Personal Financial Planning FIN533 Chapter 4
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Questions and Answers

Which of the following is a disadvantage of credit?

  • Safer than cash
  • Temptation to overspend (correct)
  • Indicates financial stability
  • One monthly payment

    • Credit increases total purchasing power.

    False

    What is closed-end credit?

    One-time loans for a specific purpose paid back in equal payments.

    Credit cards are an example of ______ credit.

    <p>open-end</p> Signup and view all the answers

    Match the following types of credit with their descriptions:

    <p>Closed-End Credit = One-time loans for specific purposes Open-End Credit = Credit available up to a limit Credit Cards = A form of open-end credit Installment Loans = Paid back in equal payments over time</p> Signup and view all the answers

    What is consumer credit primarily used for?

    <p>Personal needs, except home mortgage</p> Signup and view all the answers

    Consumer credit allows consumers to buy goods and services now and pay for them later.

    <p>True</p> Signup and view all the answers

    Name one advantage of using consumer credit.

    <p>Current use of goods and services</p> Signup and view all the answers

    Consumer credit permits purchases even when funds are ______.

    <p>low</p> Signup and view all the answers

    Which of the following is a step to avoid credit mistakes?

    <p>Review your credit history regularly</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Consumer Credit = Use of credit for personal needs Credit Capacity = The ability to borrow based on income and expenses Credit Rating = A measure of creditworthiness Opportunity Cost = The potential benefits lost from alternatives not chosen</p> Signup and view all the answers

    Using credit can lead to financial emergencies.

    <p>True</p> Signup and view all the answers

    List one reason why consumers should postpone a purchase.

    <p>To evaluate better alternatives or minimize financial strain</p> Signup and view all the answers

    What percentage of households are considered convenience users who pay their credit card balances in full each month?

    <p>One-third</p> Signup and view all the answers

    Travel and entertainment cards require carrying a balance to make payments.

    <p>False</p> Signup and view all the answers

    What should you do with anything that contains your account number to protect against fraud?

    <p>Shred it</p> Signup and view all the answers

    Home equity loans allow borrowing up to _____ of the value of your home.

    <p>85%</p> Signup and view all the answers

    Match the following credit card types with their descriptions:

    <p>Convenience Users = Pay balances in full each month Borrowers = Carry a balance and pay finance charges Smart Cards = Have an imbedded computer chip Debit Cards = Equivalent to writing a check</p> Signup and view all the answers

    What is the main drawback of cash advances using credit cards?

    <p>Higher finance charges</p> Signup and view all the answers

    It is safe to give your credit card number over the phone to anyone who asks for it.

    <p>False</p> Signup and view all the answers

    What type of browsing feature should be used when making purchases online?

    <p>Secure browser</p> Signup and view all the answers

    What is the maximum duration that adverse data can be reported on a credit report?

    <p>7 years</p> Signup and view all the answers

    Credit card companies are not required to correct inaccurate information on your credit report.

    <p>False</p> Signup and view all the answers

    List one of the 5 Cs that creditors consider when evaluating a credit application.

    <p>Character</p> Signup and view all the answers

    The ______ regulates the use of credit reports.

    <p>Fair Credit Reporting Act</p> Signup and view all the answers

    Match the following elements to their descriptions in the 5 Cs of credit evaluation:

    <p>Character = Do you pay bills on time? Capacity = Can you repay the loan? Capital = What are your assets and net worth? Collateral = What property can the lender repossess? Conditions = What economic factors could affect repayment?</p> Signup and view all the answers

    What is the maximum percentage of net monthly income that consumer credit payments should not exceed?

    <p>20%</p> Signup and view all the answers

    The Debt Payments-to-Income Ratio includes house payments as liabilities.

    <p>False</p> Signup and view all the answers

    What should the Debt To Equity Ratio be less than?

    <p>1</p> Signup and view all the answers

    If you co-sign a loan, you may be required to pay the full amount if the borrower ___.

    <p>defaults</p> Signup and view all the answers

    Match the following aspects of co-signing a loan with their consequences:

    <p>Can affect your credit rating = If the borrower fails to pay May prevent you from getting other credit = Liability for the debt Loss of collateral = If the loan defaults Request notices of overdue payments = Stay informed about the debt</p> Signup and view all the answers

    Which of the following is NOT a recommendation for building and maintaining your credit rating?

    <p>Maximize your credit card limits</p> Signup and view all the answers

    Credit bureaus provide information about consumers only to creditors and lenders.

    <p>False</p> Signup and view all the answers

    What is one step to take if you decide to co-sign for a loan?

    <p>Check your state's law about co-signer's rights</p> Signup and view all the answers

    What is the maximum duration a credit card company has to correct your account after notifying them of an error?

    <p>90 days</p> Signup and view all the answers

    Your credit rating is affected while an item is in dispute.

    <p>False</p> Signup and view all the answers

    What should you do if your identity is stolen?

    <p>Contact the fraud department of each of the three major credit bureaus and notify creditors.</p> Signup and view all the answers

    A consumer can withhold payment on damaged goods if they have paid with a credit card, as long as they attempt to resolve the issue with the ______.

    <p>creditor</p> Signup and view all the answers

    Match the following actions with their corresponding procedures in the Fair Credit Billing Act:

    <p>Notify creditor of error = Within 60 days Company responds to error = Within 30 days Credit card correction timeframe = No longer than 90 days Dispute impacts credit rating = Not affected while in dispute</p> Signup and view all the answers

    Which of the following options is a reason to file a complaint to consumer credit protection agencies?

    <p>Unresolved issues with creditors</p> Signup and view all the answers

    You must notify creditors of fraudulent accounts immediately after discovering them.

    <p>True</p> Signup and view all the answers

    What is the role of the Central Credit Reference Information System (CCRIS) in Malaysia?

    <p>To collect and provide credit information on borrowers to lending institutions.</p> Signup and view all the answers

    Study Notes

    Personal Financial Planning (FIN533) - Chapter 4: Consumer Credit (Part 1)

    • Consumer Credit Defined:

      • An arrangement to receive cash, goods, or services now and pay for them later.
      • The use of credit for personal needs (excluding home mortgages), by individuals and families.

    • Ways Consumers Finance Purchases:

      • Drawing on savings
      • Using present earnings
      • Borrowing against expected future income

    • Use and Misuses of Credit:

      • Before using credit, ask questions:
        • Can you afford the down payment?
        • Does this purchase fit your budget?
        • Are there any better ways to use this credit?
        • Can you postpone the purchase?
        • What are the opportunity costs of postponing?
        • What are the dollar and psychological costs of using credit?

    • Advantages of Credit:

      • Current use of goods and services
      • Permits purchases 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 online shopping
      • Float time/grace period
      • Potential rebates, airline miles, and other bonuses
      • Indicates financial stability

    • Disadvantages of Credit:

      • Temptation to overspend
      • Failure to repay loans 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 specific purposes.
        • Repaid in equal amounts over a specified period.
        • Examples: Mortgages, auto loans, installment loans for furniture/appliances/electronics.

      • Open-End Credit:

        • Used as needed until a maximum limit is reached.
        • Examples: Credit cards, store cards, bank credit cards, incidental credit.
        • Interest and finance charges accrue if bills are not paid in full.

    • Credit Cards:

      • Eight out of ten U.S. households carry one or more credit cards.
      • One-third are convenience users (pay in full).
      • Two-thirds are borrowers (carry a balance).
      • Some use cards for cash advances (expensive).
      • Co-branding: Linking a credit card with a business for rebates.
      • Smart cards have embedded computer chips.
      • Debit cards are similar to writing a check.

    • Protecting Yourself Against Credit/Debit Card Fraud:

      • Sign new cards when they arrive.
      • Treat cards like cash and keep them secure.
      • Shred documents containing account numbers.
      • Don't give your number over the phone unless initiating the call.
      • Avoid giving numbers on postcards.
      • Get a receipt after every transaction. Compare receipts to bills.
      • Notify issuer if you don't receive your statement, if lost/stolen.
      • Check your credit report.
      • Use secure browsers for online purchases.

    • When You Make Purchases Online:

      • Utilize a secure browser
      • Maintain records of transactions.
      • Review monthly statements online.
      • Understand website policies regarding refunds and security.
      • Keep personal information private.
      • Shop on trusted websites.
      • Do not give your password to anyone online.

    • Travel & Entertainment Cards:

      • Not typical credit cards.
      • Monthly balance is due in full.
      • American Express started issuing credit cards recently.

    • Home Equity Loans:

      • Based on the difference between the current market value of your home and the amount owed on the mortgage.
      • You can borrow up to 85% of your home's value.
      • Structured like a revolving line of credit.

    • Measuring Your Credit Capacity:

      • Before taking out a loan:
        • Assess your ability to afford it.
        • Consider what compromises you're willing to make.

    • General Rules of Credit Capacity:

      • Debt Payments-to-Income Ratio: Monthly payments should not exceed 20% of net monthly income (excluding house payments).
      • Debt-to-Equity Ratio: Total liabilities should be less than your net worth (excluding home value).

    • Co-signing a Loan:

      • The creditor notifies you of your responsibility to cover the debt if the borrower defaults.
      • Include any late fees or collection costs.
      • The creditor can directly collect from you without prior attempts to collect from the borrower.
      • If co-signing, consider:
        • If you can truly afford to pay off the loan.
        • The potential damage to your credit rating if you fail.

    • Building and Maintaining Credit Rating:

      • Limit borrowing to what you can repay.
      • Live up to the terms of contracts.
      • Check your credit report.

    • Credit Bureaus: Collect and report information on borrowers for credit institutions and lenders use

      • Obtain data from financial and credit entities (banks, finance companies, credit card companies, and merchants).

    • Fair Credit Reporting Act:

      • Regulates credit reports.
      • Credit companies must correct inaccurate or incomplete information.
      • Only authorized personnel have access.

    • What if denied credit?

      • Examine your credit report thoroughly.
      • If you believe the denial is unjustified, challenge it through legal proceedings and notify relevant agencies (federal enforcement).
      • Request that the creditor clarifies the denial’s reason.
      • If you believe the denial is legitimate, make necessary adjustments to improve creditworthiness

    • Applying for Credit:

      • 5 Cs of Credit:
        • Character (timeliness of bill payments).
        • Capacity (repayment ability).
        • Capital (assets and net worth).
        • Collateral (property pledged in case of default).
        • Conditions (economic factors impacting repayment).

    • Avoiding and Correcting Credit Mistakes:

      • Fair Credit Billing Act:
        • Notifies the creditor of errors within 60 days.
        • Includes an explanation of the error and your account number, along with your address.
        • Creditors respond within 30 days to resolve issues and correct the account.
        • Credit cards have 90 days to respond and resolve an error.
        • Your credit rating is protected during a dispute.
        • Withhold payment for damaged/shoddy goods or services while trying to resolve.

    • Identity Theft:

      • Contact each credit bureau to report fraud, and ask them to place a fraud alert on your credit report along with a statement about the permission creditors should get from you.
      • Contact creditors to check for fraudulent accounts.

    • Complaining About Consumer Credit:

      • Attempt to directly resolve issues with the creditor first.
      • Formal complaints procedures exist with various federal agencies specializing in these issues.

    • Central Credit Reference Information System (CCRIS): Malaysia.

      • Credit bureau established under the Central Bank of Malaysia, collecting and reporting credit information on 9 million + borrowers.
      • Institutions use this data for informed lending decisions.

    • Credit Tip-Off Service (CTOS): A Malaysian credit agency.

      • Compiles information on borrowers from official notices and documents.
      • Crucial for ensuring a clear credit history for borrowers with lenders/creditors.

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    Related Documents

    Personal Financial Planning (FIN533) Chapter 4: Consumer Credit (Part 1) PDF

    Description

    Dive into Chapter 4 of Personal Financial Planning (FIN533) as we explore the intricacies of consumer credit. This chapter covers the definition of consumer credit, various financing options, and the advantages and misuses of credit. Gain insights to make informed decisions about using credit responsibly.

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