Chapter 6

Question 1

What is credit?

Answer 1

Funds provided by a creditor to a borrower that the borrower will repay with interest or fees in the future

Question 2

repayments of credit is segmented into _____ and ______

Answer 2

principal repayments and interests

Question 3

What are the types of credit

Answer 3

Instalment loan and Revolving open - end credit

Question 4

Define the term instalment loan

Answer 4

a loan provided for specific purchases, with interest charged on the amount borrowed and repaid on a regular basis

Question 5

explain the term revolving open - end credit

Answer 5

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

Question 6

List the advantages of using credit

Answer 6

• 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

Question 7

List the disadvantages of using credit

Answer 7

• 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

Question 8

What is the credit application process

Answer 8

Involves filing out the application, negotiating the interest rate, and negotiating the loan contract

Question 9

Explain the term credit insurance

Answer 9

represents a commitment by some consumers to cover credit card repayments under various circumstances
- payment period is limited to short term

Question 10

What are credit reports?

Answer 10

Reports provided by credit bureaus that document a person’s credit payment history

Question 11

What is a credit score

Answer 11

• A rating that indicates a persons creditworthiness

Question 12

how long does poor credit score remain on your report?

Answer 12

three to ten years

Question 13

how long does bankruptcy remain on your report

Answer 13

6 to 7 years

Question 14

how do you improve credit score immediately?

Answer 14

Reducing debt, catching up on late payments, making the minimum required payments on time

Question 15

T OR F, a credit score of 600+ is considered very good

Answer 15

False, it is considered good. 750+ is very good

Question 16

T OR F, the range of credit score is from 200-900

Answer 16

False, it is from 300 to 900

Question 17

Why is important to review your credit report at least once a year

Answer 17

• 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

Question 18

List the advantages of credit cards

Answer 18

• 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

Question 19

mention some types of credit cards

Answer 19

Mastercard, visa and american express are the most popular

Question 20

What are prestige cards?

Answer 20

cards such as gold&platinum cards, issued to individuals who have an exceptional credit standing

Question 21

What are retail (or proprietary) credit cards?

Answer 21

cards that is honoured only by a specific retail establishment
(interest rate is charged higher than the standard or prestige cards)

Question 22

List some credit card features?

Answer 22

Annual fee 
Credit limit 
overdraft protection 
incentives to use the card 
Grace period (period between time of purchase and when payment is due)

Question 23

What is a finance charge

Answer 23

The interest and fees you must pay because of using credit

Question 24

Interest rate on a credit card is usually how much?

Answer 24

20 and 30%

Question 25

Explain the term previous balance method

Answer 25

Interest is charged on the balance at the beginning of the new billing period (least favourable)

Question 26

Explain the average daily balance method

Answer 26

interest is charged on average daily balance at the end of every day in the billing period

Question 27

which method would your finance charges be lower, if you pay part of the outstanding balance during the billing period

Answer 27

Average daily balance method (most frequent method too)

Question 28

Explain the adjusted balance method

Answer 28

Interest is charged based on the balance at the end of the new billing period

Question 29

when should you always strive to pay off your credit card balance

Answer 29

Each month

Question 30

What are the factors to consider when comparing credit cards

Answer 30

Annual fees, interest rate, teaser rates, maximum limit, grace period etc.

Question 31

What is home equity line of credit (HELOC)

Answer 31

A loan in which a home serves as collateral, allowing homeowners to borrow up to a specific credit limit (80$% or more)

Question 32

what is a payday loan

Answer 32

a short-term loan provided to you if you need funds in advance of receiving your pay cheque

Question 33

What is the maximum interest rate changed on a consumer loan

Answer 33

60% per annum

Question 34

What are the advantages of leasing

Answer 34

No substantial down payment

lower monthly payment

Question 35

What are the disadvantages of leasing

Answer 35

• no equity investment

- responsible for maintenance and damage

Question 36

explain the term Consumer proposal

Answer 36

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