Unit One Study Guide in Word formatDocument Transcript
Dakota State University
Credit and Collection
Unit One: Introduction to Credit; Consumer Credit I
Chapter 1: All
Chapter 2: All
Chapter 3: All
Chapter 4: All
Chapter 5: All but concentrate on pp. 80-86, 99-102
*indicates an objective that will definitely be on the exam
Chapter 1: Credit in the Economy
1. State what the world runs on.
* 2. Give several definitions of credit.
3. Describe cash and credit transactions.
4. Explain what are meant by the following terms:
* 5. Explain what is meant by the following components of the credit
a) default risk
c) opportunity cost
e) operating expense
f) financing expense
g) legal aspects
i) finance charges
6. Explain what is meant by the following classifications of credit
and give examples:
a) consumer credit
b) retail credit
c) revolving credit
d) retail installment credit
e) service credit
f) cash credit
g) installment loans
h) single-payment loans
i) general purpose credit cards
j) real estate credit
k) business credit
l) wholesale credit
m) merchandise credit
n) financial capital for operations
o) public credit
* 7. Explain the difference between retail and wholesale.
* 8. State four benefits to consumers of using credit.
* 9. State three benefits to businesses of using credit.
10. Explain how credit stimulates the economy.
11. Explain what is meant by government fiscal policy and who
12. Explain what is meant by government monetary policy and who
13. Describe the dangers to consumers of using too much credit.
14. Explain the danger to businesses of extending too much credit to
15. Explain the danger to businesses of using too much credit for
financing their own needs.
Chapter 2: Role of the Credit Manager
16. State three questions a firm should ask when making the business
decision to offer credit to customers.
*17. State some reasons to offer credit to customers, including the
18. Give some examples of external credit providers.
19. State some of the factors to consider when deciding on an
internal credit department.
*20. State the common challenge of all credit managers, regardless of
their exact title.
21. State some of the specific goals of the credit manager.
*22. Describe the following credit management functions:
a) promotion of the credit program
b) initial screening of applications
c) credit investigation
d) credit decision
e) control of the account receivable
23. State some common activities of professional associations for
24. Give the name of one professional association for credit
25. State some important qualifications for credit managers.
Chapter 3: Retail and Service Credit
26. Explain what retail credit is.
27. State some benefits of providing retail credit to customers,
especially the primary one.
28. State some problems of providing retail credit to customers.
29. Explain what a 30-day charge account is.
*30. State some common features of 30-day charge accounts.
31. State some benefits and pitfalls of providing 30-day charge
accounts to customers.
32. State how common 30-day charge accounts are these days.
*33. Explain what retail installment credit is.
34. Describe the type of goods usually sold via installment credit.
35. Describe the down payment usually required with installment
36. Explain what is meant by the terms of an installment agreement
and give some examples.
37. State several considerations that should be made when determining
the terms of an installment agreement.
38. Explain what a finance charge is in an installment credit plan.
39. State some requirements/characteristics of the finance charge in
installment credit plans.
40. Describe repossession of collateral upon default of the buyer.
41. Explain what a rebate of interest is when an installment plan is
paid off early.
42. Explain what the Rule of 78 is.
*43. Calculate the payoff amount for a loan using the Rule of 78.
44. Explain what an acceleration clause is in an installment credit
45. Explain how repossession works when invoking the acceleration
46. Explain why high quality credit investigation is more valuable
than repossession of collateral.
47. State some benefits and pitfalls of extending installment credit.
*48. Explain what retail revolving credit is.
49. State several important features of retail revolving credit.
50. Explain how the following three methods of computing finance
a) previous balance method
b) average daily balance method
c) adjusted balance method
51. State some benefits and pitfalls of the use of retail revolving
credit for customers.
52. State some benefits and pitfalls of the use of retail revolving
credit for stores.
53. Describe a few other variations of extending credit.
54. Describe service credit including what it is, who offers it, and
some problems involved with it.
Chapter 4: Financing Retail and Service Credit Transactions
*55. Distinguish between charge cards, credit cards, and debit cards,
including how each one functions.
56. State some advantages to the consumer of using credit cards.
57. Explain what is meant by proprietary store cards and give an
58. Explain what is meant by a general purpose credit card and give
59. State the general features of a general purpose credit card.
60. Explain how merchants use general purpose credit cards from
consumers and the cost involved to the merchants.
61. Explain how banks are connected to VISA and MasterCard.
*62. Explain what is meant by the following and give examples when
a) nonbank credit card
b) corporate brand-name cards
c) credit card banks
d) affinity cards
e) prestige cards
f) secured-card program
g) smart cards
63. Give some examples of credit card fraud.
64. Explain what is meant by “carrying the paper in-house” applied to
financing retail installment transactions.
65. Describe the direct approach in commercial bank financing of
retail installment transactions.
*66. Describe the indirect approach in commercial bank financing of
retail installment transactions, including:
a) how it operates through dealers
b) possible problems for the bank
c) why banks like the approach even with the problems
d) what is the most profitable dealer relationship for a bank
e) some of the policies banks must have in regard to dealers
67. What is meant by the following financing plans available to
a) full recourse
68. Explain what is meant by the dealer reserve.
69. Explain how inventory financing operates.
70. Explain how sales finance companies differ from commercial banks
in financing retail installment transactions.
71. State how efficient loan approval is in bank-dealer relationships
or in online loan applications.
Chapter 5: Types of Consumer Credit-Cash Loan Credit
72. Explain the difference between retail credit and cash credit.
*73. Give some reasons why consumers will use cash credit instead of
74. State some institutions that provide consumer cash credit.
75. Describe the converging trend among financial institutions in
providing consumer financial services.
*76. Describe the following types of loans:
a) installment loans in general (closed-end credit plan)
b) conventional installment loan
c) home equity loan
d) student loans
e) open-end evolving loans
f) cash advances on credit cards
g) overdraft plans for checking accounts
h) home equity lines of credit
i) single-payment loans
77. Describe the following methods of determining interest charges on
a) discount loan
b) add-on method
78. Describe the following methods of determining interest charges on
a) simple interest method
b) add-on method
79. Describe briefly some relevant aspects of:
a) commercial banks
b) credit unions
c) consumer finance companies
d) savings and loan associations
80. State some factors that raise the cost of doing business for
consumer finance companies compared to banks, thrifts, and