Consumer Credit
What is Consumer Credit?
A consumer credit system allows consumers to borrow money or incur debt, and to defer repayment of that money over time.
What is Creditworthiness?
Creditworthiness is a lender's willingness to trust you to pay your debts.
What is a loan?
A sum of money that is lended expected to be paid back with interest.
What is debt?
Something, typically money, that is owed or due.
Why do banks issue credit?
Banks generally issue credit for two reasons:
1. To make money
2. To offer service to customers
What are the 5C's of Creditworthiness?
Character
Capital
Capacity
Collateral
Conditions
What is the name of an individual who lends money at extremely high rates and often in illegal conditions?
Loan shark
What is Defaulting
Fail to fulfill an obligation, especially to repay a loan.
List Two Cons of Using Credit
Disadvantages: Interest (higher cost of items); May require additional fees; Financial difficulties may arise if one loses track of how much has been spent each month; Increased impulse buying may occur.
Are they creditworthy, and what C does the situation relate to?
Edgar, age 20, has no active income stream right now because he is unemployed.
Capacity, no
What are the two terms used to describe the actors involved in issuing and receiving a loan?
Borrowerer/Debtor
Lender/Creditor
List several different types of credit cards
1. Bank Card
2. Store Card
3. Travel and Entertainment Card
Should they use credit?
Marge, age 24, plans to buy a car on credit so that she is able to drive to school.
Depends.
What is credit score and what are two reasons why it matters?
A score that helps lenders decide how creditworthy you are — the higher the score, the lower the risk.
House or apartment hunting require good credit score.
Prospective employers review candidates’ credit history.
Allows you to have better interest and insurance rates
Gives you more financial flexibility for more credit.
Difference between debit and credit
The fundamental difference between a debit card and a credit card account is where the cards pull the money. A debit card takes it from your banking account, and a credit card charges it to your credit line.
What is inflation?
A general increase in prices and fall in the purchasing value of money.
List Four Pros of Using Credit
Advantages: Able to buy needed items now; Don’t have to carry cash; Creates a record of purchases; More convenient than writing checks; Consolidates bills into one payment.
List and define each of the C's of Creditworthiness
Character: Although it's called character, the first C more specifically refers to credit history: a borrower's reputation or track record for repaying debts.
Capital: Lenders also consider any capital the borrower puts toward a potential investment.
Capacity: Lenders assess for an borrowers capacity to pay back the debt based on factors such as income and recurring debt.
Collateral: Collateral can help a borrower secure loans. It gives the lender the assurance that if the borrower defaults on the loan, the lender can get something back by repossessing the collateral.
Conditions: The conditions of the loan, such as its interest rate and amount of principal, influence the lender's desire to finance the borrower.
List at least three variables related to a loan
Variables include:
Annual Percentage Rate (APR)
Length of the loan
Monthly payments
Total finance charge
Total to be repaid
List three different types of fees that might exist when operating a credit card
Annual fee
Late payment fee
Over-limit fee