Chapter 6: Introduction to consumer credit

Rank the following items in the order they should be completed to dispute a billing error.

1 write a letter of complaint 2 purchase removed or credit issued to account 3 receive an acknowledgment from the credit company 4 purchase placed in disput

Which of the following is the ideal, not maximum, debt payment-to-income ratio?

15%

What is a typical grace period for retailers?

21 to 30 days

How does the Fair Credit Billing Act protect consumer credit ratings?

By allowing consumers to challenge charges that are false and avoid having delinquent charges added to their credit history

How is collateral used in evaluating loans?

Collateral is used when you apply and sign for a loan, pledging some kind of property to secure the loan.

Which of the following is the best description of the importance of consumer credit in the United States?

Consumer credit is a major force in the U.S. economy.

_______ users of credit typically pay off their balances each month.

Convenience

Which of the following statements is true? Consumer credit refers to the use of credit for buying a house. Credit involves paying now for future satisfaction. Credit is an arrangement to receive cash or goods or service now and pay for them later. Credit used by a business is called consumer credit.

Credit is an arrangement to receive cash or goods or service now and pay for them later.

Why should you care how to use credit?

If you misuse credit, you will pay for it with future income, and it could take many years to pay off the debt.

Why are the five Cs used?

To help identify good customers for credit approval

What is a credit bureau?

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

A prearranged amount of money that is accessed with special checks is called:

a revolving check credit. a bank line of credit.

An arrangement whereby borrowings are permitted up to a specified limit and for a stated period is known as:

a revolving line of credit.

Capacity is the borrower's financial ___ to meet the credit obligations.

ability

How often should you review your credit report?

annually

To improve your credit score, it is important to:

avoid applying for new credit cards. pay your bills on time. understand the computation of outstanding debt.

Which of the following is not a valid reason for using credit?

borrowing for everyday expenses

A home equity loan can be seen as:

borrowing money against the value of your house.

A borrower's assets in excess of liabilities is called ______.

capital

When evaluating the 5 Cs of credit, ______ is determined by a borrower's assets or net worth.

capital

A smart card is also known as ______.

chip card

A loan for a motorcycle is an example of ______.

closed-end credit

One of the 5 Cs of credit is ________ a valuable asset that can be taken to satisfy a loan obligation, which is called

collateral

When impostors take your name, Social Security number, credit card number, or some other piece of your personal information for their use, they are:

committing a crime

Economists now recognize _____ ______ as a major force in the U.S. economy.

consumer credit

A credit file contains your detailed ____ information

credit

A credit file contains your detailed _____ information

credit

Credit card fraud affects:

credit card holders.

An example of open-end credit is:

credit cards.

Conditions, one of the five Cs of credit, refers to the general ____ conditions that can affect your _____ to repay a loan

economic ability

What are responsible purchases with a home equity loan?

educational expenses home improvements

True or false: A home equity loan is never set up as a revolving line of credit where borrowings are allowed up to a specified limit and for a stated time period.

false

True or false: An individual should get intimidated by emails that warn of dire consequences for not following the sender's instructions.

false

True or false: Credit cards are not particularly common among consumers.

false

True or false: The Fair Credit Reporting Act was enacted in 1960.

false

True or false: The three names of the major credit reporting agencies are Trans Union, Equifax, and Experiment.

false

True or false: When suing a creditor, you can sue for actual damages and $15,000 in punitive damages.

false

Credit allows you to buy clothes today and pay for them in the ______

future

What are the effects of credit card fraud?

higher prices for consumers higher interest rates for consumers

Closed-end credit is paying back a loan:

in a specified period of time and in payments of specified amounts.

A loan from the bank for personal use is considered _____ cash credit

installment

What are the three types of closed-end credit?

installment sales credit installment cash credit single lump-sum credit

Which of the following situations will credit provide an opportunity for a more efficient and productive life?

loan for business operations

The definition of open-end credit is:

loans made on a continuous basis and billed periodically for partial payment

The Fair Credit Billing Act provides that you may withhold payment on damaged or defective goods or poor services you have purchased with a credit card as long as you have:

made a sincere attempt to resolve the problem with the merchant.

To calculate the debt payments-to-income ratio, total monthly debt payments (excluding home mortgage) is divided by the _______ monthly income of the consumer. This is a one-word answer.

net

When creditworthiness is being determined, creditors look for which of the following?

net income employment history total debt

Examples of protecting against fraud are:

not giving your card number over the phone unless you have initiated the call be sure your credit card is returned to you after a purchase

The Fair Credit Reporting Act of 1971:

regulates the use of credit reports, requires deletion of obsolete information, and allows access of their files to consumers.

When reporting suspicious emails or calls from third parties (found in the discussion of what's phishing?):

report this to the Federal Trade Commission.

The most important thing you can do to improve your credit score is to pay your bills on

time

True or false: It is important to evaluate the reason for taking a home equity loan.

true

the ___ in Lending Act prohibits creditors from giving inaccurate information or denying consumers the right to cancel credit accounts.

truth

Which of the following is part of the billing dispute process?

writing a letter to the creditor

Which of the following is the main advantage of credit?

Credit allows you to enjoy goods and services now and pay later.

Which of the following are the names of credit bureaus?

Equifax TransUnion Experian

The law that protects consumers by setting standards for correcting billing mistakes and allowing customers to avoid paying for defective merchandise is called the ______.

Fair Credit Billing Act

What would happen if a Credit Bureau verifies inaccurate information?

If the Credit Bureau is wrong about information, the consumer can sue for damages.

What does the Fair Credit Billing Act (FCBA) do?

It protects consumers with billing mistakes and provides assistance in avoiding payment for defective merchandise.

Which of the following is NOT true?

Most credit card companies do not offer a grace period

How does the Secret Service fight identity theft?

The Secret Service typically focuses on financial fraud cases with large amounts of money involved.

How can a consumer get a credit card if they have bad credit?

The consumer may be able to get a secured credit card from a savings institution.

If you purchase a new but defective item that the business will not accept as a return, what does the FCBA require?

The credit card company will allow you to withhold payment on such an item because it is defective.

What do the five Cs mean?

The five Cs are five separate evaluations that a creditor will use to determine a person's creditworthiness.

Why is paying only the minimum payment detrimental?

The longer it takes for you to pay off a balance, the more finance charges you pay on an item.

Which of the following is a disadvantage of paying the minimum payments on credit cards?

The payment pays for interest and very little of the balance due.

What are the advantages to overspending with credit?

There are no real advantages to overspending on credit.

Can credit cards be issued to consumers who have been irresponsible with credit?

Yes, the bank will extend a credit limit up to the balance of a connected savings account.

It is illegal to deny credit based on:

age of a 70 year old. child bearing possibility of applicant. sex of applicant

Typically, qualified cosigners:

are able to pay loan payments.

When cosigners sign their loans, they:

are stating that they are able to pay for the loan if required.

When someone steals your personal or sensitive information, this is called

identity theft

You should review your credit file at a specific credit reporting agency at least _____ time(s) per year.

one

What type of credit is a home equity loan?

open-end credit

Convenience users:

pay off the credit balance each month in full.

Opting out is:

requesting removal of your name from mail and phone lists that solicit for credit offers.

A bank line of credit is also known as ______.

revolving check credit

If you have a complaint about a business while dealing with identity theft issues, you can file a complaint with:

the Federal Trade Commission.

The Act that prohibits creditors from giving inaccurate information or denying consumers the right to cancel credit accounts is:

the Truth in Lending Act.

When referring to credit, character means:

the borrower's attitude toward credit obligations

When referring to credit, capacity refers to:

the borrower's financial ability to meet the credit obligation.

Character, capacity, capital, collateral, and conditions are known as _____.

the five Cs of credit

The main differences between annual fees and transaction fees are:

the frequency of charges. the number of charges.

What do conditions mean in reference to credit?

the general economic conditions that can affect a borrower's ability to repay a loan

The difference between a smart card and a regular credit card is:

the metallic chip embedded on the front of the smart card.

A method to confirm that you can pay for the loan is:

to have enough take-home pay to cover monthly expenses, the loan payment and other expenses.

The Fair Credit Billing Act's underlining purpose is:

to protect consumer credit ratings

To calculate the debt payments to income ratio:

total monthly debt payments (excluding home mortgage) are divided by net monthly income.

Some credit cards charge no annual fee, but instead charge a _____.

transaction fee

True or false: A credit bureau is a reporting agency that collects credit and other information about consumers.

true

True or false: A reliable way to see if you can afford a loan is to determine what you will give up to make the monthly loan payment.

true

True or false: Credit is defined as an arrangement to receive cash, goods, or services now with payment in the future.

true

True or false: People who have a strong willingness and ability to repay debts generally have the highest credit ratings.

true

True or false: The ECOA covers your mortgage application and bans discrimination based on race, color, age, sex, marital status, national origin, and several other factors.

true

True or false: The base computation for a home equity loan is the current market value of the home less the amount you still owe on your mortgage.

true

True or false: The grace period is the time allowed to pay the balance on a credit card before interest accrues.

true

True or false: To opt out from prescreened solicitations, you may notify the credit reporting agencies via mail.

true

When making online purchases, you should:

use a secure browser, keep a record of the purchase, and review your statement

When evaluating a home equity loan, which of following should be examined?

whether payments are applied to interest only terms and condition changes hidden fees

What is typically in a credit file?

whether you rent or own your home employer information former address whether checks have been returned for insufficient funds