Finance Ch. 6

Question 1

What is consumer Credit?

Answer 1

Use of credit for personal needs, not mortgage though

Question 2

Credit

Answer 2

Receive cash, goods, services now and pay later

Question 3

3 ways to finance purchases

Answer 3

1. savings
2. Use present earnings
3. Borrow against expected future income

Question 4

Consumer credit importance

Answer 4

Major force in american economy

Question 5

Advantages of credit

Answer 5

• access to goods right now
• Can buy even when funds are low
• cushion for emergencies
• Advance notice of sales
• easier to return things
• convenient

Question 6

More advantages of credit

Answer 6

• one monthly payment
• safer than cash
• hotel reservations, car purchase
• can get rebates and other bonuses
• indicates financial stability

Question 7

Disadvantages of credit

Answer 7

• overspend
• Failure to repay loan can cause financial damage
• doesn’t increase purchasing power
• credit costs money

Question 8

Closed- end Credit

Answer 8

A single loan for a specific purpose and paid back in a specific period of time in payments of equal amounts
ex. mortgage, automobile, appliances etc…

Question 9

Open-end credit

Answer 9

Used as needed until reaching line of credit max.

• pay interest charges if bill not paid in full.
  ex. credit cards, bank cards, incidental credit, revolving check credit

Question 10

Credit cards

Answer 10

7/10 people have them

Question 11

Smart Cards

Answer 11

embedded computer chip, combine license, health care ID, insurance all in one

Question 12

Debit Cards

Answer 12

Called bank cards, take money out of your account the minute you pay.

Question 13

Gift Cards (stored value cards)

Answer 13

Prepaid cards, used for business expenses sometimes , don’t work if retailer goes bankrupt

Question 14

Travel/entertainment cards

Answer 14

Monthly balance due in full. Diners club or Amex

Question 15

smartphones

Answer 15

electronically linked to bank account, mobile commerce

Question 16

Home equity loans

Answer 16

Based on difference between market value of home and amount due on mortgage. can borrow up to 85% of appraised value.

• interest on loan is tax deductible
• set up like revolving line of credit

Question 17

Purchases online

Answer 17

• be careful
• don’t trust weird websites
• don’t download anything

Question 18

debt payments-to-income ratio

Answer 18

your monthly debt payments/net monthly income *Do not include mortgage payments
*credit payments should not exceed 20% of income

Question 19

Debt-to-equity ratio

Answer 19

Total liabilities/net worth= should be <1

Question 20

Cosigning a loan

Answer 20

• You will have to cover any late fees if borrower doesn’t pay.
• 3/4 cosigners pay the loan eventually

Question 21

Downsides or risks to cosigning a loan

Answer 21

• could hurt your credit if you can’t pay it
• could lose property you pledge
• ask to be sent a copy of overdue-payment records

Question 22

Credit Rating

Answer 22

• good credit rating is valuable, should be protected
• limit borrowing to capacity
• live up to the terms
• check to see credit report

Question 23

Credit Bureaus

Answer 23

consumer reporting agencies (CRAs) collect info about consumers.

• experian, transunion, equifax
• 36,000 complaints each year

Question 24

Who provides data to credit bureaus

Answer 24

Get info from banks, court records, finance companies, merchants, credit card companies

Question 25

What is in your credit files?

Answer 25

- employer, position, income - former address - former employer - spouses name, ss number,, - home status - checks returned for insufficient funds

Question 26

Fair Credit Reporting Act | 5 things it does

Answer 26

- regulates use of credit reports - requires deletion of obsolete information - data correction - only authorized people can view it - adverse data - 7 years, bankruptcy- 10 years

Question 27

Time limits in adverse data

Answer 27

-most of info on credit file may be reported for 7 years only -

Question 28

Fico score

Answer 28

information in your file is used to calculate your FICO score. - between 300 and 850 - Higher score= less risky you are

Question 29

Vantagescore

Answer 29

- launched in 2006 - doesnt count debt paid off - predictive scores for those with lack of credit history - ignores bad credit history due to natural disasters

Question 30

What is more important in determining your FICO credit score?

Answer 30

-Payment history

Question 31

What if your application is denied?

Answer 31

1. ask why 2. ECOA gives you right to know why 3. should contact local credit bureau 4. Should ask bureau to investigate any mistakes and correct records

Question 32

How to improve credit score

Answer 32

1. get copies of your credit report 2. pay bills on time 3. understand how credit score is determined 4. learn the legal steps to take 5. beware of credit repair scams

Question 33

Fair Credit Billing Act covers: Procedure for...

Answer 33

- 1975 - procedure for correcting billing mistakes, refusing to make credit card or revolving credit payments on defective goods, promptly crediting your payments

Question 34

In case of a Billing Error

Answer 34

- call creditor - notify error in writing within 60 days - include explanation and account number - they must respond within 30 days - 2 billing periods, no longer than 90 days to correct - credit rating is not affected during this time

Question 35

Defective goods or services

Answer 35

-you may withhold payment on damaged goods or services as long as you made an attempt to resolve with the merchant first

Question 36

Identity Crisis - | what to do if your identity is stolen...

Answer 36

1. Contact fraud department of each of the three major credit bureaus 2. tell them to flag file with a fraud alert 3. state that creditors should call before opening any new accounts in your name 4. contact creditos for any accounts that have been tampered with 5. file a police report and keep a copy 6. tear or shred any personal information before throwing it away 7. close bank accounts asap - cancel check and atm card - contact privacy rights clearinghouse - file complaint with federal trade commission

Question 37

Important consumer credit laws

Answer 37

- truth in lending and consumer leasing acts - Equal credit opportunity act - fair credit billing act - fair credit reporting act - consumer credit reporting reform act - credit card accountability, responsibility and disclosure act

Question 38

Your rights under consumer credit laws | discrimination- what to do

Answer 38

If refused credit due to discrimination: - let creditor know - file a complaint with the government - sue creditor in def district court