Personal Finance Ch. 5

Financial ability to meet credit obligations

Capacity

The borrower's assets or net worth

Capital

What is a credit bureau?

An agency that collects information on how promptly people and businesses pay their bills

2. Why is consumer credit important to our economy?

Any forecast or evaluation of the economy includes consumer spending trends and consumer credit as a sustaining force.

The borrower's attitude toward his or her credit obligations

Character

To finance a sofa for his new apartment, Caleb signed a contract to pay for the sofa in six equal installments. What type of consumer credit is Caleb using?

Close-end Credit

1. What are the two types of consumer credit?

Closed-end and open-end

One-time loan paid back in a specified time in payments of equal amounts

Closed-end credit

An asset pledged to ensure timely loan payments

Collateral

What are the major sources of: Medium-priced Loans

Commercial Banks, Savings and Loans, Credit Unions

General economic conditions that affect your ability to repay a loan

Conditions

Write the steps you should take if you are denied credit

Contact the credit bureau and ask for a copy of your credit report Ask the bureau to investigate any inaccurate or incomplete information and correct its records

What steps would you take if someone stole your identity?

Contact the credit bureaus and tell them to flag your file with a fraud alert Contact the creditors and follow up in writing File a police report and keep a copy of the report.

The interest computed only on the principal, the amount that you borrow.

Simple Interest

Vicky is trying to decide whether to finance her purchase of a used Mustang convertible. What questions should Vicky ask herself before making her decision?

a. Do I have the cash I need for down payment? b. Do I want to use my savings instead of credit? c. Can I afford the car? d. Can I use the credit in a better way? e. Could I put off buying the car for a while? f. What will happen if I don't buy it now? g. What are the costs of using credit?

What are the two general rules of measuring credit capacity?

debt payments-to-income ratio, and debt-to-equity ratio.

What is consumer credit?

the use of credit for personal needs (except a home mortgage) by individuals and families.

The dollar amount that a lender makes available to a borrower

Line of credit

What is the difference between a credit card and a debit card?

A credit card extends credit and delays your payment. A debit card electronically subtracts money from your savings or checking account to pay for goods and services at the time of purchase.

Interest is calculated on the full amount of the original principal, no matter how often you make payments.

Add-on Interest Method

List advantages and disadvantages of using credit

Advantages: you can enjoy goods and services when your funds are low and pay for them later; you can combine several purchases into one monthly payment; you have record of your expenses; you can stop payment on purchases of defective items; you can travel more safely without carrying a lot of cash; sometimes you need credit cards to make hotel reservations or purchases over the phone. Disadvantages: credit costs money; there is a temptation to overspend.

How is credit capacity measured?

Debt payments-to-income ratio is calculated by dividing your monthly debit payments by your net monthly income. The debt-to-equity ratio is calculated by dividing your total liabilities by your net worth.

What are the major sources of: Expensive Loans

Finance Companies, Retail Stores, Credit Cards (Cash Advances)

The total amount paid to use the credit.

Finance charge

3. List two good reasons to borrow and two unnecessary reasons to borrow.

Good Reasons a. A medical emergency. b. Borrowing for college education. Unnecessary Reasons a. Borrowing for everyday living expenses. b. Borrowing to finance a luxury car.

A periodic charge for the use of credit.

Interest

What are some warning signs of debt problems?

Making only the minimum monthly payments, having trouble making even the minimum monthly payment, missing loan payments, using savings to pay for necessities, receiving payment due notices, borrowing money to pay off old debts, exceeding the credit limits and being denied credit.

The smallest amount a borrower can pay on a credit card bill and remain a borrower in good standing.

Minimum Monthly Payment

What steps might you take if there is a billing error in your monthly statement?

Notify creditor in writing Pay the portion of the bill that is not in question.

A line of credit in which loans are made and repaid on a continuous basis.

Open-end credit

What are the major sources of: Inexpensive Loans

Parents, Family members, friends

What are the factors a lender cannot consider according to the law when offering credit?

Race, nationality, age, sex, marital status, public assistance

What are the three major trade-offs you should consider as you take out a loan?

Term versus interest cost, lender risk versus interest rate, and cost of your loan

The cost of credit on a yearly basis expressed as a percentage.

The APR

What are the two key concepts to remember when you borrow money?

The finance charge, and the annual percentage rate

3. How might you protect your credit information on the internet?

Use a secure browser, keep records of online transactions, review your monthly statements; read the privacy and security policies, keep your personal information private, never give your password to anyone on line, don't download files sent by strangers.

What is Chapter 7 Bankruptcy

a debtor is required to draw up a petition listing his or her assets and liabilities. The debtor submits the petition to a U.S. district court and pays a filing fee. The discharge of debts in Chapter 7 does not affect alimony, child support, certain taxes, fines, certain debts arising from educational loans, or debts that you fail to disclose properly to the bankruptcy court. Furthermore, debts arising from fraud, embezzlement, drunken driving, larceny, or certain other willful or malicious acts may also be excluded

What is Chapter 13 Bankruptcy

a debtor with a regular income proposes a plan for using future earnings or assets to eliminate his or her debts over a period of time. In such bankruptcy, the debtor normally keeps all or most of his or her property. During the period when the plan is in effect, which can be as long as five years, the debtor makes regular payments to a Chapter 13 trustee, or representative, who then distributes the money to the creditors. Under certain circumstances, the bankruptcy court may approve a plan that permits the debtor to keep all property, even though he or she repays less than the full amount of the debts.