor credit score remain on your report?
three to ten years
how long does bankruptcy remain on your report
6 to 7 years
how do you improve credit score immediately?
Reducing debt, catching up on late payments, making the minimum required payments on time
T OR F, a credit score of 600+ is considered very good
False, it is considered good. 750+ is very good
T OR F, the range of credit score is from 200-900
False, it is from 300 to 900
Why is important to review your credit report at least once a year
- ensures report is accurate
- identifies and eliminates deficiencies
- identifies the types of info that lenders or credit card companies may consider when deciding whether to provide credit
List the advantages of credit cards
- establish a good credit history (easiest way)
- create credit capacity
- eliminate the need for cash
- earn additional benefits
- keep track of spending
- receive free financing until the due date of credit card statement
mention some types of credit cards
Mastercard, visa and american express are the most popular
What are prestige cards?
cards such as gold&platinum cards, issued to individuals who have an exceptional credit standing
What are retail (or proprietary) credit cards?
cards that is honoured only by a specific retail establishment
(interest rate is charged higher than the standard or prestige cards)
List some credit card features?
Annual fee Credit limit overdraft protection incentives to use the card Grace period (period between time of purchase and when payment is due)
What is a finance charge
The interest and fees you must pay because of using credit
Interest rate on a credit card is usually how much?
20 and 30%
Explain the term previous balance method
Interest is charged on the balance at the beginning of the new billing period (least favourable)
Explain the average daily balance method
interest is charged on average daily balance at the end of every day in the billing period
which method would your finance charges be lower, if you pay part of the outstanding balance during the billing period
Average daily balance method (most frequent method too)
Explain the adjusted balance method
Interest is charged based on the balance at the end of the new billing period
when should you always strive to pay off your credit card balance
Each month
What are the factors to consider when comparing credit cards
Annual fees, interest rate, teaser rates, maximum limit, grace period etc.
What is home equity line of credit (HELOC)
A loan in which a home serves as collateral, allowing homeowners to borrow up to a specific credit limit (80$% or more)
what is a payday loan
a short-term loan provided to you if you need funds in advance of receiving your pay cheque
What is the maximum interest rate changed on a consumer loan
60% per annum
What are the advantages of leasing
No substantial down payment
lower monthly payment
What are the disadvantages of leasing
- no equity investment
- responsible for maintenance and damage
explain the term Consumer proposal
This is the last resort before declaring bankruptcy. It is an offer made by a debtor to his or her creditors to modify his or her payments. Creditors have up to 45 days to object
