Consumer Credit Overview

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Questions and Answers

What is a primary advantage of consumer credit?

Encourages excessive spending

Immediate access to goods and services (correct)

Limits purchasing options

Assures a higher credit score

Which of the following is a disadvantage of consumer credit?

May lead to overspending (correct)

Easier to manage finances

Increases total purchasing power

Improves financial stability

What is indicated by a strong credit rating?

High level of debt

Indicates financial stability (correct)

Lack of credit use

Financial instability

What should you consider when assessing your credit capacity?

Your ability to meet essential expenses and monthly loan payments Signup and view all the answers

Why is consumer credit considered safer than cash?

Protects funds from loss Signup and view all the answers

Which of the following best defines consumer credit?

A loan provided to individuals for purchasing consumer goods. Signup and view all the answers

What is a disadvantage of consumer credit?

It can lead to high levels of debt and interest payments. Signup and view all the answers

Which of the following illustrates a use of consumer credit?

Taking out a loan to buy a car. Signup and view all the answers

How does consumer credit provide an advantage?

It allows for immediate access to goods and services. Signup and view all the answers

What trend has been observed in relation to student loans?

They have surpassed $1.5 trillion in the US. Signup and view all the answers

Why is it important to assess credit capacity?

To understand the total debt in relation to income. Signup and view all the answers

What percentage of Americans aged 18-34 have student loan debt?

45% Signup and view all the answers

Which statement reflects a common misconception about consumer credit?

All types of consumer credit have the same interest rates. Signup and view all the answers

What percentage of Americans aged 18-34 are reported to have student loan debt?

45% Signup and view all the answers

What is the monthly payment for a $100,000 student loan at 8% APR over 10 years?

$1,213 Signup and view all the answers

What is a characteristic of credit card loans compared to most consumer loans?

They are revolving loans. Signup and view all the answers

Which of the following statements about student loan holders is true?

Nearly 1 in 5 do not know how their monthly payments are determined. Signup and view all the answers

What percentage of adults reported carrying a balance and being charged interest on their credit cards in the past year?

47% Signup and view all the answers

What is the potential disadvantage of a revolving loan like a credit card?

They can lead to ongoing debt if not managed carefully. Signup and view all the answers

Which of the following is NOT a reason people might use consumer credit?

To save money effectively. Signup and view all the answers

How does student debt impact the decision-making of borrowers regarding future loans?

Many expressed the desire to change their approach if given a second chance. Signup and view all the answers

What is the correct description of a consumer credit?

A credit extended to consumers for various types of purchases. Signup and view all the answers

What happens to credit card holders who exceed their credit line?

They are charged a fee for exceeding their limit. Signup and view all the answers

What does consumer credit primarily allow individuals and families to do?

Receive cash, goods, or services and pay for them later for personal needs Signup and view all the answers

Which of the following is a disadvantage of using consumer credit?

Can lead to overspending and debt accumulation Signup and view all the answers

Which option is NOT one of the three ways consumers can finance purchases?

Trade investments for immediate cash Signup and view all the answers

What is one of the considerations to evaluate before using credit for a major purchase?

Whether the purchase fits within the budget Signup and view all the answers

How can spending current income on luxuries be disadvantageous?

It may lead to reduced financial flexibility in the future Signup and view all the answers

When considering a major purchase using credit, which question is important to ask?

Do I have the cash for the down payment? Signup and view all the answers

One trade-off of borrowing against expected future income includes which of the following?

Reduction of current emergencies fund Signup and view all the answers

What common reason do consumers borrow funds for education?

To cover tuition fees with a student loan Signup and view all the answers

What is a psychological cost of using credit for purchases?

Experiencing potential stress from debt obligations Signup and view all the answers

Study Notes

Consumer Credit

Consumer credit is an arrangement to receive cash, goods, or services now, with payment in the future.
It is used for personal needs, excluding mortgages.
Advantages include: immediate access to goods and services, purchase even with low funds, a cushion for emergencies, advanced sales/return notices, and convenience.
Disadvantages include: temptation to overspend, failure to repay can result in loss of assets and reputation, and the cost of credit.
Key questions to ask regarding consumer credit: available cash, savings use, budget suitability, alternative uses for credit, and postponement options.
Psychological and financial costs of using credit should be considered.
Credit plays a significant role in the American economy.

Consumer Borrowing/Credit

Reasons for consumer borrowing include education (student loans), consumption (credit cards/personal loans/home equity lines), vehicle purchases (auto loans), business financing (credit cards/home equity lines/business loans), home purchases (mortgages), home improvements (home equity loans), and investment (margin loans).
Student loan debt has significantly increased.
Half of credit card holders carry balances
Borrowing has increased against retirement funds.
High-cost borrowing methods are common.
Debt payments-to-income ratio: monthly debt divided by monthly net income (should ideally be less than 20%).
Debt-to-equity ratio: Total liabilities divided by net worth (should ideally be less than 1).

Cosigning a Loan

A cosigner guarantees repayment if the borrower defaults.
Careful consideration of ability to repay is needed.
Full loan amount and potential late/collection fees are potential burden.
Cosigner(s) may be wholly/partially responsible for repayment.
Cosigning can affect credit rating and impact future credit access.
Factors to consider include: Affordability, potential damages to credit score, and implications of loan default.

Loan Amortization

Loan repayment in consistent installments.
Principal, the initial amount borrowed, reduces gradually with each payment.
Portion of payment allocated to interest expense, decreasing through each subsequent period.
Greater portion of payment directed to principal reduction as balance reduces.

Credit History/Ratings

A good credit rating is a valuable asset.
Credit limits should be monitored and managed responsibly.
Contract compliance is crucial.
Credit reports may show if outstanding debts are problematic.
The rating should be managed well.
Banks are creating their own systems for credit rating clients.
Factors which may be used include: income, loan balance, any delays in repaying loans, net worth, and liquidity.
Maintaining a good rating is essential to gain access to better terms.

Credit Cards

Credit cards are revolving credit.
Borrowers can borrow against a credit line without a fixed amount.
Monthly expenses are calculated on outstanding balances.
Minimum monthly payments are usually only for interest expense.
The practice of paying the minimum often leads to significantly higher loan totals including added interest compared to covering the full balance.

Improving credit score

Get copies of your credit report to ensure accuracy.
Maintain timely payments on all debts.
Understanding credit score determination.
Avoiding credit repair scams.

Interest Rate

Interest rate is the cost of borrowing money.
Not just repayment of the loan; interest must also be paid.
The greater the interest rate, the higher the total borrowing cost.

Student Loans

Increasing amount of money borrowed by students.
Data shows a considerable percentage of people within the 18-34 age bracket hold student loans.
More than half wish they could go through the loan process differently.

Calculating Debt Payments-To-Income Ratio

Divide monthly debt payments by monthly net income to determine the ratio.
House payments/mortgage should not be included when determining this.

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Description

This quiz covers the fundamental aspects of consumer credit, including its advantages, disadvantages, and the psychological effects of borrowing. It also explores the different reasons consumers opt for borrowing, such as education and vehicle purchases. Assess your understanding of consumer credit's role in the economy and key considerations in managing it.