PART 1

1. Define consumer credit and explain its advantages and disadvantages.

Consumer credit refers to the debt that an individual incurs when he /she purchases a product or uses a service. However, consumer credit is based on the ability and also willingness of an individual to pay the debt when it is due. For example they include loans and purchases that a consumer makes using credit cards.

Consumer credits are convenience to use especially when purchasing products from the internet. Also, it relieves a person from carrying large amount of cash when purchasing. The disadvantage of consumer credit is that, it encourages debt since people will tend to spend more than they earn. The use of credit cards result to the accumulation of interest and some extra fees. When a person uses a credit line, he/she is always charged some interest.

2. What are the two general rules of measuring credit capacity?

First rule is the debt payments-to-income. This rule is computed by dividing a person’s monthly debt payments by his/her net monthly income. Second rule is debt-to-equity ratio. The rule is computed by dividing the total liability of a person by his/her net worth.

3. A friend comes to you for advice about improving his or her credit score. What advice would you give to this friend?  Make sure to include the five steps for improving your credit score.

It is very important for a person to improve his/her credit score. I will advice my friend on ways to improve his credit score based on the following steps. First, it would be important if he pays his bills on time. The payment should be monthly or on whichever duration they had agreed. The reliability of a person on paying his or her credit makes approximately a third of his/her credit score (Soll, Keeney, & Larrick, 2013). Second, he should get used to using a small ratio of the credit that is available. Therefore, the credit card balances should be low at all time. Similarly, he should ensure that his credit score does not go beyond 50 percent. Third, he should distance himself from cases of applying for more new credit lines in a short span of time. New credit entails new amount of credit inquiries and it will be shown on a person’s credit report. It is advisable to avoid applying for new credit. Lastly, he should not close the credit card account that he is not using. When a person closes his credit card account, he reduces the credit limit available.

4. What are two key concepts to keep in mind as you shop for credit?

The first concept is the finance charge and the second concept is the Annual Percentage Rate (APR). Therefore, before shopping for credit, an individual is supposed to compare between the APR and the finance charge. The Consumer Credit Protection Act requires the consumers to look keenly at the cost of borrowing so that they can compare the cost they will incur on credit before shopping.

5. Explain the Rule of 78s.

The rule is mainly used on short-term loans by applying pre-determined interest. In a financial practice, it is required that the interest rate on loan should be paid first, before the actual payment amounts are made.

6. Explain choices available in declaring bankruptcy.

The first choice is a straight bankruptcy (chapter 7). It entails a situation whereby a debtor sells his assets to pay the creditor and then he would be freed from his debts. The second choice is a wage earner plan (chapter 13 bankruptcy). Chapter 13 is useful particularly to regular income earners since they are well of and can arrange for the repayment of all or part of their debts usually for a certain period. The period is always a round three to five years. However, none of the choices is an easy way to repay your debts.

7. What are the two basic types of credit? Give examples of both.

Secured credit entails a situation whereby a person is given loan against the value of his/her asset. Failure to pay the loan then the lender has the legal power to sell the asset and get back the money. The lender always charge low rates. For example mortgage and pension loans. On the other hand, unsecured credit does not involve using an asset as a security for the loan. The creditor normally estimates the amount of money a person can pay over a given period. For this case the lenders normally charge high rates. For example credit cards.

8. What are the three most common types of closed-end credit?

The three common types include the following. The sales credit is type of loan that a person can use to get things like furniture and other appliances. Second, installment cash credit is a direct loan that an individual will use for personal reasons. Also, the money can be used for vacation purposes. The last type is single lump sum credit. The loan is supposed to be repaid in full amount by the borrower on a given day that had been specified.

9. What is revolving check credit?

It refers to the prearranged loans given to the consumer for a specified amount of which he/she will write a special check to the bank.

10. How can you protect yourself against debit/credit card fraud?

It is advisable to sign for banking alerts. Most financial institutions offer their customers such services. Therefore, when an irregular change occurs in your account, then a person can easily be informed through the alert. Also, a person should stay away from ATM machine that are in disrepair. Sometimes those ATMs might not work and they can be used to get the card information from the customers. Lastly, a person should always update his/her contact information with the bank. When the bank has your current phone number then they can call you in case they sense some suspicious charges,

11. What are a few things to consider before you cosign a loan?

Before you cosign a loan, you should ensure that you are able to pay the loan. In case you fail to pay, then there is a possibility of being sued or damaging your credit ratings.

A person should also ensure that his/her liability for the loans can help him/her to secure other loans. A person should make it possible even if the lender has not asked for debt repayment.

A person should clearly understand the consequences of securing a loan before making a pledge for the loan. It is always important when you pledge properties like land, automobiles and other assets.

A person should ensure he/she gets copies of relevant documents that include warranties, loan contract and lending disclosure statement. The copies might be helpful in case the borrower and lender get into a dispute. The borrower should give out the copies because it is difficult for the lender to issue them.

12. In what ways can you lower the risk to your lender in order to reduce your borrowing costs?

First, I will use my savings to repay my loans. It is advisable to use your savings to repay any outstanding balances you have. Second, a person can switch to another loan. For this case, a person can use another loan to pay off his/her loan hence reducing the overall cost of the loan. Lastly, a person can use extra payments to reduce his/her loan. The lender should allow you to make extra payments and that will reduce the overall cost.

13. Explain the concept of “float.”

It refers to the number of shares of a security that have been declared as outstanding and also available to the public to carry out trade.

14. Explain simple interest.

It refers to the amount a person borrows multiplied by the interest rate and by the loan duration. For example, simple interest= P ×I ×N

15. What can you do if you are unable to meet your credit obligations?

A person is advised to contact his/her creditors immediately. Similarly, it is important to investigate the situation thoroughly before a person signs a contract with debt Consolidation Company (Telyukova, 2013). Also, it would be useful if an individual contacts his/her local Consumer Credit Counseling Services for help. The last thing that a debtor can do is to declare himself bankrupt.

16. In open-end credit, what are the various systems creditors use to calculate the balance on which they assess finance charges?

The methods include the following. The average daily balance method, adjusted balance method and previous balance method.

17. What are the various methods used to calculate interest?

The method involves variations of the simple interest calculation method. However, if the loan is prepaid, the rule of 78s will yield the percentage of the total interest that the borrower will get.

PART II

1. Given her current situation, list some suggestions on how Shelby can reduce her credit card debt.

First, Shelby should take stock of her finances. She should know the actual amount of debt she has. Similarly, Shelby should take an action plan of writing down the debts and the interest rates charged on every card she has. Moreover, she is supposed to be honest with herself and declare financially where she stands. By doing that, she will end up hitting her target.

Second, Shelby should improve on her rates. For her to save large amount of money, she should negotiate for lower interest rates. It is advisable for her to call all her credit card companies and request them politely to reduce the interest rates.

Third, she can decide to track her cost. However, it entails writing down all the expenses and this will act as a foundation for her budget. It is important to study credit card bills and bank statement to get some knowledge on the expenses incurred.

Fourth, Shelby can create her budget. The budget should be realistic and some of the expenses should be removed. Therefore, it would be useful to her if she cut back the expenses. Changing the budget from monthly to weekly budget would be ideal since she will be able handle it better.

Fifth, she can start to track her progress. Keeping an eye on ones spending is crucial in determining the debt one has. Therefore, Shelby should revisit her progress after few months to see if the results are positive.

2. What is the best way for Shelby and Mark to become more aware of the effect of credit card debt on their current and long-term financial situation?

Both Shelby and Mark will be conversant with the effect of credit card debt when they apply for a mortgage to buy a condo and also when they take a loan for Shelby’s pet store. It would be difficult to get both mortgage and loan since the creditors would be keen with assessing their credit worthiness. Shelby and Mark are at their worst financial position and that is what the lenders will consider before giving out the loans. There is a high possibility that the request for mortgage and loans might be declined by the creditors. Similarly, if they will manage to get the mortgage and loan, they will be charged a high interest rate.

References

Soll, J. B., Keeney, R. L., & Larrick, R. P. (2013). Consumer misunderstanding of credit card use, payments, and debt: causes and solutions. Journal of Public Policy & Marketing, 32(1), 66-81.

Telyukova, I. A. (2013). Household need for liquidity and the credit card debt puzzle. The Review of Economic Studies, 80(3), 1148-1177.

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