Study the following for Chapter 5 Test—Credit

Question 1

Know why consumers fall into the “Credit Card Trap”

Answer 1

They think the money is ‘free’. Buy now, pay later mentality, I ‘deserve’ it, it’s on sale!

Question 2

Know three advantages of using credit cards

Answer 2

-convenient in not carrying around cash

-online shopping

-increase credit score to show you are able/willing to make monthly payments

-emergencies

Question 3

Know three disadvantages of using credit cards

Answer 3

-interest charged

-overspending

-missed payments lead to bad credit

-can become heavily in debt

Question 4

Know 5 C’s of credit

Answer 4

Collateral- What ASSET(s) can you sell to pay off debt?

Capital-What are your assets, liabilities, and net worth?

Conditions-Job security? What’s going on in the economy? High unemployment? Recession?

Character-What is your credit history/score? Will you pay the loan?

Capacity- What is your income? Debt? Are you ABLE to pay the monthly loan payments? Are you making enough money?

Question 5

Know Debt Payment-to-Income Ratio (Should be under 20%)

Answer 5

Formula: All monthly debt payments (except housing) / Net Income (after payroll taxes)

Ex: Suzie takes home 1250/month. She had a school loan for $200/month, credit card payments $50, and a car payment of $150. Would Suzie Qualify for a mortgage?

Work:
A. 200 + 50 + 150 = 400/1250 =32%
1250 x .20 = 250

B. Analysis: Suzies Debt income to payment ratio is clearly way TOO HIGH at 32%- it should be 20% or lower. She needs to reduce her debt in order to qualify for loan.

C. Advice: Suzie should reduce monthly credit card payments, and work more hours

Question 6

Know Open ended credit (credit card)

Answer 6

Open-end credit is a loan from a bank or other financial institution that the borrower can draw on repeatedly, up to a certain pre-approved amount, and that has no fixed end date for full repayment.

Examples: Credit Card or Debit Card

Question 7

Know Closed End credit

Answer 7

(like a car loan or furniture loan, when each monthly payment is the same) and be able to do the math table from class regarding the furniture payments.

Question 8

What is the best way to obtain a credit report? (know one)

Answer 8

Credit Bureaus like Experian or TransUnion, or Equifax

Question 9

What are warning signs of credit?

Answer 9

-missed payments

-using savings for bills

-getting calls from creditors

-only paying the minimum on credit cards

Question 10

Know The Types of Bankruptcy

Answer 10

Chapter 7- Straight Bankruptcy- NO EFFORT to REPAY debt

Chapter 13- Proposal to REPAY DEBT