Chapter 6 Flashcards
Define credit.
An arrangement to receive cash, goods or services now, but pay for them in the future
Define consumer credit.
the use of credit for personal needs (except a home mortgage) by individuals and families
Credit is good for (2)
medical emergencies, buying cars
Misuse of credit results in (2)
defaulting, bankruptcy
(T/F) Credit is safer than cash.
True
Give three examples of closed-end credit.
mortgage loans, automobile loans, installment loans
Give three examples of installment loans.
installment sales contract, installment cash credit, single lump-sum credit
Give three examples of open-end credit.
Visa/Mastercard; Diners Club/Amex; overdraft protection
What is closed-end credit?
one-time loan for a specific purpose that’s paid back in equal amounts over a specified time period
Give an example of an installment sales credit.
furniture loan
Given an example of an installment cash credit.
cash loan
Give an example of a single lump-sum credit.
delay frig payment 90 days
How do you use open-end credit?
use as needed until reaching line of credit max
When are T&E cards’ balances due?
due in full each month
What is revolving credit?
prearranged line of credit loan where checks are written as needed (HELOC)
What fraction of U.S. households carry 1+ credit cards?
7/10
What percentage of credit card users pay balances in full each month?
45%
What percentage of credit card users carry balances and pay financing charges each month?
55%
Is using a credit card for cash advances a good idea?
no — it’s expensive because you have to pay interest and advance fees
What is co-branding?
linking a credit card with a business offering rebates on products and services
Home equity loans are based on
the difference between current market value of your home and the amount owed on the mortgage
With home equity loans, you typically borrow
up to 80% of the home value
Home equity loans are set up like
a revolving line of credit with check book
(T/F) Interest on a home equity loan is not deductible.
False, interested IS deductible
What are the consequences if a home equity loan payment is missed?
bank can foreclose
How do we calculate the debt payments-to-income ratio?
monthly payments/net monthly income (not including house payments, which is considered a long-term liability)
How do we calculate the debt-to-equity ratio?
total liabilities/net worth* (*excluding home value)
The debt-to-equity ratio should be less than
1
(T/F) If a payment on a co-signed loan is missed, the creditor can collect the debt directly from you instead of first going to the borrower.
True
What percentage of co-signers end up repaying loans?
75%
What is the range for FICO credit scores?
300-850
What is the preferred credit score for a home loan?
760
What is the preferred credit score for an auto loan?
720
Give the name for the three biggest credit bureaus.
Experian, TransUnion, Equifax
The FTC gets how many complaints about credit bureaus each year?
36,000
When was the Fair Credit Reporting Act passed?
1971
What is the purpose of the Fair Credit Reporting Act?
to regulate the use of credit reports
Adverse data on a credit report can be reported for
7 years
Bankruptcy on a credit report can be reported for
10 years
If a credit report dispute is unresolved, what can you do?
send in a 100-word statement
What are the 5 C’s (what creditors look for)?
character; capacity; capital; collateral; conditions
[5 C’s] Define character.
Do you pay bills on time?
[5 C’s] Define capacity.
Can you repay the loan?
[5 C’s] Define capital.
What are your assets and net worth?
[5 C’s] Define collateral.
What property can you pledge that the lender can repossess, if you default?
[5 C’s] Define conditions.
What economic conditions could affect your ability to repay the loan?
When was the Fair Credit Billing Act passed?
1975
If there’s a credit mistake, you can notify the creditor of the error in writing within
60 days
Creditors must respond to a notification of error within
30 days
Credit card companies have how long to correct a bill on your account?
2 billing periods, but no more than 90 days
(T/F) Your credit score is affected while a credit bill is in dispute.
False
What can you do if you buy a damaged/shoddy good?
You can withhold payment if you have paid for them with a credit card and you make a sincere attempt to resolve the problem with your creditor
Credit balanced must be refunded within
7 business days, if you request it
All credit balances must be refunded if
in your account for over 6 months
What should you do if your identity is stolen?
contact fraud department of all 3 major credit bureaus and tell them to flag your file with a fraud alert; include a statement that creditors should call you for permission before opening any new accounts in your name
What do the Truth in Lending and Consumer Leasing Acts deal with?
APR
What does the Equal Credit Opportunity Act deal with?
discrimination
What does the Fair Credit Billing Act deal with?
billing errors
What does the Fair Credit Reporting Act deal with?
disclose who reports bad marks
What does the Consumer Credit Reporting Reform Act deal with?
free credit report
What does the Credit Card Accountability, Responsibility and Disclosure Act deal with?
higher minimum payment
