Credit Flashcards
What is creditworthiness?
Borrower’s ability to pay back credit
What is step one of the Credit Granting Procedure?
Completion of a Credit Application Form
- a statement of personal and financial facts about a potential credit recipient
Name, occupation, income, debts, assets, etc.
What is step two of the Credit Granting Procedure?
Investigation of the Applicant
- Contacting present and past employers
- Credit Report from the Credit Bureau
Credit Rating – a risk factor that assesses an individual creditworthiness
RO – Too new to rate
R1 – Current
R9 – Collections
What is step three of the Credit Granting Procedure?
Evaluation of the Applicant
- usually done by the manager
Do we grant credit????
What is character?
An individual’s financial personality
Assesses reliability and intention to repay the loan
Can the applicant hold down a job?
Is the applicant reliable at their job?
Does the applicant have a job skill?
Are they willing to accept financial responsibility?
To help determine character, creditors (lenders) get information about
whether or not debtor (borrower) pays bills on time
whether the debtor has had credit before and if that was paid off on time
how long debtor has lived at the current address
type of job and how long the debtor has been at the job
Must answer basic questions:
“Will debtor pay back on time
What is capacity?
An individual’s ability to repay a debt
Income level
Stability of occupation
Regular income?
Spouse’s income
Major expenses
May require a co-signer if your capacity is weak or you are a new borrower
Must answer basic questions:
“Can debtor pay back on time?
What is capital?
An individual’s financial worth
House / Furniture
Car
Savings / Investments
Insurance policies
Major expenses
These are things that are owned (“assets”)
assets are a potential source of repayment if the applicant’s income is not enough
May be required to use these items as collateral.
What is a credit bureau?
that collects and sells information about individuals’ and businesses’ credit history
sell information to creditors (e.g. – banks and retailers)
benefit creditors because they can make good lending decisions
benefit debtors because lenders can make quick decisions about granting credit
ability to pay back credit
What is a credit rating?
measure of individuals’ or businesses’ credit worthiness
a number which indicates to the creditor the level of risk
credit rating depends on whether:
balance is owed on credit cards
regular bills are paid on time
other loans are paid on time
credit level is reasonable relative to income
everyone can ask for their own credit report so that you know what your rating is
What is credit creditworthiness of students?
hard to determine if no prior loans taken
creditors will look at character more
marks, regular school attendance, part-time job
before trying to get larger credit (e.g. for a car), a good idea to take a small loan or make credit card purchases and pay them off on time. some creditors will require loans to have a “co-signer”
someone else who has a good credit rating, and who will pay a loan if a student cannot.
What are the signs of a credit crisis?
not paying off credit card balances
using cash advances (cash from your credit card account)
not knowing how much you owe
How to get out of debt?
credit – especially credit cards make it easy for people to get into a credit crisis
worst thing to do is avoid creditors
steps to ease credit crisis
be honest with creditors about the situation
pay whatever is owed in overdue payments, if possible
put away credit cards so you cannot use them
change spending habits
get a “consolidation” loan
use credit counselling services
What are consolidation loans?
put all debts together in one loan
helps set regular, manageable payment schedule
have lower interest rates than credit cards
