Questions and Answers
Single lump-sum credit is a type of open-end credit.
False
Revolving check credit is a type of closed-end credit.
False
Seven out of ten U.S. citizens use credit cards.
False
Mortgage loans are a type of open-end credit.
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Credit cards are a type of closed-end credit.
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Installment cash credit is a type of loan that must be repaid in total on a specified day.
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The Debt Payments-to-Income Ratio should not exceed 30% of your net income.
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The Debt To Equity Ratio should be greater than 1.
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If you co-sign a loan, you are not responsible for paying the debt if the borrower defaults.
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When co-signing a loan, the creditor must first try to collect the debt from the borrower before coming to you.
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House payments are considered short-term liabilities.
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As a co-signer, you will not receive a notice telling you that you are being asked to guarantee the debt.
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Under the Fair Credit Billing Act, you have 30 days to notify the creditor of an error in writing.
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The credit card company has 60 days to correct your account or tell you why they think the bill is correct.
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You can withhold payment on damaged or shoddy goods or poor services if you have paid for them with cash.
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Your credit rating is affected while an item is in dispute.
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The Fair Credit Billing Act allows you to dispute a charge without making a sincere attempt to resolve the problem with your creditor.
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If a cosigner defaults on a loan, the lender can only seize the collateral from the borrower.
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Credit bureaus only collect information from banks and finance companies.
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Under the Fair Credit Reporting Act, credit card companies must correct inaccurate or incomplete information within a month.
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Adverse data can be reported on a credit report for ten years.
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If a creditor denies credit, they must provide a written explanation for the denial.
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Consumers have no recourse if they believe they were unfairly denied credit.
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Consumer credit refers to the use of credit for personal needs, including a home mortgage, by individuals and families.
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Borrowing against expected future income is not a way consumers can finance purchases.
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It is always recommended to use credit for every major purchase.
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Consumer credit is not a major economic force.
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Consumers should always postpone a purchase if they can.
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Consumer credit can only be used for essential needs.
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Study Notes
Consumer Credit
- Consumer credit is an arrangement to receive cash, goods, or services now and pay for them in the future
- It is the use of credit for personal needs, except a home mortgage, by individuals and families
- Three ways consumers can finance purchases: draw on their savings, use present earnings, or borrow against expected future income
Advantages of Credit
- Current use of goods and services
- Permits purchase even when funds are low
- A cushion for financial emergencies
- Advance notice of sales
- Easier to return merchandise
- Convenient when shopping
- One monthly payment
- Safer than cash
- Needed for hotel, car reservations, and shopping online
- Can take advantage of float time/grace period
- May get rebates, airline miles, or other bonuses
- Indicates financial stability
Disadvantages of Credit
- Temptation to overspend
- Failure to repay loan may lead to loss of income
- It does not increase total purchasing power
- Credit costs money
Types of Credit
- Closed-End Credit: one-time loans for a specific purpose that you pay back in a specified period of time, and in payments of equal amounts
- Examples: mortgage, automobile, and installment loans for furniture, appliances, and electronics
- Installment cash credit is a direct loan of money for personal purposes (i.e., home improvements)
- Single lump-sum credit is a loan that must be repaid in total on a specified day (30-90 days)
- Open-End Credit: use as needed until reaching line of credit max
- Examples: credit cards, department store cards, bank credit cards
- Revolving check credit is the prearranged loan from a bank for a specified amount, also called bank line of credit
Credit Cards
- Eight out of ten U.S. households have at least one credit card
- Credit cards are a type of open-end credit
Measuring Your Credit Capacity
- Debt Payments-to-Income Ratio: monthly payments should not exceed 20% of your net income (excluding house payment)
- Debt To Equity Ratio: total liabilities should be less than net worth (excluding home value)
Co-Signing a Loan
- The creditor will give you a notice that tells you that you are being asked to guarantee the debt
- Consider if you can afford to pay the loan if the borrower defaults
- If the borrower does not pay, you may have to pay up to the full amount and also any late or collection fees
Avoiding and Correcting Credit Mistakes
- Fair Credit Billing Act:
- Notify creditor of error in writing within 60 days
- Include your explanation of the error and your account number to the billing inquiries address
- They must respond within 30 days
- Credit card company has two billing periods but no longer than 90 days to correct your account or tell you why they think the bill is correct
- Your credit rating is not affected while item is in dispute
- You can withhold payment on damaged or shoddy goods or poor services if you have paid for them with a credit card, if you make a sincere attempt to resolve the problem with your creditor
Identity Theft
- If your identity is stolen, your credit rating could be damaged
- Liability for this debt may prevent you from getting other credit that you want
- If you put up collateral, you could lose it if the loan goes into default
- Check your state’s law to learn about cosigner’s rights
- Request that a copy of overdue payment notices be sent to you
Building and Maintaining Your Credit Rating
- Limit your borrowing to your capacity to repay
- Live up to the terms of contracts
- Check to see what is in your credit report
Credit Bureaus
- Credit bureaus collect information from banks, finance companies, credit card companies, merchants, and other creditors
- Fair Credit Reporting Act regulates the use of credit reports
- Credit card companies must correct inaccurate or incomplete information
- Only authorized persons have access to your report
- Adverse data can be reported for seven years; bankruptcy for ten years
Denied Credit
- Check your credit file at the credit bureau
- If you believe reasons for denial are invalid: file suit and/or notify federal enforcement agency
- Ask the creditor to clarify reason for denial; if you believe the denial is valid...
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Description
Test your knowledge on consumer credit, its advantages and disadvantages, types of credit, credit capacity, and laws that protect consumers. Learn how to avoid and correct credit mistakes. Based on FIN533 Chapter 4.
