Ch. 6 Intro to Consumer Credit

Question 1

Credit

Answer 1

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

Question 2

Consumer Credit

Answer 2

The use of credit for personal needs

Question 3

True or False: Consumer credit is not a major force in the American Economy

Answer 3

False. Any forecast or evaluation of the economy includes consumer spending trends and consumer credit

Question 4

Which generation holds 60% of outstanding credit card debt?

Answer 4

Baby Boom Generation

Question 5

What is the trade-off a person will have to make with using credit?

Answer 5

They will have less money available to spend in the future

Question 6

How do people pay off consumer credit?

Answer 6

Through payment plans based on future income

Question 7

What are some advantages of using credit?

Answer 7

• It is safer to use credit for travel and online purchases
• They may offer added benefits at no extra charge
• They indicate that you are a responsible individual

Question 8

What are some disadvantages of using credit?

Answer 8

• If you do not repay your loan, you could lose your good reputation, income, and valuable property.
• You may even need to go to court and file bankruptcy

Question 9

Closed-end Credit

Answer 9

One-time loans that the borrower pays back in a specified period and in payments of equal amounts

Question 10

Open-end Credit

Answer 10

Loans are made continuously and the borrower is billed periodically for at least a partial payment

Question 11

What are the three most common types of closed-end credit?

Answer 11

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

Question 12

What is Installment sales credit and how do you pay it off?

Answer 12

• A loan that allows you to receive merchandise (ex. large appliances or furniture).
• You make a down payment and sign a contract to repay the balance (plus interest and service charges) in equal installments over a specified period.

Question 13

What is installment cash credit and how do you pay it off?

Answer 13

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

Question 14

Single lump-sum credit

Answer 14

A loan that must be repaid in total on a specified day (usually 30 - 90 days)

Question 15

What are the three most common types of open-end credit?

Answer 15

• Cards issued by banks and department stores
• Travel and entertainment cards
• Overdraft protection

Question 16

What is the main difference between open-end and closed-end credit?

Answer 16

With open-end credit, you do not need to apply to make a single purchase. You can use it to make any purchases as long you do not exceed the line of credit

Question 17

Incidental credit

Answer 17

Credit arrangement that has no extra costs and no specific repayment plan

Question 17

Revolving check credit (also called bank line of credit)

Answer 17

Prearranged loan for a specified amount that you can use by writing a special check

Question 18

List 5 tips to remember when choosing a credit card

Answer 18

1. Choose a card with an interest-free grace period if you pay your bills in full.
2. Department stores and gasoline companies are good places to obtain your first credit card
3. Beware of cards that offer no fee/low interest but charge interest as soon as you purchase something
4. Plan your budget more carefully if you are paying the minimum amounts on monthly statement (causing you to pay more interest)
5. If you have a bad credit history, look for a savings institution that will give you a secured credit card (the line of credit is determined by amount in deposit).

Question 18

What is the difference between convenience users and borrowers?

Answer 18

Convenience users pay off their balances in full each month while borrowers carry their balances beyond the grace period and pay finance charges

Question 18

What are Smart Cards and what are their advantages?

Answer 18

• They are cards embedded with a computer chip that combines credit cards, driver’s licenses, healthcare IDs, flier miles, and telephone cards.
• They provide security, confidentiality, portability, and convenience

Question 19

Co-branding

Answer 19

Linking of credit card with business trade name offering points or premiums toward the purchase of a product/service.

Question 19

How many credit cards are being used in the US?

Answer 19

Over 1.1 billion

Question 20

True or False: You are responsible for charges on a debit card that you did not accept

Answer 20

False. If you report a lost or stolen debit card within two days, your liability is limited to $50. After two days, your liability is $50 plus any amount penalty for not notifying your issuer.

Question 21

Mobile Commerce

Answer 21

Using smartphones to make purchases

Question 22

Home Equity Loan

Answer 22

Loan based on the current market value of a home less the amount still owed on the mortgage.

Question 23

Depending on the value of your home, what % of its value can you borrow?

Answer 23

Up to 85%

Question 24

What may happen if you miss payments on your home equity loan?

Answer 24

You can lose your home

Question 25

What are seven things you should consider when choosing a home equity loan?

Answer 25

1. See if lender protects you from rising interest rates
2. Compare lender fee with other institutions
3. See if lender charges an inactivity fee
4. See if lender has right to change terms/conditions of your loan or terminate your loan
5. Double check to see if interest on your home equity loan is deductable
6. Evaluate reasons for using equity in home for loans
7. Know full costs and risks of home equity loans

Question 26

What is the difference between a home equity loan and a home equity line of credit?

Answer 26

With a home equity loan, you receive the borrowed amount in a lump sum payment and it has a fixed rate of interest. With a home equity line of credit, you can borrow money multiple times from an available maximum amount.

Question 27

What are five ways you can protect yourself from credit card fraud?

Answer 27

1. Store cards in secure places
2. Shred anything with account number before throwing it away
3. Do not give card number over phone or online unless you initiate the call
4. Double check card and receipt after transaction to make sure its yours
5. Call card issuers if billing statement is incorrect or your credit cards are lost or stolen

Question 28

What are four ways to protect your credit info online?

Answer 28

1. Use a secure browser
2. Keep records of online purchases
3. Read the policies of websites you visit. (If you can’t find anything about their policies, shop somewhere else)
4. Never give password to anyone online (even your internet service provider)