Personal Finance Chapter 6

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

What can you do to build and maintain your credit rating?

-Pay on time -Don't exceed 50% of available credit -Diversify your account types -Keep the old and the new -Monitor your credit history

Disadvantages of credit

-Temptation to overspend -Failure to repay loan may lead to loss of income -Misuse of credit can create serious long-term financial problems, damage to family relationships, and a slowing of progress toward financial goals -It does not increase total purchasing power -Credit costs money

Three alternatives in financing current purchases:

1. draw on their savings 2. use their present earnings 3. borrow against their expected future income

The maximum debt payment-to-income ratio that is acceptable is around ______ %.

20

What is a debit card?

A bank card that automatically deducts the amount of a purchase from the checking account of the cardholder. You are never responsible for charges on a debit card you haven't accepted.

installment cash credit

A direct loan of money for personal purposes, home improvements, or vacation expenses. You make no down payment and make payments in specified amounts over a set period.

Cash Advance

A loan of cash you obtain with a credit card. High Interest usually accrues from the moment you accept the cash, and you must also pay a transaction fee.

single lump-sum credit

A loan that must be repaid in total on a specified day, usually within 30 to 90 days. Lump-sum credit is generally, but not always, used to purchase a single item.

Valid reasons for using credit

A medical emergency. A car or other transportation for a work commute. (within budget) Borrowing for a college education.

Closed end credit (Installment credit)

A one-time loans paid in a specified period of time and in payments of equal amounts.

What is a credit bureau?

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

Installment sales credit

A type of credit contract issued by the seller that requires periodic payments at specified times. The seller adds finance charges to the cost of the items purchased.

Debt to Equity Ratio

Calculated by dividing your total liabilities by your net worth. In calculating this ratio, do not include the value of your home and the amount of its mortgage. If your debt-to-equity ratio is about 1—that is, if your consumer installment debt roughly equals your net worth (not including your home or the mortgage)—you have probably reached the upper limit of debt obligations.

What are the 5 C's of credit?

Character Capacity Capital Collateral Conditions

Why is consumer credit important to our economy?

Consumer credit is important to our economy because any forecast or evaluation of the economy includes consumer spending trends and consumer credit as a sustaining force.

credit bureaus

Credit bureaus, also called credit agencies or credit reporting agencies, are companies that collect credit information about individuals. They then calculate a credit score for each individual based on this information. Note that credit bureaus are private, for- profit businesses-they are not part of the government, though they are overseen by various government agencies. In the United States, the three major credit bureaus are Equifax, Experian, and TransUnion.

Borrowers

Credit card holders that carry balances beyond the grace period and pay finance charges.

Smart cards

Credit card sized card containing a microchip for data storage and processing. They are embedded with a computer chip that can store 500 times the data of a credit card.

What are the general rules for measuring credit capacity?

Debt to income ratio should be less that 20% and Debt to equity ratio should be between 0.33 and 0.50.

Questions for a major purchase

Do I have the cash I need for the down payment? Do I have the cash I need for the down payment? Does the purchase fit my budget? Could I use the credit I need for this purchase in some better way? Could I postpone the purchase? What are the opportunity costs of postponing the purchase? What are the dollar costs and the psychological costs of using credit?

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.

What is the Fair Credit Reporting Act (FCRA)?

Legislation intended to promote the accuracy, fairness, and privacy of consumer information contained in the files of consumer reporting agencies. It aims at protecting consumers from the willful and/or negligent inclusion of inaccurate information in their credit reports.

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

Loan for business operations

Interest

Money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt.

closed end credit examples

Mortage Loan Auto Loan Installment loans

Which of the following is NOT true? Cardholders who do not pay in full each month are borrowers Cardholders who pay in full each month are convenience users Most credit card companies do not offer a grace period

Most credit card companies do not offer a grace period

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

Differentiate among various types of credit. (LO 6-2)

Two basic types of consumer credit exist: closed-end credit and open-end credit.

What are the uses and misuses of credit?

Uses of Credit: -Online Payment -Expensive Purchases -Day to Day Purchases -Build Credit Misuses of Credit -Substituting Credit for Cash -Making only Minimum Payments -Missing Payments -Cash Advances

Order of a billing error dispute.

Write a letter of complaint Purchase placed in dispute Receive an acknowledgment from the credit company Purchase removed or credit issued to account

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

a bank line of credit a revolving check credit

Incidental credit

a credit arrangement that has no extra costs and no specific repayment plan.

A bank line of credit is also known as:

a revolving check credit

Credit

an arrangement to receive cash, goods, or services now and pay for them in the future.

A loan for a motorcycle is an example of:

closed-end credit

What are the two main types of consumer credit?

closed-end credit and open-end credit

All economists now recognize ____ ____ as a major force in the American economy.

consumer credit

Open-end Credit (Revolving account)

loans made on a continuous basis and you are billed periodically for at least partial payment.

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 take-home pay does not cover monthly expenses your take home just covers monthly expenses and the loan payment

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

Debt-to-Income Ratio Formula

Recurring Monthly Debt / Gross Monthly Income Calculated by dividing your monthly debt payments (not including house payment, which is a long-term liability) by your net monthly income.

Select all that apply To improve your credit score, it is important to: increase the amount of credit outstanding understand the computation of outstanding debt pay your bills on time avoid applying for new credit cards

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

Fair Credit Billing Act (FCBA)

The Fair Credit Billing Act is designed to protect consumers from unfair billing practices and to provide a mechanism for addressing billing errors in "open end" credit accounts, such as credit card accounts.

debt-to-income ratio

The amount of debt a person or a household has in relation to his or her income. Lenders use this ratio to decide if more debt can be taken on by the borrower. A person's debt-to-income ratio is determined by dividing total monthly debts by gross monthly income.

Character

The borrower's attitude toward credit obligations. Most credit managers consider character the most important factor in predicting whether you will make timely payments and ultimately repay your loan.

Equal Credit Opportunity Act (ECOA)

The federal law that prohibits discrimination in the extension of credit because of race, color, religion, national origin, sex, age, or marital status.

What is Consumer credit?

the use of credit for personal needs (except a home mortgage) by individuals and families, in contrast to credit used for business purposes

Debt to Equity Ratio Formula

total liabilities/total equity

What are your legal remedies if a credit reporting agency engages in unfair reporting practices?

Any consumer reporting agency or user of reported information that willfully or through negligence fails to comply with the provisions of the Fair Credit Reporting Act may be sued by the affected consumer. If the agency or the user is found guilty, the consumer may be awarded actual damages, court costs and attorneys' fees, and, in the case of willful noncompliance, punitive damages as allowed by the court.

Select all of the following ways that represent the improper use of credit.

Bankruptcy Default and loss of credit rating

Select all that apply What are ways to protect against credit card fraud? Reviewing your billing statements Making copies of credit cards Don't give your card number over the phone unless you initiate the call Writing card number on a postcard or the outside of an envelope Shred anything with your account number on it

Shred anything with your account number on it Don't give your card number over the phone unless you initiate the call Reviewing your billing statements

Capital

Your assets or net worth. Generally, the greater your capital, the greater your ability to repay a loan. The lender determines your net worth by requiring you to complete certain credit application questions. You must authorize your employer and financial institutions to release information to confirm the claims made in the credit application.

Select all that apply Security features currently being added to credit cards to deter counterfeiting include: eye scan devices to prove identity thumbprint recognition for point-of-sale terminals ultraviolet ink on the company logo a holograph that changes color and image

a holograph that changes color and image ultraviolet ink on the company logo

When cosigners sign their loans, they:

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

Advantages of Credit

immediate access to goods and services flexibility in money management safety and convenience cushion in emergencies a means of increasing resources good credit rating if you pay your debts back in a timely manner.

What can happen if you cosign a loan?

lenders will expect you to come up with the required payments, plus any additional interest and fees. It doesn't matter if the borrower has more money than you or is able to pay but doesn't, the lender collects wherever possible, and they take the path of least resistance.

What is the procedure under consumer credit laws when denial of credit is discriminatory?

Complain to the creditor. File a complaint with the government. If all else fails, sue the creditor.

When misused, credit can result in _____, ____, and loss of _____.

default bankruptcy creditworthiness

open end credit examples

department store credit cards, bank credit cards (visa or mastercard) Travel and entertainment cards Overdraft protection

Capacity

financial ability to meet credit obligations, that is, to make regular loan payments as scheduled in the credit agreement. the lender checks your salary statements and other sources of income, such as dividends and interest. Your other financial obligations and monthly expenses are also considered before credit is approved.

"Shopaholics" and young adults are most vulnerable to ____ credit.

misusing

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

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

False

True or false: Throwing away all credit card documents is a way to prevent fraud.

False

Co-branding

The linking of a credit card with a business trade name offering "points" or premiums toward the purchase of a product or service.

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

True

A credit limit can also be called:

line of credit

The definition of open-end credit is:

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

Consumer credit enables people to enjoy goods and services now, help in emergencies and pay for them through ____ ____based on future _____.

payment plans income

Revolving check credit (bank line of credit)

prearranged loan for a specified amount that you can use by writing a special check. Repayment is made in installments over a set period.

Typically, qualified cosigners:

are able to pay loan payments

Truth in Lending Act (TILA)

A federal law requiring lenders to provide residential loan applicants with estimates of the total finance charges and the annual percentage rate (APR).

What is a home equity loan?

A loan based on the difference between the current market value of a home and the amount the borrower owes on the mortgage. The equity in a home serves as collateral for the loan.

Collateral

An asset that you pledge to a financial institution to obtain a loan. If you fail to honor the terms of the credit agreement, the lender can repossess the collateral and then sell it to satisfy the debt.

Select all that apply Which of the following is something that the Equal Credit Opportunity Act designed to do? Ensure that persons are not discriminated against because of their race Ensure that persons are not discriminated against because of their sex Offer credit to consumers through the ECOA bank Show bankers how to ignore retirement income when evaluating loans Ensure that persons are not discriminated against based upon their age

Ensure that persons are not discriminated against because of their race Ensure that persons are not discriminated against because of their sex Ensure that persons are not discriminated against based upon their age

Conditions

General economic conditions that can affect your ability to repay a loan. The basic question focuses on security—of both your job and the firm that employs you.

Types of Closed End Credit

Installment sales credit, installment cash credit, and single lump-sum credit.

To calculate the debt payments to income ratio, total monthly debt payments (excluding home mortgage) is divided by the ________monthly income of the consumer.

Net

How do you correct erroneous information in your credit file?

Notify the credit bureau of any erroneous information and then provident pertinent data to prove it.

What calculations can you use to determine if you can afford a loan?

One is to add up all of your basic monthly expenses and then subtract this total from your take-home pay. If the difference will not cover the monthly payment and still leave funds for other expenses, you cannot afford the loan. A second and more reliable method is to ask yourself what you plan to give up to make the monthly loan payment.

How can you protect yourself against credit card fraud?

Treat your cards like money. Store them in a secure place. Shred anything with your account number before throwing it away. Don't give your card number over the phone or online unless you initiate the call. Don't write your card number on a postcard or the outside of an envelope. Remember to get your card and receipt after a transaction, and double-check to be sure it's yours. If your billing statement is incorrect or your credit cards are lost or stolen, notify your card issuers immediately. If you don't receive your billing statement, notify the company immediately.

A line of credit is:

an open-end type of credit that the lender makes available to the borrower

Select all that apply What are some disadvantages of credit?

The temptation to overspend Future income may decrease

convenience users.

Those who pay off their balances in full each month and avoid the finance and interest charges