CREDIT UNIT
TEST REVIEW
CREDIT TEST REVIEW
_________________ is an arrangement to
receive cash, goods, or services now and
pay for them in the future.
CREDIT
When credit is used for personal needs it is
referred to as _________ ________.
CONSUMER CREDIT
CREDIT TEST REVIEW
An entity that that lends money is called an
_______________.
CREDITOR
List two great reasons to use credit
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Save money
Purchase items that we cannot afford on a cash
basis
CREDIT TEST REVIEW
What are three factors to consider before using
credit?
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Is there a down payment?
Do you want to use savings instead of credit?
Can you afford the item?
Could you use the credit in a better way?
Can you put off buying the item for a while?
What are the opportunity costs of postponing the
purchase?
What are the costs of using credit?
CREDIT TEST REVIEW
What are three advantages to using credit?
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Allows you to enjoy goods and
services now and pay for them later.
Safer than cash
Easy to track spending
Rewards and perks etc…
CREDIT TEST REVIEW
A one time loan that will be paid back over a
specified period of time, in payments of equal
amounts.
CLOSED END CREDIT
List some examples of items that are usually
purchased with closed-end credit:
HOUSES, VEHICLES, FURNITURE
CREDIT TEST REVIEW
Used for the purchase of merchandise, typically
requires a down payment with remaining balance of
loan being paid in installments.
INSTALLMENT SALES CREDIT
Money borrowed for personal reasons, does not
necessarily require a down payment, balance is paid
in installments.
INSTALLMENT CASH CREDIT
A loan that must be paid in full, by a specified day,
typically within 30-90 days.
SINGLE LUMP-SUM CREDIT
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Credit as a loan with a certain limit on the
amount of money you can borrow for a
variety of goods and services.
OPEN END CREDIT
Examples of Open-End Credit:
VISA, MASTERCARD, AMERICAN
EXPRESS
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After your application for credit is approved, you typically
can begin to make purchases as long as you do not
exceed the
LINE OF CREDIT
Payment amounts, dates, applicable charges, and all
other pertinent information regarding your account will
be determined by the
TERMS OF AGREEMENT
CREDIT TEST REVIEW
Name two sources of commercial credit:
 Commercial Bank
 Credit Union
 Retail Stores etc…
True or False: The average credit cardholder
has more than six cards.
 TRUE
CREDIT TEST REVIEW
Many credit card companies offer a
__________________, a time period during which no
finance charges will be added to your account.
GRACE PERIOD
The total dollar amount you pay to use credit.
FINANCE CHARGE
CREDIT TEST REVIEW
True or False: Generally, if the balance is paid in full prior
to the due date, there will be no finance charge to pay.
TRUE
How are debit cards different than credit cards?
 Debit cards utilize cash in your checking
account. Credit cards utilize borrowed money!
CREDIT TEST REVIEW
Method by which most credit cards calculate the finance
charges for the period. It is found by adding each day’s
balance and then dividing the total number of days in a
billing cycle.
AVERAGE DAILY BALANCE
The cost of credit on a yearly basis. It is expressed as a
percentage.
ANNUAL PERCENTAGE RATE (APR)
CREDIT TEST REVIEW
The process of moving unpaid credit card debt
from one issuer to another. Often comes with a
fee of some form.
BALANCE TRANSFER
A charge by the lender for using the credit card
to obtain cash. Can be a flat rate or percentage
(2%/$10).
CASH ADVANCE FEE
CREDIT TEST REVIEW
The written statement provided to the cardholder
outlining the terms and conditions. Required by
Federal Reserve regulations. Must include the
APR, monthly minimum payments formula,
annual fee and cardholder’s rights in billing
disputes.
CARDHOLDER AGREEMENT
CREDIT TEST REVIEW
The minimum amount a cardholder can pay to
keep the account from going into default.
MINIMUM PAYMENT
When a potential customer has passed a
preliminary credit-information screening. Does
not guarantee a line of credit.
PRE-APPROVED
CREDIT TEST REVIEW
What are some ways you can apply for a credit
card?
 In person, at a financial institution
 In person, through a promotional event
like a sporting event or welcome week
on a college campus
 By telephone
 Traditional mail
 Online
CREDIT TEST REVIEW
Outline of all of the specifics of your relationship with
the creditor.
TERMS AND CONDITIONS
What are three things that you could find in your
terms and conditions?
 Finance charges
 Due dates
 Specific lending policies
 Much, much more!
CREDIT TEST REVIEW
What are the 5 C’s:
CHARACTER, CAPACITY, CAPITAL,
COLLATERAL AND CONDITIONS.
Which “C” attempts to measure what type of
person you are when it comes to paying your
bills?
CHARACTER
CREDIT TEST REVIEW
How can creditors try to measure your
character?
References (Both personal and professional)
 Criminal background check
 Have you used credit before?
 How long have you lived at your current
address?
 How long have you held your current job?

CREDIT TEST REVIEW
What “C” attempts to measure how much debt
you can take on?
CAPICITY
What questions can a creditor ask to try to
assess your capacity?
What is your job and how much is your salary?
 Do you have other sources of income?
 What are your current debts?
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CREDIT TEST REVIEW
A common ratio used to calculate capacity:
DEBT PAYMENTS-TO-INCOME RATIO
This ratio is calculated as follows:
Total Monthly Debt (not inc. housing)
Monthly Net Income
It is highly recommended to keep this ratio under
?????
20%
CREDIT TEST REVIEW
Stuart just received his first job offer after graduating
from beauty school. His expected monthly income is
$2,500. The only debt payments he has are school
loan payments of $375 a month. What is his Debt
Payments-to-Income Ratio?
Debt Payments ÷ Monthly Net Income
$375 ÷ $2,500 = .15
15%
CREDIT TEST REVIEW
Any item of value that you own
ASSET
Examples of Assets
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Cash
Property
Personal possessions
Investments
CREDIT TEST REVIEW
Which “C” is represented by taking the total
value of your assets and subtracting your
total debt?
CAPITAL
Why do creditors care about how much capital
you have?
Capital tells them if you have other ways to
pay back your debt besides new income.
CREDIT TEST REVIEW
Which “C” is something pledged as a security for
repayment of a loan.
COLLATERAL
Which “C” refers to both big and small picture
concerns outside of just you.
CONDITIONS
CREDIT TEST REVIEW
What types of things to lenders look at when
assessing conditions?
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General economic conditions at the time of applying?
Unemployment Rate
Recession
your specific company and position.
Is your position in demand? How expendable are you?
CREDIT TEST REVIEW
What are some tips or applying for credit if
you don’t have much of a credit history
(Young borrower or bad history)
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Establish a checking or savings account
Borrow against your savings account
Open a department store credit card
Gas Cards!
Get a Cosigner
CREDIT TEST REVIEW
The record of your complete credit history
CREDIT REPORT
Credit reports are collected and maintained by
CREDIT BUREAUS
CREDIT TEST REVIEW
The three major credit bureaus are:
Experian
 Trans Union
 Equifax
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How do credit bureaus make money?
By selling the information they collect to
creditors who are considering extending
loans/credit.
CREDIT TEST REVIEW
Where do credit bureaus get their information
from?
Banks, stores, other types of finance
companies and lenders, courts and other
public records
The information they collect includes:
Type of credit they have extended
 The amounts and terms of the loans
 Customer’s paying habits
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CREDIT TEST REVIEW
A typical credit report includes what type of
information?
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Name
Address
Social Security Number
Employment Info (Where, Position & $$)
Homeowner or Renter Status
Checks returned for insufficient funds
Your spouse’s information
CREDIT TEST REVIEW
TRUE OR FALSE: Credit reports also contain very
detailed information on EVERY loan or use of
credit.
TRUE
These reports are updated regularly to show:
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Payments you have made (Both amounts and
number of)
Late Payments
Missed Payments
How much you still owe
Lawsuits & judgments against you
CREDIT TEST REVIEW
To ensure citizens rights were being protected,
Congress passed the ________________
FAIR CREDIT REPORTING ACT
The act regulates the use of credit reports by:
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Deleting out of date information
Giving consumers access to their reports
Giving consumers the right to correct
discrepancies
Limiting who can obtain your credit report
CREDIT TEST REVIEW
The majority of information in your report may only be
reported for how long?
7 years
If you have declared personal bankruptcy this time
frame becomes..
10 years
Credit Bureaus can disclose information past these
time frames if:
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A credit application of $75,000 or more
Apply for life insurance of $150,000 or more
CREDIT TEST REVIEW
A measure of a person’s ability and willingness to make
credit payments on time.
CREDIT SCORE
Most commonly used credit score
FICO SCORE
How is your FICO score calculated?
It’s a secret BUT it includes Payment History,
Current Debt, Length of Credit History, Types of
Credit Accounts and Attempts at New Credit
CREDIT TEST REVIEW
How FICO Score is calculated
CREDIT TEST REVIEW
Why is a good credit score important?
 Determines whether or not your improved
 High score means lower interest rates
 Low scores mean higher rates and fees
 Insurance rates are affected by credit scores too!
How scores affect loan amounts example
CREDIT TEST REVIEW
What can you do to improve your credit score?
 Make payments on time!
 Reduce overall debt
 Review your credit report for errors
 Limit your applications/inquiries
CREDIT TEST REVIEW
When there is some form of error in billing to your credit
account.
BILLING ERROR
Some examples of billing errors:
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A charge for something you did not buy
An amount on your bill that is different from the actual
amount you paid
Arithmetic errors
“Double” billing
Payments not credited to your account
CREDIT TEST REVIEW
Using someone’s name, Social Security Number,
credit card number, or personal information, without
consent, for your own purposes.
IDENTITY THEFT
 Signs of Identity Theft include:
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You see withdrawals from your bank account that you can’t
explain.
You don’t get your bills or other mail.
Debt collectors call you about debts that aren’t yours.
You find unfamiliar accounts or charges on your credit report.
Medical providers bill you for services you didn’t use.
CREDIT TEST REVIEW
What are a few steps you can take to try to
prevent identify theft?
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Keep financial documents locked away
Ask “Why” when probed for personal information
Shred personal documents when no longer needed
Watch your mail!
Be clever with passwords
Get good encryption and antivirus software
REVIEW YOUR CREDIT INFORMATION REGULARLY!
CREDIT TEST REVIEW
A ________________ begins with an unpaid
bill….
DEBT COLLECTION
The companies who purchase this debt is called a
DEBT COLLECTION AGENCY
CREDIT TEST REVIEW
Debt collection agencies must adhere to protocols
established by the:
FAIR DEBT COLLECTION PRACTICES ACT
List two protections provided by the Fair Debt Collection
Practices Act:
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Can’t call before 8AM or after 9PM
Can’t Curse or insult you
Can’t demand that you pay more than you owe
Can’t claim papers they send you are legal forms if they
are not
Make up consequences for not paying your debt
Can’t call you at work if your employer does not allow it
CREDIT TEST REVIEW
TRUE or FALSE: All financial counseling
programs are non-profit.
FALSE. Beware! Not all financial counselors are built
the same! Many companies in this industry exist
purely for profit.
The legal process in which some or all of the
assets of a debtor are distributed among the
creditors because the debtor is unable to pay
their debt.
BANKRUPTCY
CREDIT REVIEW TEST
Which type of bankruptcy has the following conditions:
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Many, but not all, of your debts are forgiven
Majority of debtors assets are sold to pay off creditors
The release from debt does not affect alimony, child support, fines
stemming from driving while intoxicated among other things.
CHAPTER SEVEN
Which type of bankruptcy has the following conditions:
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Debtor presents a plan to the court to eliminate their debts over a
specific period of time.
Debtor normally keeps all, or most, of their property
During the plan (not to exceed 5 years), debtor makes regular
payments to a Chapter 13 trustee who then distributes the money to
the creditors.
CHAPTER 13