FIN533 Chapter 4: Consumer Credit (Part 1)

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29 Questions

What is a key consideration when deciding whether to use credit for a major purchase?

Whether the item fits within your budget

What is a primary difference between using savings and using credit to finance a purchase?

Whether you have to pay back the full amount

What is a potential drawback of using credit to finance a purchase?

You may have to pay interest

What is a key consideration when deciding whether to borrow against expected future income?

Whether you have a stable job

Why is consumer credit considered a major economic force?

Because it is a large industry

What is a key question to ask yourself before using credit for a major purchase?

Do I have the cash for the down payment?

What is the primary purpose of a credit report in the context of financial institutions?

To assist financial institutions in making informed decisions on credit applications

What is the estimated number of borrowers in Malaysia whose credit information is stored in the CCRIS database?

9 million

What is the primary function of CTOS in the context of credit reporting?

To facilitate credit leads and information for financial institutions

What type of information is typically provided in a CTOS report?

Bankruptcy and summons information

Why is it important for individuals to ensure their CTOS report is clear?

To avoid being denied credit applications

What is the name of the computerized database system that houses credit information in Malaysia?

Central Credit Reference Information System (CCRIS)

What percentage of households are considered borrowers, carrying a balance over and paying finance charges?

Two-thirds

What is the primary difference between a smart card and a traditional credit card?

The presence of an embedded computer chip

What is the purpose of a stored-value card?

To make purchases in lieu of cash or credit

Which type of card is not a true credit card, but rather a payment method?

Debit card

What is a common use of stored-value cards in a business setting?

To pay travel expenses

What is a benefit of travel and entertainment cards, such as Diners Club or Carte Blanche?

The ability to access airport lounges

What is the primary objective of assessing an individual's 'Character' when applying for credit?

To assess the individual's creditworthiness

What is the purpose of inquiring about an individual's 'Collateral' when applying for credit?

To secure the loan with a pledged property

What is the primary reason for creditors to assess an individual's 'Conditions' when applying for credit?

To assess the economic conditions that may affect the individual's ability to repay the loan

What is the purpose of asking for a '100-word explanation' in a credit application?

To provide an opportunity for the individual to explain their credit history

What is the primary purpose of a credit application?

To assess the individual's ability to repay the loan

What is the primary benefit of 'Taking steps to improve your creditworthiness'?

It increases the individual's chances of getting approved for credit

What is the maximum time period within which the credit card company must correct your account or respond with an explanation?

90 days

What is the primary reason you can withhold payment on damaged or shoddy goods or poor services if you have paid for them with a credit card?

You made a sincere attempt to resolve the problem with your creditor.

What is the benefit of notifying the creditor of an error in writing within 60 days?

Your credit rating is not affected while the item is in dispute.

How many days does the creditor have to respond to your notification of error?

30 days

What is the primary purpose of the Fair Credit Billing Act?

To provide consumers with recourse for credit mistakes.

Study Notes

Consumer Credit

  • Consumer credit 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
    • Borrow against expected future income
  • Trade-offs with each alternative:
    • Draw on savings: loses the interest that could be earned
    • Use present earnings: reduces current spending power
    • Borrow against expected future income: pays interest and may affect future spending power

Use and Misuses of Credit

  • Questions to ask before using credit for a major purchase:
    • Do I have the cash for the down payment?
    • Do I want to use my savings for this purchase?
    • Does this purchase fit my budget?
    • Could I use the credit I'll need in some better way?
    • Can I postpone this purchase?

Central Credit Reference Information System (CCRIS)

  • The CCRIS contains credit information on about 9 million borrowers in Malaysia.
  • The database system automatically processes the credit data received from financial institutions and synthesizes the information into credit reports.

Credit Tip-Off Service (CTOS)

  • CTOS stands for Credit Tip-Off Service, the company itself is categorized as a Credit Agency.
  • CTOS is an electronic 'archive' of information collated from gazettes, newspapers, court notices, and searches at relevant statutory bodies.
  • CTOS reports provide information on bankruptcy, summons of any individual in Malaysia.

Credit Cards

  • One-third of households are convenience users, paying balances in full each month.
  • Two-thirds are borrowers, carrying a balance over, paying finance charges.
  • Some use cards for cash advances, which can be expensive.
  • Co-branding: linking a credit card with a business offering rebates on products and services.
  • Smart cards have an imbedded computer chip.
  • Debit cards: similar impact as writing a check, electronically subtracts from your account the moment you make a purchase.

Stored-Value (or Gift) Cards

  • Are prepaid cards.
  • Resemble a debit card and use magnetic stripe technology to store and track funds.
  • Used in lieu of paper gift certificates.
  • Used for business purposes (payroll, travel expenses, government benefit payments).

Travel and Entertainment Cards

  • These cards are not really credit cards.
  • Monthly balance is due in full.
  • Diners Club or Carte Blanche cards have an annual fee that allows you to replace lost passports, buy airline tickets, find doctors, and access airport lounges around the world.

Applying for Credit

  • The 5 Cs of credit:
    • Character: Do you pay bills on time?
    • Capacity: Can you repay the loan?
    • Capital: What are your assets and net worth?
    • Collateral: What property do you have to pledge that the lender can repossess if you default on the loan?
    • Conditions: What economic conditions could affect your ability to repay the loan?

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.
  • If your identity is stolen, you can:
    • Notify the creditor of the error in writing.
    • Place a fraud alert on your credit report.

Test your understanding of consumer credit, including its advantages and disadvantages, types of credit, credit capacity, credit rating, and laws that protect consumers. Learn how to avoid and correct credit mistakes and understand what creditors look for when applying for credit.

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