Credit

Question 1

What are the 5 C’s of Credit and explain them

Answer 1

1. Capacity (The borrower’s ability to repay a loan short-term, all outstanding debt, resources coming in vs outstanding debt)
2. Capital (The borrower’s financial strength, the liquidity of the buyer),
3. Character (Willingness to pay off debt, if you pay your bills on time i.e. your credibility and reputation)
4. Collateral (Loan to values, if you have assets to pay back your loan)
5. Conditions (What conditions affect the borrower’s ability to pay, interest rates, foreign exchange rates, consumer spending)

Question 2

Advantage of buying something on credit

Answer 2

You can maximise enjoyment

Question 3

Disadvantage of buying something on credit

Answer 3

impulse buying, overbuying, cost of credit, and financial difficulties

Question 4

What can affect your credit score that is good and bad

Answer 4

1. Making a late payment (bad)
2. Having a high debt to credit utilization ratio (bad)
3. Applying for a lot of credit at once (bad)
4. Closing a credit card account (bad)
5. Stopping your credit related activities for an extended period of time (bad)
6. Paying your credit on time (good)
7. Not overbuying and exceeding credit limits (good)

Question 5

What is a credit score/rating

Answer 5

A numerical rating representing the perceived ability of a person or organization to fulfill their financial commitments, based on an analysis of their credit history and current financial circumstances. Are given to businesses and governments, while credit scores are given to people

Question 6

What is a credit bureau

Answer 6

A business that gathers credit information on all borrowers and individuals in a particular region for the purpose of selling that information, make credit scores, equifax and transunion are examples of credit bureaus

Question 7

What is the Annual Percentage Rate (APR)

Answer 7

The rate of interest charged on credit card purchases, stated as a yearly rate, rate will be found in the cardholder’s agreement or on credit card statements
Grace Period: The time between the statement date (purchase history) and the payment date where interest is not charged, Canadian grace periods are approximately 21 days and only applies if balance is paid in full on the payment due date

Question 8

How do you calculate interest on a credit card

Answer 8

1. Divide the APR by the number of days in the year. This determines the daily interest rate.
2. Multiply the daily interest rate by the average daily balance. This determines the interest charged per day.
3. Multiply the interest charged per day by the number of days in your billing cycle. This determines the interest charged for that billing cycle

Question 9

What is a debtor

Answer 9

Debtors who borrow money from banks or other financial institutions. (A/R to Bank)

Question 10

What is a creditor

Answer 10

Creditors refers to the person or entity who owes money (A/P to Bank)