Activity 1

Questions for review and Discussion (50 pts.)

1. How does the business cycle affect the volume of credit transactions? Explain.

Business cycle refers to the rise and fall of the economy during the expansion
and contraction of business activities. It can affect the volume of credit
transaction through some circumstances. For instance, when there is an
economic growth or expansion, the volume of credit transaction is higher.
When people have more income, people are confident to have credit. Thus,
this will lead to a high credit volume. When there is a slump in stock or
unemployment occurs, contraction may happen. This means that people have
no income to buy for goods or services. People are not confident to buy goods
or services through credit since they cannot pay it because they have no
source of income. There is a decrease in consumer product. This will lead to a
low volume of credit.

2. What is the importance of “Truth in Lending Act”?

Truth in Lending Act is an act established in which it helps to protect consumers

from unjust billing practices when people acquire credit or for installment basis. It
is significant because it serves as consumer’s protection ensuring their safety for
a just and equal billing. This is to ensure that the consumer is protected against
inaccurate and unfair credit billing or practices. This is also to keep consumers
informed of credit agreements or interest rates. This means that when a business
fails to comply with this policy, the business can be held accountable.

3. Explain the various sources of credit information.

There are different sources of credit information. First, the creditor can get
information through interview with the applicant. The character investigation
with series of interview is a good source of getting information because
through this, the creditor can determine if the applicant is lying or not, and he
can also evaluate if the applicant has the capacity to pay the debt. Second
through credit rating agencies, it shows the rate of a debtor’s ability in paying
back the debt which must be timely with the scheduled payment. Third is the
lender’s own record. It shows the record of the lender about financial
information such as the capacity and the capability of someone to pay the debt.
Last is the financial statement. Financial statements show the financial position
of an individual. The creditor needs accounting information to help them in their
lending decisions. Through financial statement the creditors can assess the
financial stability of an individual.

4. Explain the hazards of credit.

 Credit has also its risk if the debtor cannot pay on time or choose to default. It
is true that credits are useful, however there are also hazards. Some of the
hazards of credit when there is a higher interest charge, debtor cannot right
away pay for the debt. When interest is higher, the debtor most likely has the
difficulty to pay for the principal and chargers. Second, the temptation to
overspend is higher. Sometimes, people tend to purchase on credit overspend
causing in piling up of debt. They are too confident to buy since there is need to
lay out cash. Late fees can also be a hazard for the side of creditor. Late fees
can affect their income. Potential for credit damage may occur also. When
debtor cannot pay its liabilities, there is a possible of low rating of credit.

5. What are the different criteria considered in granting personal credit?

There are different criteria when it comes to granting a personal loan, this is to
ensure that the debtor can pay his debt. Some of the criteria needed are the
debtor's occupation, wealth, personal income or wages, income of the family and
etc. The creditor needs to know the occupation of the debtor to really know that
the debtor has the capacity to pay the debt. The length of employment can also
be a beneficial factor to know that the debtor is really capable to pay through his
wages. The creditor is after also with the debtor's wealth to know if the debtor's
assets are greater than its liabilities. Personal income is also one of the criteria
such as this will give you the data that the personal income can sustain the
installment payment. In case of emergency that the debtor cannot pay his
liabilities, the creditor has a backup plan which is from the family income of the
debtor.