What Are the Two General Rules of Measuring Credit Capacity? How Is It Calculated?

Concept 5-3

1. What are the two general rules of measuring credit capacity? How is it calculated?

The first general rule has to do with the debt payment to monthly income. You add all of your monthly expenses not including your mortgage and divide that by your monthly income. The percentage should not be more than 20 percent which is the max; experts prefer this to be at a 15 percent. The second general rule is debt to equity which is your liabilities by your net worth; this gives you your net worth.

2. Math the following key terms with the appropriate definition.

a. Character

b. Capacity

c. Capital

d. Collateral

e. Conditions

D An asset pledged to obtain a loan

A The borrower's attitude toward credit obligations

B Financial ability to meet credit obligations

C The borrower's assets or net worth

E General economic conditions that affect your ability to repay a loan

3. What are the factors a lender cannot consider according to the law?

It states that race, nationality, age sex, marital statues and certain other factors may not be used to discriminate against you in any part of the credit dealing. Some other factors are if you're on public assistance or by geographic domain.

4. What is credit bureau?

An agency that collects information on how promptly people and businesses pay their bills

5. Write the steps you should take if you are denied credit.

Step 1 Receive written notification that credit has been denied and the reasons for denial.

Step 2 Check your credit file at the credit bureau

Step 3 You believe the reasons for denial are valid (stay on this step if true)

Step 3a ask the credit is you can provide additional information

Step 3b apply to another creditor whose standards are different

Step 3c take steps to improve your creditworthiness

Step 4 You are not sure if reasons are valid or invalid

Step 4a ask creditor to clarify the reasons for denial

Step 5 reasons for denial are invalid or discriminatory

Step