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UA CSM 204 - Exam 2 Study Guide
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CSM 204Exam # 2 Study Guide: Chapters 6-9CSM 204 Exam 2 Review SheetDefinition of credit An arrangement to receive goods and services now, but pay laterThis ties up future incomeDefinition of consumer creditThe use of credit for personal needs, besides home mortgages, by individuals and families, as opposed to credit used for business purposesImportance of consumer credit in our societyWithout credit, we wouldn’t be able to purchase expensive items as easily nor would companies know who is a good candidate to lend money to and who is not.Uses and misuses of creditUses of creditEmergenciesAvoiding inflation costBeing able to have more and enjoy moreMisusesBuying items you can’t affordNot being able to make the monthly payments in full, which cause you to have to pay interest in your items, making the products worth much less than you are having to pay for them.Can result in default, bankruptcy, and loss of creditworthinessMake sure the benefits making the purchase now outweigh the cost of using credit nowAdvantages and disadvantages of credit AdvantagesCurrent use of good and servicesMedical EmergenciesMay purchase when funds are lowNeeded purchases when funds are lowSafer than cash or debit cardsAS LONG AS YOU PAY IN FULL EACH MONTHCushion for emergenciesEasier to return merchandiseConvenient when shoppingOne monthly paymentNeeded for reservations and online purchasesFloat time and grace periodRewards programsCash backMerchandiseAccidental death and dismemberment insuranceAuto rental insuranceRoadside assistanceRedeem points for using your credit card to receive things like airline tickets, gadgets, vacation packages, cars, hotel rooms, etc.Indicates financial stabilityDisadvantagesTemptation to overspendPotential damage to credit ratingDoes not increase total purchasing powerCredit costs moneyMinimum payment temptationCourt action and bankruptcy if you cannot payCan cause long-term financial problems if you do not payDamages to family relationshipsSlowing of progress towards financial goalsTypes of credit Installment cash creditA direct loan of money for personal purposesHome improvements, vacation expenses, etc.No down paymentMake payments of a specified amount over an extended period of timeInstallment sales creditA loan that allows you to receive merchandise, mostly high priced itemsFurniture, large appliances, etc.Down payment and usually sign a contract to repay the balanceThere are interest and service chargesMake payments of a specified amount over an extended period of timeClosed-ended creditA one time loan that the borrower pays back in a specific period of time in equal payment amountsInstallment cash creditA direct loan of money for personal purposesHome improvements, vacation expenses, etc.No down paymentMake payments of a specified amount over an extended period of timeInstallment sales creditA loan that allows you to receive merchandise, mostly high priced itemsFurniture, large appliances, cars, etc.Down payment and usually sign a contract to repay the balanceThere are interest and service chargesMake payments of a specified amount over an extended period of timeSingle pay loans/Single lump-sum creditA loan that must be repaid in total on a specified day, usually within 30-90 daysUsually used to purchase a single itemOpen-ended credit/Revolving creditA line of credit in which loans are made on a continuous basis and the borrower is billed periodically for at least partial paymentCredit cardsA card that allows the holder to purchase goods and services on creditLines of creditThe dollar amount, which may or may not be actually borrowed by the borrower, that a lender makes available to a borrower.Smart CardsCombine credit cards, a driver’s license, a health care ID, your medical history, your insurance information, frequent-flier miles, and telephone cardsEmbedded with a computer chipStores 500x the data of a credit cardDebit CardsElectronically subtracts the amount of a purchase for the buyer’s account at the moment the purchase is madeStore Value CardsGift cards/prepaid Travel and Entertainment CardsMonthly balance is due each month in fullSmart PhonesMobile CommerceScannable barcodes that allow consumers to pay using a mobile phone instead of a physical cardHome Equity LoansA loan based on the current market value of a home less the amount still owed on the mortgageGeneral rules of credit capacity Computing RatiosDebt Payment to Income RatioCalculated by dividing your monthly debt payments, not including your house payments, by your net monthly income.Spend no more than 20% of your net income on consumer credit payments, but 15% is much better.Debt to Equity RatioCalculated by dividing your total liabilities by your net worthIf your debt to equity ratio is about 1 (if your consumer installment debt roughly equals your net worth – not including your home or the mortgage) you have probably reached the upper limit of debt obligations.In other words, if you are in debt $48,000 and your net worth is $50,000, your debt to equity ratio is almost equal to 1, which means you should under no circumstances borrow any more money. You should be worth much more than you owe. The closer your debt to ratio is to 0, the better off you are.Cosigning a loan The test questions are from the perspective of you being the cosigner for someone else’s loan.What does cosigning a loan mean?You are being asked to guarantee this debt, meaning that you are promising to pay the debt if the person you cosign for doesn’t/can’t.Building and maintaining your credit rating Limit how much and how often you borrow moneyLive up to the terms of your contractControl the number of inquiries into your credit. These decrease your credit rating as well.Five Cs of credit CharacterThe borrower’s attitude toward his or her credit obligationsCapacityThe borrower’s financial ability to meet credit obligationsBeing able to pay back the loanCapitalThe borrower’s financial ability to meet credit obligationsCollateralA valuable asset that is pledged to ensure loan paymentsSomething of monetary value that can be taken from the borrower in the event of the borrower not making paymentsConditionsThe general economic conditions that can affect a borrower’s ability to repay a loanYou have no control over the conditionsImproving your credit rating FICO Credit Score slide35% Payment History30% Amounts Owed15% Length of Credit History10% Types of Credit Used10% Taking on More DebtImproving your


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