ASSIGNMENT 2AReview Question 6 the below question and select o.docx

ASSIGNMENT 2A
Review Question 6 the below question and select one of the ill-
structured problems taken from the journal Policy Analysis
(now the Journal of Policy Analysis and Management Under the
title “Department of Unintended Consequences”. Analyze the
problem; then, provide an example on how classification
analysis, hierarchy analysis, and synectics might be used to
structure the problem you selected. Identify the problem you
selected in your discussion with one of the following key
phrases: (a) Egyptian agriculture, (b) ecologists and field mice,
(c) San Francisco’s North Beach parking.
The ill-structured problems that follow are taken from
illustrations published in the journal Policy Analysis (now the
Journal of Policy Analysis and Management) under the title
“Department of Unintended Consequences.”
For several thousand years, Egyptian agriculture depended on
the fertilizing sediment deposited by the flood of the Nile. No
longer, however. Due to expensive modern technology intended
to improve the age-old lot of the peasant, Egypt’s fields must be
artificially fertilized. John Gall, writing in the New York Times
Magazine (December 26, 1976), reports that the Nile sediment
is now deposited in the Aswan Dam’s Lake Nasser. Much of the
dam’s electrical output is used to supply enormous amounts of
electricity to new fertilizer plants made necessary by the
construction of the dam.
University of Illinois ecologists can explain how certain
harmful field mice spread from their native regions into areas
where they had never before been found. They are using the
new, limited-access, cross-country highways, which turn out to
be easy escape routes with few barriers. Older highways and
roads, as well as railroad rights-of-way, run into towns and
villages every few miles and effectively deter mice migration.
The Illinois group found that before interstate highways ran

through central Illinois, one type of mouse was limited to a
single county. But in six years of superhighways the four-inch-
long creatures have spread sixty miles south through the center
of the state. The ecologists are concerned lest the mice, a
species that loves to chew on trees, become a threat in central
and southern counties where apple orchards abound (Wall Street
Journal, December 1, 1977).
Edward J. Moody … argues persuasively that worship of Satan
has the effect of normalizing abnormal people. Thus, to “keep
secret” from ordinary people their satanic power and existence,
such persons are urged to behave as straight as possible. The
effect, of course, is more effective social relations—the goal for
which Satan’s name has been invoked in the first place! (P. E.
Hammond, “Review of Religious Movements in Contemporary
America,” Science, May 2, 1975, p. 442).
Residents of San Francisco’s North Beach areas must now pay
$10 for the privilege of parking in their own neighborhood. A
residential parking plan was recently implemented to prevent
commuters from using the area as a daytime parking lot. But
according to a story in the San Francisco Bay Guardian (March
14, 1978), the plan has in no way improved the residential
parking situation. Numbers of commuters from outlying districts
of the city have simply been changing their car registrations to
North Beach addresses. A North Beach resident—now $10
poorer—still spends a lot of time driving around the block.
Choose one of these problems and write a short essay on how
classification analysis, hierarchy analysis, and synectics might
be used to structure this problem.
ASSIGNMENT 2B
From the case study, Case 3.1, analyze the problem; then,
provide two key differences in data collection represented by
the process of group interviewing and content analysis. Take a
position on which data collection method is better. Provide at
least two reasons for your position

CASE 3.1
CASE 3.1 STRUCTURING PROBLEMS OF RISK IN MINING
AND TRANSPORTATION
Complex problems must be structured before they can be
solved. The process of structuring a policy problem is the
search for and specification of problem elements and how they
are the elements are
Policy stakeholders. Which stakeholders affect or are affected
by a problem?
Policy alternatives. What alternative courses of action may be
taken to solve the problem?
Policy actions. Which of these alternatives should be acted on
to solve the problem?
Policy outcomes. What are the probable outcomes of action and
are they part of the solution to the problem?
Policy values (utilities). Are some outcomes more valuable than
others in solving the problem?
Most policy problems are messy or ill-structured. For this
reason, one or more problem elements can be incorrectly
omitted from the definition of a problem. Even when problem
elements are correctly specified, relations among the elements
may be unknown or obscure. This makes it difficult or
impossible to determine the strength and significance, practical
as well as statistical, of causal relations. For example, many
causal processes that are believed to govern relations among
atmospheric pollution, global warming, and climate change are
obscure. The obscuriy of these processes stems not only from
the complexity of “nature” but also from the conflicting beliefs
of stakeholders who disagree, often intensely, about the
definition of problems and their potential solutions. For this
reason, the possible combinations and permutations of problem
elements—that is, stakeholders, alternatives, actions, outcomes,
values—appear to be unmanageably huge.
Under these conditions, standard methods of decision theory
(e.g., risk-benefit analysis), applied economics (e.g., benefit-

cost analysis), and political science (e.g., policy implementation
analysis) are oflimited value until the problem has been
satisfactorily defined. This is so because an adequate definition
of the problem must be constructed before the problem can be
solved with these and other standard methods. Standard methods
are useful in solving relatively well-structured (deterministic)
problems involving certainty, for example, problems
represented as fixed quantities in a spreadsheet. Standard
methods are also useful in solving moderately structured
(probabilistic) problems involving uncertainty, for example,
problems represented as policy outcomes with different
probabilities. However, ill-structured problems are of a
different order. Estimates of uncertainty, or risk, cannot be
made because we do not even know the outcomes to which we
might attach probabilities. Here, the analyst is much like an
architect who has been commissioned to design a custom
building for which there is no standard plan.79 The adoption of
a standard plan, if such existed, would almost certainly result in
a type III error: solving the wrong problem.
Public policies are deliberate attempts to change complex
systems. The process of making and implementing policies
occurs in social systems in which many contingencies lie
beyond the control of policy makers. It is these unmanageable
contingencies that are usually responsible for the success and
failure of policies in achieving their objectives. The
contingencies are rival hypotheses that can challenge claims
that a policy (the presumed cause) produced one or more policy
outcomes (the presumed effects). In such cases, it is usually
desirable to test, and when possible eliminate, these rival
hypotheses through a process of eliminative induction.
Eliminative induction takes this general form: “Repeated
observations of policy xand outcome y confirm that x is
causally relevant to the occurrence of y. However, additiona
observations of x, z, and y confirm that unmanageable
contingency z and not policy x is responsible for the occurrence
of y.” By contrast, enumerative induction takes this general

form: “Repeated observations confirm that the policy x is
causally relevant to the occurrence of policy outcome y.”
Eliminative induction permits a critical examination of
contingencies that are beyond the control of policy makers.
Because the number of these contingencies is potentially
unlimited, the process of identifying and testing rival
explanations is never complete. Yet, precisely for this reason, it
seems impossible to identify and test an unmanageably huge
number of potential rival hypotheses. How is this to be done?
One answer is creativity and imagination. But creativity and
imagination are impossible to teach, because there are no rules
governing the replication of creative or imaginative solutions.
Another answer is an appeal to well-established theories.
However, the bulk of theories in the social sciences are disputed
and controversial. “Well-established” theories are typically
“well-defended” theories, and rival hypotheses are rarely
considered seriously, let alone tested.
A more appropriate alternative is the use of boundary analysis
and estimation to structure problems involving a large number
of rival hypotheses. Boundary analysis and estimation look for
rival hypotheses in the naturally occurring policy quarrels that
take place among stakeholders. In addition to the policy analyst,
these stakeholders include scientists, policy makers, and
organized citizen groups. The aim of boundary estimation is to
obtain a relatively complete set of rival hypotheses in a given
policy context. Although boundary estimation strives to be
comprehensive, it does not attempt the hopeless task of
identifying and testing all plausible rival hypotheses. Although
the range of rival hypotheses is never complete, it is possible to
estimate the probable limit of this range.
Assessing the Impact of National Maximum Speed Limit
A boundary analysis was conducted with documents prepared by
thirty-eight state officials responsible for reporting on the
effects of the original 55 mph and later 65 mph speed limits in
their states. As expected, there were sharp disagreements among
many of the thirty-eight stakeholders. For example, some states

were tenaciously committed to the hypothesis that speed limits
are causally related to fatalities (e.g., Pennsylvania and New
Jersey). Others were just as firmly opposed (e.g., Illinois,
Washington, Idaho). Of direct importance to boundary
estimation is that 718 plausible rival hypotheses were used by
thirty-eight stakeholders to affirm or dispute the effectiveness
of the 55 mph speed limit in saving lives. Of this total, 109
hypotheses were unique, in that they did not duplicate
hypotheses advanced by any other stakeholder.
Here, it is important to note that from the standpoint of
communications theory and language, the information content of
a hypothesis is inversely related to its relative frequency or
probability of occurrence. Hypotheses that are mentioned more
frequently—those on which there is greater consensus—have
less probative value than rarely mentioned hypotheses, because
highly probable or predictable hypotheses do not challenge
accepted knowledge claims.
The rival hypotheses were analyzed according to the cumulative
frequency of unique (nonduplicate) causal hypotheses. As
Figure C3.1 shows, the cumulative frequency curve of unique
rival hypotheses flattens out after the twenty-second
stakeholder. Although the total number of rival hypotheses
continues to increase without apparent limit, the boundary of
unique rival hypotheses is reached within a small and affordable
number of observations. This indicates that a satisfactory
definition of the problem has probably been achieved. Indeed,
of the 109 unique rival hypotheses, several variables related to
the state of the economy—unemployment, the international
price of oil, industrial production—explain the rise and fall of
traffic fatalities better than average highway speeds and the 55
mph speed limit.
FIGURE C3.1
Pareto chart—cumulative frequency of rival causes of traffic
fatalities
Evaluating Research on Risk in Mine Safety and Health

In 1997, a branch of the U.S. Office of Mine Safety and Health
Research began a process of strategic planning. The aim of the
process was to reach consensus, if possible, on the prioritization
of research projects that address different aspects of risk
associated with the safety and health of miners.
Priority setting in this and other research organizations
typically seeks to build consensus under conditions in which
researchers, research managers, and external stakeholders use
conflicting criteria to evaluate the relative merits of their own
and other research projects. Even when reliable and valid data
are available—for example, quantitative data from large-sample
studies of the probabilities of different kinds of mine injuries
and deaths—it is often unclear whether “objective” measures of
risk, by themselves, provide a sufficient basis for prioritizing
research. The difficulty is that extra-scientific as well as
scientific factors affect judgments about the relative merits of
research on risk. For example, the probabilities of the
occurrence of “black lung” disease and other high-risk
conditions have been intensively investigated. Despite the
importance of the black lung problem, additional research is not
a priority. Accordingly, data on high expected severity
(probability ¥ severity) do not alone provide a sufficient basis
for prioritizing research problems. Because judgments about
research priorities are based on multiple, hidden, and frequently
conflicting criteria, it is important to uncover and evaluate these
criteria as part of the process of problem structuring. This is a
classic ill-structured problem for which the fatal error is
defining the wrong problem.
The problem-structuring process had three major objectives.
The first was to uncover hidden sources of agreement and
disagreement, recognizing that disagreement is an opportunity
for identifying alternative approaches to priority setting.
Second, the process was designed to generate from stakeholders
the criteria they use to evaluate research on risks affecting mine
safety and health. Third, the process employed graphs, matrices,
and other visual displays in order to externalize the criteria

underlying individual judgments. The priority-setting process
enabled each team member to understand and debate the varied
reasons underlying the priorities used to evaluate research on
risk.
FIGURE C3.2Pareto chart—cumulative frequency of criteria for
evaluating research on risk
Stakeholders were prompted to state the criteria they use to
distinguish among twenty-five accident and health problems.
Each stakeholder was presented with a form listing pre-
randomized sets of three problems. One stakeholder was chosen
at random to present criteria to the group. The first presented 14
criteria for evaluating research on risk, which included two
criteria —severity and catastrophic potential of accidents and
diseases—which were based on large-sample relative frequency
(probability) data. The second randomly chosen team member
presented 17 additional (new) criteria. The third team member
added 11, the fourth 12, the fifth 6, and so on, until no
additiona criteria could be offered that were not mentioned
before. In all, 84 criteria were generated, none after the
eleventh presenter. The approximate boundary of the problem
was displayed with a Pareto chart to show the cumulative
frequency of constructs (Figure C3.2).
The process of interactive group priority setting not only
addressed the “objective” side of risk research but also captured
“subjective” dimensions that go by such labels as “perceived
risk,” “acceptable risk,”“researchable risk,” and “actionable
risk.” The problem was successfully bounded by means of an
open problem-structuring process of generating and discussing
criteria that were otherwise tacit, concealed, or implicit. The
method of boundary analysis and estimation provides a “stop
rule” that avoids the infinite search for problems. ■
INSTRUCTOR: Dr. Zhenhu Jin, Professor of Finance

OFFICE:
OFFICE PHONE:
HOME PHONE:
E-MAIL: [email protected]
OFFICE HOURS:
COURSE DESCRIPTION:
FIN 390
This course provides an overview of personal and family
financial management with an emphasis on budgets, tax
management, credit management, investment selection,
insurance selection, retirement planning and estate planning.
Business majors may take this course only as a free elective.
COURSE OBJECTIVES:
This course offers an overview of personal and family financial
management with an emphasis on budgets, tax management,
investment and insurance selection, long-term financial and
estate planning. It will enable the students to sort through the
maze and make sound personal finance decisions.
The major objectives of this course are:
a. to gain an understanding of the basic concepts of personal
and family financial management;
b. to enhance the awareness of the various issues in long-term
financial and estate planning;
c. to learn how to make sound personal finance decisions in an
environment with increasing savings, credit, insurance, and
investment options.

CREDIT HOURS: 3
REQUIRED MATERIALS:
TEXT - Personal Finance - 10th Edition, by Kapoor, Dlabay,
and Hughes, McGraw-Hill Irwin
FINANCIAL CALCULATOR - you will need a financial
calculator for this course. I strongly encourage you to use Texas
Instruments BA II PLUS as I am very familiar with it and will
be able to help you learn how to use it.
ATTENDANCE AND PARTICIPATION:
Class participation is extremely important for this online
course. You are required to respond to all the discussion
questions posted by the instructor each week. In addition, you
are expected to comment on other students postings and respond
to the instructor's follow up questions. You must respond to the
discussion questions during the week they are posted. Each
student must post on at least 3 days during the week. For the
purpose of this course, each week starts on Monday and ends on
Sunday.
ELECTRONIC MAIL:
E-mail is used to enhance communication between the students
and me. You are encouraged to send E-mail to me to ask
questions related to the course work. From time to time,
students may receive emails from me about current events,
announcements, etc. Please check your E-mail on a regular
basis.
HOMEWORK ASSIGNMENTS:

Suggested homework assignments will be given for each chapter
though they will not be collected or graded. The assignments
are intended to help you to understand the materials covered in
each chapter. The key to the assigned problems will be
provided. Students are urged to do all the assignments either
individually or in groups. If you have any question, please
contact me.
GRADING:
Your course grade will be determined on the basis of the
following:
a. Quizzes: There will be quizzes after each chapter - 80%
b. Class participation and discussion - 20%
HONOR CODE:
All work in this course will be under the university's honor code
system.
TENTATIVE COURSE PLAN (Materials to be covered and the
suggested homework assignments)
Week 1
Chapter 1 - Personal Financial Basics
Chapter 2 - Financial Aspects of Career Planning
Chapter 3 - Money Management Strategy: Financial Statements
and Budgeting
Week 2

Chapter 4 Planning Your Tax Strategy
Chapter 5 - Financial Services: Savings Plans and Payment
Accounts
Week 3
Chapter 6 - Introduction to Consumer Credit
Chapter 7 - Choosing a Source of Credit: The Costs of Credit
Alternatives
Week 4
Chapter 8 - Consumer Purchasing Strategies and Legal
Protection
Chapter 10 - Property and Motor Vehicle Insurance
Week 5
Chapter 14 - Investing in Stocks
Chapter 15 - Investing in Bonds
Week 6
Chapter 16 - Investing in Mutual Funds
CHAPTER OVERVIEW
This chapter defines consumer credit and analyzes its
advantages and disadvantages. The importance of consumer
credit in our economy is explained and uses and misuses of
credit are discussed. Financial and personal opportunity costs of
using credit are emphasized. Next, two types of consumer

credit—closed-end credit and open-end credit—are
differentiated. Then, general rules of measuring credit capacity
such as debt payments-to-income ratio and debt-to-equity ratio
are explained. This is followed by coverage of building and
maintaining a credit rating. Next, the information that creditors
look for in granting or refusing credit is identified, and the
Equal Credit Opportunity Act is explained. Then, the steps in
avoiding and correcting credit mistakes are outlined, and the
provisions of the Fair Credit Billing Act are described. Finally,
strategies for complaining about consumer credit are introduced
and the major consumer credit laws are summarized.
LEARNING OBJECTIVES
CHAPTER SUMMARY
After studying this chapter, students will be able to:
My Life
Obj. 1
Define consumer credit and analyze its advantages and
disadvantages.
Consumer credit is the use of credit by individuals and families
for personal needs. Among the advantages of using credit are
purchasing goods when they are needed and paying for them
gradually, meeting financial emergencies, achieving
convenience in shopping, and establishing a credit rating. But
credit costs money, encourages overspending, and ties up future
income.
My Life
Obj. 2
Differentiate among various kinds of credit.
Closed-end and open-end credit are two types of consumer
credit. With closed-end credit, the borrower pays back a
onetime loan in a specified period of time and with a specified
number of payments. With open-end credit, the borrower is
permitted to take loans on a continuous basis and is billed for
partial payments periodically.
My Life
Obj. 3

Assess your credit capacity and build your credit rating.
Two general rules of thumb for measuring credit capacity are
the debt payments-to-income ratio and the debt-to-equity ratio.
In reviewing your credit-worthiness, a creditor seeks
information from one of the three national credit bureaus or a
regional credit bureau.
My Life
Obj. 4
Describe the information creditors look for when you apply for
credit.
Creditors determine credit-worthiness on the basis of the five
C’s: character, capacity, capital, collateral, and conditions.
My Life
Obj. 5
Identify the steps you can take to avoid and correct credit
mistakes.
If a billing error occurs on your account, notify the creditor in
writing within 60 days. If the dispute is not settled in your
favor, you can place your version of it in your credit file. You
may also withhold payment on any defective goods or services
you have purchased with a credit card as long as you have
attempted to resolve the problem with the merchant.
My Life
Obj. 6
Describe the laws that protect you if you complain about
consumer credit.
If you have a complaint about credit, first try to deal directly
with the creditor. If that fails, you can turn to the appropriate
consumer credit law. These laws include the Truth in Lending
Act, the Consumer Leasing Act, the Equal Credit Opportunity
Act, the Fair Credit Billing Act, and the Fair Credit Reporting
Act.

Chapter 07
Choosing a Source of Credit:
The Cost of Credit Alternatives
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc.
All rights reserved.
7-*
Chapter 7
Learning Objectives
Analyze the major sources of consumer credit
Determine the cost of credit by calculating interest using
various interest formulas
Develop a plan to manage your debts
Evaluate various private and governmental sources that assist
consumers with debt problems
Assess the choices in declaring personal bankruptcy
7-*
Sources of Consumer Credit
Objective 1: Analyze the major sources of consumer credit

WHAT KIND OF LOAN SHOULD YOU SEEK?
Inexpensive loansParents or family membersLoans based on
assets- using CD as collateralLoans for finance education (from
the U.S. Department of Education)
7-*
Sources of Consumer Credit (continued)
WHAT KIND OF LOAN SHOULD YOU SEEK?
Medium-priced loansCommercial banks, savings and loan
associations, and credit unions
Expensive loansFinance and check cashing companiesRetailers
such as car or appliance dealersBank credit cards and cash
advances
7-*
The Cost of Credit
Objective 2: Determine the cost of credit by calculating interest
using various interest formulas
Truth in Lending Law is the federal law that requires creditors
to disclose the annual percentage rate (APR) and the finance
charge as a dollar amount.
Finance charge is the total dollar amount you pay to use credit.
It includes interest costs, service charges, credit-related
insurance premiums, or appraisal fees
7-*

The Cost of Credit (continued)
The annual percentage rate (APR) is the percentage cost of
credit on a yearly basis
APR: True rate of interest so you can compare rates with other
sources of credit. It is important to shop for credit.
7-*
TACKLING THE TRADE-OFFS
Term versus interest costs. Longer loans-lower payments, but
more total interest
Lender risk versus interest rate. Some ways to reduce the
lender’s risk and the interest rate:Accept a variable interest
rateProvide collateral to secure the loanMake a large down
payment up frontHave a shorter loan term
7-*
CALCULATING THE COST OF CREDIT
Simple interestComputed on principal only and without
compounding. The dollar cost of borrowingI = P x r x T
7-*

CALCULATING THE COST OF CREDIT (continued)
Simple interest on the declining balanceInterest is paid only on
the amount of original principal not yet repaid
7-*
CALCULATING THE COST OF CREDIT (continued)
Add-on interestInterest is calculated on the full amount of the
original principal, added to the principal, and the total of both
is divided by the number of payments to be made
7-*
COST OF OPEN-END CREDIT
Adjusted balance methodFinance charges are calculated after
payments made in the billing period have been subtracted
7-*
COST OF OPEN-END CREDIT (continued)
Average daily balance methodCreditors
1) add your balances for each day in the billing period
2) divide this total by the number of days in the billing period
3) multiply this average by the monthly interest rate.
New purchases may be excluded from the average daily balance
calculation, but generally are included if you carry over a

balance.
7-*
Two-cycle average daily balance methodMay include or exclude
new purchasesCreditors use average daily balance for two
consecutive billing cyclesThe Credit CARD act of 2009 bans
this method.
7-*
Previous balance methodMethod of computing finance charges
that gives no credit for payments made during the billing period
For example...APR 18%; Monthly rate 11/2%Previous balance
$400; Payments $300Finance charge $6.00 (11/2% x $400)
7-*
Inflation: Borrowers and Lenders are concerned about the
purchasing power of dollars, rather than the actual credit used.

Taxes: Interest paid on consumer credit is not tax deductible.
7-*
Minimum Payment: Avoid the minimum monthly payment trap.
Early repayment: The Rule of 78s-favors lenders.
Credit insurance: Loan paid off if insured dies or becomes
disabled--Expensive.
7-*
The Cost of Credit (continued)Credit Card Accountability,
Responsibility, and Disclosure Act of 2009 (The Credit Card
Act)Limits increases in the APR in the first yearRestricts
issuers from charging higher interest rates on existing
balancesTeaser rates must be for at least 6 monthsIssuers must
mail statements at least 21 days before payment is
dueDisclosure statement must be clear and timelyCard issuers
must post card agreements on the internet
7-*
The Cost of Credit (continued)Credit Card Accountability,
Responsibility, and Disclosure Act of 2009 (The Credit Card
Act) (continued)
Requires statements to report the due dates, potential late fees,

and total costs of making only the minimum paymentsSets a
consistent due date for card payments each monthRestricts the
penalties for over the limit feesProhibits card issuers from
issuing card to consumers under 21 with out a cosigner or
independent means to repay debt.
7-*
Managing Your Debts
Objective 3: Develop a plan to manage your debts
Notify creditors if you can’t make a payment.
7-*
Managing Your Debts (continued)
The Fair Debt Collection Practices Act regulates debt collection
agencies (continued)If a debt collector calls you, within five
days they must send you a written notice of amount owed, the
creditors name, and your right to dispute the debtYou can
dispute the debt or pay it
You may request verification of the debt within 30 days; (See
Exhibit 7-3). If not sent, you can insist that communication
about the debt cease
If verification sent, you may pay the debt or give notice that
you will not pay
7-*

Reasons for Debt
Emotional problems such as the need for instant gratification
The use of money to punish or get even
The expectation of instant comfort among young couples who
overuse the installment plan
Keeping up with the Joneses
Overindulgence of children
Misunderstanding or lack of communication among family
members
Amount of finance charges makes it difficult to repay
7-*
Warning Signs of Debt Problems (Exhibit 7-5)
Paying only the minimum balance each month
Increasing the total balance due each month
Missing or alternating payments or paying late
Intentionally using overdraft protection or taking frequent cash
advances

Using savings to pay routine bills such as food
Getting second or third payment notices
Not talking to your partner about money or talking only about
money
Depending on overtime to meet routine expenses
7-*
Warning Signs of Debt Problems (continued)
Warning Signs of Debt Problems (Exhibit 7-5) (continued)
Using up your savings
Borrowing money to pay old debts
Not knowing how much you owe
Going over your credit limit on credit cards
Having little or no savings for the unexpected
Being denied credit due to a credit report
Getting a credit card revoked by the issuer
Putting off medical or dental visits because you can’t afford
them now
7-*

Consumer Credit Counseling Services
Objective 4: Evaluate various private and governmental sources
that assist consumers with debt problems
** If you can’t pay your bills, postpone further credit
purchases, talk with your creditors, or seek help from a non-
profit credit counseling service
7-*
Consumer Credit Counseling Services (continued)
Consumer Credit Counseling Service (CCCS) is a non-profit
which is supported by contributions from banks, merchants, etc.
Provides education about credit and budgetingProvides help
with spending planProvides debt counseling services for
those with serious financial problemsCan develop a debt
consolidation
plan and negotiate reduced interest rates
7-*
Consumer Credit Counseling Services (continued)
Universities, local county extension agents, credit unions,
military bases, and state and federal housing authorities provide
nonprofit counseling services.
You can check with your financial institution or consumer
protection office to see if it has a listing of reputable, low-cost

financial counseling services.
Avoid those service providers with large fees.
www.consumercredit.com is the website of the nonprofit
American Consumer Credit Counseling
Bankruptcy is a last resort
7-*
Declaring Personal Bankruptcy
Objective 5: Assess the choices in declaring personal
bankruptcy
Bankruptcy is a 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 his or her debts.
7-*
(continued)
Women account for 36 percent bankruptcies
A record 2.0 million people declared bankrupt in 2005
Bankruptcy was designed as a last resort but has become an

“acceptable” tool of credit management
Bankruptcy Abuse Prevention and Consumer Protection Act of
2005
7-*
(continued)
Chapter 7 bankruptcy (most debts are forgiven)
Submit a petition to the court that lists assets and liabilities,
and pay a filing fee
Many, but not all, debts are forgiven
Assets are sold to pay creditors
Can keep some assets
Fresh start
Most filed used to be this type
7-*
(continued)
After Chapter 7 You May No Longer Owe...
Retail store charges

Bank credit card charges
Unsecured loans
Unpaid hospital or physician bills
7-*
(continued)
After Chapter 7 Bankruptcy You Still May Owe...
Certain taxes and fines
Child support and alimony
Educational loans
Debts from willful or malicious acts
7-*
(continued)
Bankruptcy Abuse Prevention and Consumer Protection Act of
2005
What does it include?Executive Office for U.S. Trustees
develop a financial management training curriculum to educate
individual debtorsDebtors complete an approved instructional
course in personal financial managementClerk of each
bankruptcy district maintain a list of credit counseling agencies
and instructional courses on personal financial management
7-*

(continued)
Chapter 13 Bankruptcy…
A voluntary plan proposed to the bankruptcy court for those to
want to pay a portion of their debt over a period up to five years
Must have a regular income
Can’t have more than $250,000 unsecured debt or $750,000 in
secured debt
Payments are made to a trustee
Trustee distributes money to your creditors
Court may allow you to keep property & pay less than full
amount of debts
Costs to the debtor include court costs, attorney’s fees and
trustee’s fees and costs
7-*
Chapter 06
Introduction to Consumer Credit
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc.
All rights reserved.
6-*
Chapter 6

Learning Objectives
Define consumer credit and analyze its advantages and
disadvantages
Differentiate among various types of credit
Assess your credit capacity and build your credit rating
Describe the information creditors look for when you apply for
credit
Identify the steps you can take to avoid and correct credit
mistakes
Describe the laws that protect you if you have a complaint about
consumer credit
6-*
What is Consumer Credit?
Objective 1: Define consumer credit and analyze its advantages
and disadvantages
Credit is an arrangement to receive cash, goods or services now,
and pay for them in the future
Consumer credit is the use of credit for personal needs, except a
home mortgage, by individuals and families
6-*
(continued)Three ways consumers can finance purchases
Draw on their savings

Use present earnings
Borrow against expected future income
Trade-offs with each alternative
Consumer credit: A major economic force
6-*
(continued)
USE AND MISUSES OF CREDIT
Before you use credit for a major purchase, ask yourself some
questions
Do I have the cash for the down payment?
Do I want to use my savings for this purchase?
Does this purchase fit my budget?
Could I use the credit I’ll need in some better way?
6-*
(continued)
USE AND MISUSES OF CREDIT (continued)
Before you use credit for a major purchase, ask yourself some
questions
Can I postpone this purchase?
What are the opportunity costs of postponing this purchase?
What are the dollar and psychological costs of using credit for
this purchase?
6-*

What is Consumer Credit? (con’t)
ADVANTAGES OF CREDIT
Current use of goods and services
Permits purchase even when funds are low
A cushion for financial emergencies
Advance notice of sales
Easier to return merchandise
Convenient when shopping
6-*
(continued)
MORE ADVANTAGES OF CREDIT
One monthly payment
Safer than cash
Needed for hotel, car reservations and shopping online
Can take advantage of float time/grace period
May get rebates, airline miles, or other bonuses
Indicates financial stability
6-*

(continued)
DISADVANTAGES OF CREDIT
Temptation to overspend
Failure to repay loan may lead to loss of income
It does not increase total purchasing power
Credit costs money
6-*
Types of Credit
Objective 2: Differentiate among various types of credit
Closed-End CreditOne-time loans for a specific purpose that
you pay back in a specified period of time, and in payments of
equal amountsMortgage, automobile, and installment loans for
furniture, appliances and electronics
6-*
Types of Credit (continued)
Open-End CreditUse as needed until reaching line of credit max
Credit cards, departments store cards, bank credit cards,
incidental creditYou pay interest and finance charges if you do
not pay the bill in full when due
6-*

CREDIT CARDS
Eight out of ten U.S. households carry one or more credit cards
One-third are convenience users- pay balances in full each
month
Two-thirds are borrowers, carrying a balance over, paying
finance charges
Some use cards for cash advances – expensive
Co-branding - linking a credit card with a business offering
rebates on products and services
Smart cards have an imbedded computer chip
Debit cards: similar impact as writing a check
6-*
PROTECTING YOURSELF AGAINST DEBIT/CREDIT CARD
FRAUD
Sign new cards when they arrive
Treat cards like money - keep them secure

Shred anything with your account number on it
Don’t give your number over the phone unless you initiate the
call, and don’t put it on postcards
Get card & receipt after every transaction: compare receipts to
bills when they arrive, checking for errors
Notify the card issuer if you don’t get your billing statement, or
if your card is lost or stolen If stolen call 1-888-EXPERIAN
Check credit report regularly
6-*
When You Make Purchases OnlineUse a secure browser
Keep records of online transactions
Review monthly statements-can do so online
Read policies of the websites you visit concerning refunds, site
security, and privacy
Keep personal information private unless you know who is
gathering it and why
Shop at businesses you know and trust
Never give out your password to anyone online
Don’t download files sent by strangers
6-*
TRAVEL AND ENTERTAINMENT CARDS

These cards are not really credit cards
Monthly balance is due in full
American Express recently started issuing credit cards
6-*
STORED VALUE (OR GIFT) CARDS
Resemble a debit card.Used in lieu of paper gift
certificates.Used for business purposes (travel
expenses).Bankruptcy can make the cards worthless.
6-*
HOME EQUITY LOANS
Based on the difference between current market value of your
home and the amount owed on the mortgage
Borrow up to 85% of the value of the home
It is set up like a revolving line of credit
6-*
Measuring Your Credit Capacity
Objective 3: Assess your credit capacity and build your credit
rating
Before you take out a loan, ask yourself
Can you afford the loan?
What do you plan to give up in order to make the payment? Are
you prepared to make this trade-off?
6-*

*Not including house payment which is a long-term liability
GENERAL RULES OF CREDIT CAPACITY
Debt Payments-to-Income Ratio
Consumer credit payments should not
exceed a max of 20% of your net income
6-*
monthly payments*
net monthly income
(continued)
GENERAL RULES OF CREDIT CAPACITY
Debt To Equity Ratio
total liabilities
net worth*
=
Should be < 1
*Excluding home value
6-*

(continued)
CO-SIGNING A LOAN
The creditor will give you a notice that tells you…
You are being asked to guarantee the debt, so consider if you
can afford it if the borrower defaults.
If the borrow does not pay, you may have to pay up to the full
amount and also any late or collection fees.
If a payment is missed the creditor can collect the debt from
you without first trying to get it from the borrower.
6-*
(continued)
If you do co-sign, consider...
Can you afford to pay the loan? If not, your credit rating could
be damaged
Liability for this debt may prevent you from getting other credit
that you want
If you put up collateral, you could lose it if the loan goes into
default
Check your state’s law to learn about cosigner’s rights
Request that a copy of overdue payment notices be sent to you
6-*
(continued)

BUILDING AND MAINTAINING YOUR CREDIT RATING
Limit your borrowing to your capacity to repay
Live up to the terms of contracts
Check to see what is in your credit report
6-*
(continued)
CREDIT BUREAUS
Credit bureaus collect informationExperian, Trans Union and
EquifaxFTC gets about 12,000 complaints about credit bureaus
each year
WHO PROVIDES DATA TO CREDIT BUREAUS?
Bureaus get information from banks, finance companies, credit
card companies, merchants, other creditors
6-*
(continued)
Fair Credit Reporting Act
This act regulates the use of credit reports
Credit card companies must correct inaccurate or incomplete
information

Only authorized persons have access to your report
Adverse data can be reported for seven years; bankruptcy for
ten years
6-*
(continued)
What If You are Denied Credit?
Check your credit file at the credit bureau
If you believe reasons for denial are invalid: file suit and/or
notify federal enforcement agency
Ask the creditor to clarify reason for denial; if you believe the
denial is valid . . . Apply to another creditor with different
standardsTake steps to improve your creditworthinessYou have
the right to provide a 100 word explanation in your file
6-*
Applying for Credit
Objective 4: Describe the information creditors look for when
you apply for credit
What Creditors Look For: 5 Cs
Character - Do you pay bills on time?
Capacity - Can you repay the loan?
Capital - What are your assets
and net worth?

Collateral - What property do you have to pledge that the lender
can repossess if you default on the loan?
Conditions - What economic conditions could affect your ability
to repay the loan?
6-*
Applying for Credit
How to improve your credit score:
Get copies of your credit report-review for accuracy.
Pay your bills on time.
Understand how your credit score is determined.
Learn the legal steps to improve your credit report.
Beware of credit-repair scams.
6-*
Avoiding and Correcting Credit Mistakes
Objective 5: identify the steps you can take to avoid and correct
credit mistakes
Fair Credit Billing Act
Notify creditor of error in writing within 60 days
Include your explanation of the error and your account number
to the billing inquiries address
They must respond within 30 days
Credit card company has two billing periods but no longer than
90 days to correct your account or tell you why they think the
bill is correct
Your credit rating is not affected while item is in dispute
6-*

(continued)
You can withhold payment on damaged or shoddy goods or poor
services if you have paid for them with a credit card, if you
make a sincere attempt to resolve the problem with your
creditor.
6-*
(continued)
What if Your Identity is Stolen?
Contact the fraud department of each of the three major credit
bureaustell them to flag your file with a fraud alertinclude a
statement that creditors should call you for permission before
opening any new accounts in your name
Contact creditors to check for accounts that have been tampered
with or opened fraudulently
6-*
(continued)
What if Your Identity is Stolen? (continued)

File a police report, keep a copy
Check www.privacyrights.org or call 619-298-3396
File a complaint with the Federal Trade Commission
1-877-FTC-Help
6-*
Complaining About Consumer Credit
Objective 6: Describe the laws that protect you if you have a
complaint about consumer credit
First try to solve the problem directly with the creditor
If that does not work there are more formal complaint
procedures
There are a variety of consumer credit protection laws and
federal agencies who administer and assist with complaint
procedures
See the Exhibit 6-11
“Summary of Federal Consumer Credit Laws”
6-*
Complaining About Consumer Credit
(continued)
PROTECTION UNDER CONSUMER CREDIT LAWSTruth in
Lending and Consumer Leasing
Equal Credit Opportunity Act
Fair Credit Reporting Act
Consumer Credit Reporting Reform Act
Credit Card Accountability, Responsibility and Disclosure Act.
6-*

ASSIGNMENT 1
Conducting a Stakeholder Analysis. Choose one (1) policy issue
in the U.S. and generate a list of at least five (5) stakeholders
who affect or are affected by problems in the issue area. Next,
apply the procedures for a stakeholder analysis USING THE
BELOW STEPS BY STEP PROCESS.
STEP 1: Using Google or a reference book such as The
Encyclopedia of Associations, identify and list about ten
stakeholders who have taken a public position on a policy.
Make the initial list as heterogeneous as possible by sampling
opponents as well as supporters.
STEP 2: For each stakeholder, obtain a policy document (e.g., a
report, news article, e-mail, or telephone interview) that
describes the position of each stakeholder.
STEP 3: Beginning with the first statement of the first
stakeholder, list other stakeholders mentioned as opponents or
proponents of the policy.
STEP 4: For each remaining statement, list the new stakeholders
mentioned. Do not repeat.
STEP 5: Draw a graph that displays statements 1, 2,..n on the
horizontal axis. On the vertical axis, display the cumulative
frequency of new stakeholders mentioned in the statements. The
graph will gradually flatten out, with no new stakeholders
mentioned. If this does not occur before reaching the last
stakeholder on the initial list, repeat steps 2 to 4. Add to the
graph the new statements and the new stakeholders.
STEP 6: Add to the estimate stakeholders who should be
included because of their formal positions (organization charts
show such positions) or because they are involved in one or

more policy-making activities: agenda setting, policy
formulation, policy adoption, policy implementation, policy
evaluation, and policy adaptation, succession or termination.
Retain the full list for further analysis. You now have an
estimate of the “population” of key stakeholders who are
affected by and affect the policy, along with a description of
their positions on an issue. This is a good basis for structuring
the problem.
ASSIGNMENT 1B
From the e-Activity, provide at least two examples from the
article and from your own experience of ways that worldviews,
ideologies, and popular myths may have shaped the formulation
of a specific problem or issue. Provide the source(s) of the
paper or report you selected.
E-ACTIVITY
Go to one or more of the following Websites and review at least
two policy papers or reports published by a government agency
or a think tank that address a problem or an issue of interest:
Public Agenda, located at www.publicagenda.org; RAND
Corporation located at www.rand.org; and / or American
Enterprise Institute, located at www.aei.org. Be prepared to
discuss.

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