Chapter 6 - Credit

Question 1

what is the #1 rule of credit?

Answer 1

use it as a tool, not as a means to acquire luxuries

Question 2

what is rule #2 of credit?

Answer 2

with the exception of your home and student debt, your first goal should be to get out of debt as quickly as possible

Question 3

definition of credit?

Answer 3

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

Question 4

what is the debt snowball method?

Answer 4

1. list out all your debts
2. make minimum payments on everything
3. pay extra on your smallest debt
4. move on to the next smallest debt
5. repeat until all debt is paid off

after the first debt is paid off, take the payments that you were making on that debt and add them to the payment of the second smallest debt

Question 5

what is the debt avalanche method?

Answer 5

same as snowball but instead of order = balance, we have order = interest rate

Question 6

what are the four advantages of credit cards?

Answer 6

1. easy to use
2. keeps record of everything you purchased (good for tracking expenses)
3. helps build credit score
4. can often provide “rewards”

Question 7

what are the 4 disadvantages of a credit card?

Answer 7

1. studies show we spend 20% more when we use plastic vs. cash
2. people often spend more to “get points”
3. sometimes difficult to know how much you have left to spend in your budget - wouldnt have that problem with cash or debit
4. easy to go in debt

Question 8

having to make credit card payments ties future earnings to …….

Answer 8

past events

Question 9

should you get overdraft protection? why or why not?

Answer 9

never. because the fees are high and it hurts your credit score

Question 10

should you get missed payment insurance?

Answer 10

no never

Question 11

t/f: don’t ever co-sign someone’s debt

Answer 11

the bank knows what makes a person have good/bad credit. signing to make someone get a loan is stupid if the bank already declined them.

Question 12

Define money management. How does it differ from long-term investment or long-term borrowing decisions?

Answer 12

• Money management is a series of decisions you make regarding income and expenses over the short term.

As opposed to long-term investing and borrowing decisions, money management focuses on short-term investments to achieve liquidity and adequate return.

Question 13

what is a credit report

Answer 13

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

Question 14

Name some ways in which an individual might handle a cash flow deficiency. Which would be preferable? Why?

Answer 14

An individual might handle a cash flow deficiency by keeping enough cash in liquid investments such as a chequing account or savings account to cover deficiencies. Alternatively, an individual might rely on credit cards to cover cash shortfalls. Keeping sufficient liquidity is preferable to using a credit card, since your unpaid credit card balance could be subject to high interest if you are not able to pay off credit card debt by the end of the grace period.

Question 15

can you have overdraft protection on cc?

Answer 15

yes, you can spend above your limit

Question 16

do some cc offer a grace period?

Answer 16

yes they do, its a period in which you are not charged any interest on your purchases.

Question 17

what is the finance charge

Answer 17

the interest and fees you must pay as a result of using credit

Question 18

what does equity mean in terms of a HELOC?

Answer 18

Home equity is the difference between the market value of the home and the debt on the home.

Question 19

what is prime rate

Answer 19

the interest rate a bank charges its bes

Question 20

what does ammortize mean?

Answer 20

to repay the principle in a set of equal payments

Question 21

what is the difference between a secured and unsecured loan?

Answer 21

secured: backed by collateral
unsecured: not backed

Question 22

should you lease a car?

Answer 22

no

Question 23

What is liquidity? How is your personal cash flow statement used to help manage your liquidity? Why is liquidity necessary?

Answer 23

Liquidity represents your ability to cover unexpected expenses. The personal cash flow statement determines the amount of excess cash that can be saved or shortfall of cash that must be covered over a period. Liquidity is necessary to avoid defaulting on necessary expense payments.

Question 24

Why do individuals use chequing accounts? What is the disadvantage of having funds in a chequing account? What is the difference between a debit card and a credit card?

Answer 24

individuals have chequing accounts so that they do not have to carry much cash when making purchases. The big disadvantage of chequing accounts is that they often pay no interest. A credit card allows you to purchase goods and services on credit, within your credit limits. If you do not pay off your entire balance each month, you will incur a finance charge. When you use a debit card, payment comes directly from your chequing account. There is no finance charge and you are limited only by the funds available in your bank account.

Question 25

List and describe some of the banking services offered by financial institutions.

Answer 25

• chequing services, monitoring your account balance, reconciling your account balance and accessing your account balance through an automated phone service.
• online banking that allows customers to check the balance, credit card and investment account, transfer funds, pay bills electronically and perform a number of administrative tasks.

Question 26

Explain the two types of credit. Under what conditions might a consumer find each type useful?

Answer 26

Installment credit is provided for specific purchases, such as for a car. The borrower has a period of time, usually a few years, over which the amount borrowed is repaid. Fixed payments consisting of both interest and principal are generally made monthly for a set period of time.

Revolving open-end credit, such as a credit card debt or lines of credit, grant a maximum amount of credit to consumers based on their income, debt level and credit payment history. Consumers use this type of credit as needed, respecting the repayment terms established in advance.

Question 27

Name the two major credit bureaus. How do they score your credit rating? Will both bureaus always produce the same credit score?

Answer 27

Equifax Canada and TransUnion Canada are the two primary credit bureaus. They use BEACON for credit scoring which is based on several factors, two of which are payment history and amount of credit owing.

Each bureau may produce a difference score because the information each bureau receives on the credit applicant may vary.

Question 28

What five factors determine your credit score, and how are these factors weighted by BEACON?

Answer 28

1-Payment history
2-Amount of credit owing
3-Length of credit history
4-Types of credit used
5-Searching and acquiring new credit (# of recent enquiries)

Question 29

What is the range for credit scores?

Answer 29

300 to 900.

Question 30

What is a credit limit? How can you increase your credit limit?

Answer 30

The credit limit is the maximum amount of credit you are allowed. The credit limit varies among individuals. You can increase your credit limit by paying credit card bills on time. Changes in your income can also affect your credit limit.

Question 31

How might you eliminate the annual fees charged by some credit cards?

Answer 31

Annual fees are sometimes waived for cardholders who use their cards frequently and pay their bills on time. Or, you might choose a card that doesn’t charge an annual fee.

Question 32

What are your responsibilities if you co-sign a loan? What are the potential consequences of failing to live up to your responsibilities as a co-signer?

Answer 32

If you co-sign a loan agreement, this makes you responsible if the borrower does not repay the loan. You can be required to pay the balance of the loan not repaid by the borrower. If you fail to repay the loan when the borrower doesn’t, the lender has the right to sue you or to try to seize your assets. Furthermore, a co-signed loan can restrict the amount you can borrow, since a lender may be concerned that you will not be able to repay another loan.