COPYRIGHT © 2008 by Nelson, a division of Thomson Canada Ltd
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Chapter 6 – Borrowing on Open Account
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Chapter 6 - Learning Goals
LG 1 - Describe the reasons for using consumer credit, and identify its benefits and problems.
LG 2 - Develop a plan to establish a strong credit history.
LG 3 - Distinguish among the different forms of open account credit.
LG 4 - Understand how to apply for, obtain, and manage open account credit.
LG 5 - Understand how to choose the right credit cards and recognize their advantages and disadvantages.
LG 6 - Understand how to avoid credit problems, how to protect yourself against credit card fraud, and understand the personal bankruptcy process.
Learning Goals
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Internet Links and On-Line Resources
• Financial Consumer Agency of Canada (FCAC) to learn about credit scores and how credit card rates are calculated.
• Charge Cards – a site where you can compare credit card features and rates.
• Money Sense’s Credit Card Calculator• SafeCanada Web site to safeguard your identity• Equifax Canada• Trans-Union Canada• Northern Credit Bureaus Inc.• Credit Counselling Canada
Web Links
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Key Chapter Terms
Debt safety ratio Open account credit Credit limit Credit statement Bank credit card Line of credit Cash advance Balance transfer Rebate (co-branded) credi
t card Grace period Retail charge card Prestige cards Affinity cards Secured (collateralized cre
dit cards)
Student credit card Debit card Prepaid card Revolving line of credit Overdraft protection line Unsecured personal credit
line Home equity credit line Credit investigation Credit bureau Annual percentage rate
(APR) Average daily balance
method Daily balance method Consumer proposal Straight bankruptcy Personal bankruptcy Credit counsellor
Terms
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DefinitionsDebt Safety Ratio
The proportion of total monthly consumer credit obligations to monthly take-home pay.
Low 10% Manageable 15% Maximum 20%
Terms
pay home-keMonthly ta
paymentscredit consumer monthly Totalratiosafety Debt
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DefinitionsOpen account credit
A form of credit extended to a consumer in advance of any type of transaction; type of credit that accompanies charge accounts and credit cards.
Terms
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DefinitionsCredit Limit
A specified amount beyond which a customer may not borrow or purchase on credit.
Terms
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DefinitionsCredit Statement
A monthly statement that summarizes the transactions, interest charges, fees, and payments in a consumer credit account.
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DefinitionsBank Credit Card
A credit card issued by a bank or other financial institution that allows the holder to charge purchases at any establishment that accepts it; can also be used to obtain cash advances.
Terms
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DefinitionsLine of Credit
The maximum amount of credit a customer is allowed to have outstanding at any point in time.
Terms
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DefinitionsCash Advance
A loan that can be obtained by a bank credit cardholder at any participating bank or financial institution; it begins to accrue interest immediately and requires no formal application
Terms
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DefinitionsBalance Transfer
A program that enables cardholders to readily transfer credit balances from one card to another.
Terms
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DefinitionsRebate (co-branded) credit card
A bank credit card that combines features of a traditional bank credit card with an additional incentive, such as rebates and airline mileage.
Terms
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DefinitionsGrace Period
• A short period of time, usually 17 to 26 days, during which you can pay your credit card bill in full and not incur any interest charges.
Terms
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DefinitionsRetail Charge Card
• A type of credit card issued by retailers and oil companies that allows customers to charge goods and services up to a pre-established amount.
Terms
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Definitions30-day (regular) charge account
• A charge account that requires customers to pay the full amount billed within 10 to 20 days after the billing date.
Terms
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DefinitionsTravel and Entertainment (T&E) Card
• A credit card, such as American Express or Diner’s Club, accepted by travel and entertainment-related establishments, as well as a growing number of other businesses and stores.
Terms
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DefinitionsPrestige Card
• A type of bank or T&E card that offers higher credit limits, has stricter requirements for qualification, and generally offers more features than its “regular” counterpart.
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DefinitionsAffinity Card
• A standard bank credit card issued in conjunction with some charitable, political, or other sponsoring non-profit organization.
Terms
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DefinitionsSecured (collateralized) credit cards
• A type of credit card that’s secured with some form of collateral, such as a bank GIC.
Terms
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DefinitionsStudent credit card
• A credit card marketed specifically to university students.
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DefinitionsDedit card
• A card used to make transactions for cash rather than credit; it replaces the need for cash or cheques by initiating charges against one’s chequing account.
Terms
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DefinitionsPrepaid card
• A plastic card with a magnetic strip or microchip that stores the amount of money the purchaser has to spend and deducts the value of each purchase; it eliminates the need to use cash.
Terms
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DefinitionsRevolving line of credit
• A type of open account credit offered by banks and other financial institutions that can be accessed by writing cheques against specially designated credit line accounts.
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DefinitionsOverdraft protection line
• A line of credit linked to a chequing account that allows a depositor to overdraw the account up to a specified amount.
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DefinitionsUnsecured personal credit line
• A line of credit made available to an individual on an as-needed basis.
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DefinitionsHome equity credit line
• A line of credit issued against the existing equity in a home.
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DefinitionsCredit investigation
• An investigation that involves contacting credit references or corresponding with a credit bureau to verify information on a credit application.
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DefinitionsCredit bureau
• An organization that collects and stores credit information about individual borrowers.
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DefinitionsCredit scoring
• A method of evaluating an applicant’s creditworthiness by assigning values to such factors as income, existing debts, and credit references.
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DefinitionsAnnual percentage rate (APR)
• The actual or true rate of interest paid over the life of a loan.
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DefinitionsAverage daily balance method
• A method of computing finance charges by applying interest charges to the average daily balance of the account over the billing period.
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DefinitionsDaily balance method
• A method of computing finance charges by applying interest charges to the balance at the end of each day for the billing period.
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DefinitionsMinimum monthly payment
• In open account credit, a minimum specified percentage of the new account balance that must be paid in order to remain current.
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DefinitionsConsumer proposal
• An arrangement for scheduled debt repayment, often for a portion of the debts, over future years that is an alternative to straight bankruptcy.
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DefinitionsStraight bankruptcy
• A legal proceeding that results in “wiping the slate clean and starting anew”; most of the debtor’s obligations are eliminated in an attempt to put the debtor’s financial affairs in order.
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DefinitionsPersonal bankruptcy
• A form of legal recourse open to insolvent debtors in which they may petition a court for protection from creditors and arrange for the orderly liquidation and distribution of their assets.
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DefinitionsCredit counsellor
• A professional financial advisor who assists overextended consumers in repairing budgets for both spending and debt repayment.
Terms
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