Export your learner materials as an interactive game, a webpage, or FAQ style cheatsheet.
Unsaved Work Found!
It looks like you have unsaved work from a previous session. Would you like to restore it?
Total Categories: 7
Credit is fundamentally defined as the trust that enables one party to provide resources to another with the expectation of future reimbursement, thereby establishing a debt.
Answer: True
The fundamental definition of credit hinges upon the establishment of trust, which facilitates the provision of resources (financial assets, goods, or services) by one party (the creditor) to another (the debtor) under the explicit expectation of future reimbursement. This process inherently establishes a debt, formalizing reciprocity and legal enforceability.
The term 'credit' originated from the Latin word 'credere', meaning 'to sell'.
Answer: False
The assertion is false. The Latin root 'credere' signifies 'to trust, entrust, or believe,' not 'to sell.' The term 'credit' entered English via French and Italian, retaining its core meaning of trust or belief, which underpins the concept of deferred payment.
In a credit transaction, the debtor is the party that provides the resources and expects repayment.
Answer: False
This statement is incorrect. The debtor is the party that receives resources and incurs the obligation to repay. The creditor is the party that provides the resources with the expectation of future reimbursement.
The commercial meaning of 'credit' was a later development in English, appearing after its non-commercial meanings.
Answer: False
This assertion is false. The term 'credit' entered English in the 1520s, and its original commercial meaning, related to trust and belief in future repayment, was established early on. The term 'creditor' itself dates back to the mid-15th century.
The 'See also' section lists topics related to credit, such as subprime lending and financial literacy.
Answer: True
This statement is accurate. The 'See also' section of the article enumerates related subjects pertinent to the study of credit, including critical areas such as subprime lending, financial literacy, credit risk, and various forms of credit mechanisms.
The 'Authority control' section provides links to external databases for cataloging and managing information about the subject 'Credit'.
Answer: True
This statement is accurate. The 'Authority control' section serves as a metadata component, offering standardized links to external databases (e.g., GND, Library of Congress) utilized for cataloging and managing information pertaining to the subject of 'Credit,' thereby facilitating resource discovery and organization.
What is the fundamental definition of credit according to the provided text?
Answer: The trust that enables resource provision with the understanding of future reimbursement, creating debt.
The fundamental definition of credit, as presented, is the trust that permits one party to supply resources (financial assets, goods, or services) to another with the explicit expectation of future reimbursement, thereby establishing a debt. This trust is essential for formalizing reciprocity and legal enforceability in transactions.
Which of the following is NOT a type of resource that can be provided through credit?
Answer: Immediate, non-reimbursable gifts.
Resources provided through credit inherently involve an expectation of reimbursement. Therefore, immediate, non-reimbursable gifts do not constitute a resource that can be provided via credit, as they lack the fundamental element of deferred payment and debt creation.
In a credit transaction, who is the creditor?
Answer: The party providing resources and expecting repayment.
The creditor in a credit transaction is the entity or individual that supplies the resources (funds, goods, or services) and holds the expectation of future repayment from the debtor.
The word 'credit' entered English in the 1520s, originating from which language family?
Answer: Romance (via French and Italian)
The word 'credit' entered the English language in the 1520s, originating from the Romance language family, specifically through Middle French and Italian, ultimately deriving from the Latin verb 'credere'.
What was the original commercial meaning of 'credit' in English usage?
Answer: The concept of trust and belief in future repayment.
The original commercial meaning of 'credit' in English usage was fundamentally rooted in the concept of trust and belief in the future repayment of an obligation. This aligns with its etymological origins in Latin, signifying something entrusted or believed.
In the 19th century, agrarian communities commonly used general stores that offered credit, allowing farmers to pay after selling their crops.
Answer: True
During the 19th century, general stores in agrarian communities frequently offered store credit, enabling farmers to purchase goods year-round, with settlement typically occurring post-harvest after crop sales.
Credit cards became widely adopted in the 1900s primarily due to independent retailers seeking a universal payment method.
Answer: False
This statement is incorrect. The widespread adoption of credit cards in the 20th century was driven more by the formation of company chains utilizing them for internal payments and later by banks issuing cards like Bank Americard and American Express, rather than independent retailers seeking a universal method.
Early bank-issued credit cards like Bank Americard allowed consumers to accumulate debt with finance charges.
Answer: True
This statement is accurate. Early bank-issued credit cards, such as Bank Americard introduced in 1958, enabled consumers to accumulate debt through revolving credit arrangements, which typically included finance charges on outstanding balances.
How did general stores in 19th-century farming communities typically utilize credit?
Answer: They offered credit for farmers to purchase goods throughout the year, settled after harvest.
In 19th-century agrarian communities, general stores commonly extended store credit to farmers. This allowed farmers to acquire necessary goods and supplies throughout the year, with the understanding that these debts would be settled upon the sale of their crops following the harvest.
What development led to the increased prominence of credit cards in the 20th century?
Answer: The formation of company chains using credit cards for internal payments.
The increased prominence of credit cards in the 20th century was significantly influenced by the emergence of large company chains that adopted credit cards for internal payment systems. This paved the way for broader acceptance and the subsequent issuance of cards by financial institutions.
The traditional view accurately portrays banks solely as intermediaries connecting savers and borrowers.
Answer: False
This perspective is inaccurate. While banks do function as intermediaries between savers and borrowers, the traditional view fails to encompass their fundamental role in modern economies: the creation of credit and, consequently, money through the lending process.
Banks primarily create money by accepting deposits and holding them in reserve.
Answer: False
This statement is false. Banks primarily create money not by holding reserves, but through the process of issuing credit. When a bank extends a loan, it creates new money by recording a liability and an equivalent asset, effectively generating funds through lending rather than solely managing existing deposits.
When a bank issues credit, the created money is permanently removed from circulation.
Answer: False
This statement is incorrect. Money created by banks through issuing credit is not permanently removed from circulation; rather, it is effectively removed when the credit and corresponding debt are canceled upon full repayment. Until then, it exists within the economy.
In the UK economy as of December 2013, nearly all money was created as credit.
Answer: True
This statement is accurate. Data from December 2013 indicates that approximately 97% of the money within the UK economy originated from credit creation, underscoring the dominant role of banking and lending in the money supply.
The primary use of credit created by banks is for funding international trade.
Answer: False
This statement is false. While banks do facilitate international trade, the primary application of credit created by banks is predominantly for the purchase of real estate and property, significantly influencing inflation in these sectors and driving economic cycles.
How does the source describe the modern role of banks in the economy, contrasting it with the traditional view?
Answer: Banks are fundamentally involved in credit creation and money generation through lending.
The source contrasts the traditional view of banks as mere intermediaries with their modern role, emphasizing that banks are fundamentally engaged in credit creation and the generation of money through their lending activities.
When a bank issues credit, how does it create money according to the source?
Answer: By recording a liability and an equivalent asset representing the loan repayment stream.
According to the source, when a bank issues credit, it creates money by simultaneously recording a liability (the deposit created for the borrower) and an equivalent asset (the loan repayment stream). This accounting mechanism generates new money within the economy.
Secured credit requires collateral, whereas unsecured credit does not.
Answer: True
This statement is accurate. Secured credit is contingent upon the provision of collateral, such as property or assets, to mitigate the lender's risk. Conversely, unsecured credit, like many personal loans and credit cards, is extended without requiring specific collateral.
Trade credit involves a buyer delaying payment for goods purchased from a seller.
Answer: True
This statement is accurate. Trade credit is a common commercial practice wherein a seller extends credit to a buyer, allowing the buyer to defer payment for goods or services purchased, thereby facilitating transactions within the supply chain.
Consumer credit exclusively refers to the issuance of credit cards to individuals.
Answer: False
This statement is false. Consumer credit encompasses a broad range of financial arrangements for individuals, including not only credit cards but also store cards, personal loans, and often mortgages, representing any provision of money, goods, or services with deferred payment.
Residential mortgages are universally classified as a standard form of consumer credit by financial institutions.
Answer: False
This statement is not universally true. While residential mortgages represent personal borrowing, their substantial market volume leads many financial institutions and regulatory bodies, such as the U.S. Federal Reserve, to classify them separately from standard consumer credit.
Revolving credit allows a borrower to pay off a balance over time, but incurs no finance charges.
Answer: False
This statement is false. While revolving credit offers the flexibility to pay off a balance over time, it typically involves finance charges on the outstanding amount, making it a costly form of credit if not managed carefully.
Which of the following is an example of unsecured credit?
Answer: A consumer credit card.
A consumer credit card is a prime example of unsecured credit, as it is typically issued without requiring the borrower to pledge specific collateral. This contrasts with secured credit, which is backed by assets such as a house or car.
What is trade credit?
Answer: A system where buyers delay payment for goods purchased from a seller.
Trade credit is a commercial arrangement wherein a seller permits a buyer to defer payment for goods or services purchased. This practice is common in business-to-business transactions and is often managed by a company's credit department.
Which of the following is typically considered consumer credit?
Answer: A personal loan.
A personal loan is typically classified as consumer credit, representing a form of borrowing extended to an individual for personal use, distinct from business loans, corporate bonds, or government securities.
Why might residential mortgages be classified separately from consumer credit?
Answer: Their large market size leads some observers to classify them differently.
Residential mortgages may be classified separately from standard consumer credit due to their substantial market volume and economic significance. Regulatory bodies, such as the U.S. Federal Reserve, sometimes exclude them from consumer credit definitions to focus on other forms of personal borrowing.
Which of the following is listed as a type of credit in the article?
Answer: Public Credit
The article enumerates various forms of credit, including bank credit, commerce credit, consumer credit, investment credit, international credit, and public credit. Therefore, 'Public Credit' is listed as a type of credit.
Revolving credit is characterized by:
Answer: The ability to pay off a balance over time, potentially with finance charges.
Revolving credit is characterized by its flexible repayment structure, allowing borrowers to pay off outstanding balances over time. However, this flexibility typically entails incurring finance charges on the remaining balance.
The Equal Credit Opportunity Act of 1974 mandated that women could not be denied credit cards.
Answer: False
The statement is false. The Equal Credit Opportunity Act of 1974 prohibited discrimination based on sex, marital status, race, religion, national origin, or age in credit transactions. It did not mandate that women *could not* be denied credit cards, but rather that denial could not be based on discriminatory factors like sex or marital status, thereby addressing historical inequities.
Redlining was a practice that historically prevented people of color from obtaining credit for home purchases, especially in white neighborhoods.
Answer: True
This statement is accurate. Redlining was a discriminatory practice wherein financial institutions systematically denied credit and services, such as home loans, to individuals residing in specific geographic areas, often based on racial or ethnic composition, thereby limiting access to credit for people of color, particularly in white-dominated neighborhoods.
Banks primarily mitigate credit default risk by charging extremely high interest rates on all loans.
Answer: False
This statement is false. While interest rates are a factor, banks primarily mitigate credit default risk through a combination of assessing borrower creditworthiness, requiring collateral for significant loans, and careful underwriting, rather than solely relying on excessively high interest rates across all lending.
A credit manager's role involves overseeing the granting and management of credit to customers.
Answer: True
This statement is accurate. A credit manager's responsibilities are centered on the administration of credit policies, which includes evaluating customer creditworthiness, approving credit lines, managing accounts receivable, and implementing strategies to minimize default risk for the organization.
Which piece of legislation significantly improved credit access for women in America by combating discrimination?
Answer: The Equal Credit Opportunity Act of 1974
The Equal Credit Opportunity Act of 1974 was pivotal in improving credit access for women by prohibiting discrimination based on sex and marital status, thereby addressing historical barriers such as stricter terms or requirements for male co-signers.
What practice historically hindered people of color from obtaining credit for home purchases, particularly in certain neighborhoods?
Answer: Redlining.
The practice of redlining historically impeded people of color from obtaining credit for home purchases, particularly in predominantly white neighborhoods, by systematically denying financial services based on geographic location and racial composition.
How do banks primarily reduce the risk of not recovering money lent?
Answer: By requiring collateral and assessing creditworthiness.
Banks primarily mitigate the risk of loan default by rigorously assessing the creditworthiness of potential borrowers and, for substantial credit extensions, by requiring collateral. Collateral serves as an asset that the bank can seize if the borrower fails to meet their repayment obligations.
What is the primary function of a credit manager within a company?
Answer: To oversee the granting and management of credit to customers.
The primary function of a credit manager is to oversee the entire credit process for a company, which includes evaluating customer creditworthiness, approving credit lines, managing accounts receivable, and implementing strategies to minimize default risk.
Interest is a charge levied on borrowers for the use of funds associated with bank-created credit.
Answer: True
This statement is accurate. Interest represents the cost incurred by a borrower for the utilization of funds provided through bank-created credit, forming a crucial component of the debt obligation alongside the principal amount.
The cost of credit for a borrower includes only the principal amount borrowed.
Answer: False
This statement is false. The total cost of credit for a borrower extends beyond the principal amount to include various additional charges, such as interest, mandatory fees, and potentially optional costs like credit insurance, all of which contribute to the overall expense of borrowing.
The Annual Percentage Rate (APR) is designed to show the total cost of borrowing in a standardized format.
Answer: True
This statement is accurate. The Annual Percentage Rate (APR) serves as a standardized metric, mandated by 'truth in lending' regulations, to represent the total cost of borrowing, encompassing interest and mandatory fees, thereby facilitating consumer comparison of diverse credit offerings.
Credit scores are primarily determined by the lender's personal assessment of the borrower's character.
Answer: False
This statement is false. Credit scores are primarily determined by quantitative data analyzed by credit rating agencies or bureaus, focusing on objective factors such as payment history, defaults, and credit utilization, rather than subjective personal assessments of character by individual lenders.
A higher credit score generally leads to lower Annual Percentage Rates (APRs) on loans.
Answer: True
This statement is accurate. A higher credit score signifies a lower perceived risk of default to lenders, which generally translates into access to more favorable borrowing terms, including lower Annual Percentage Rates (APRs) on loans.
Credit scores are calculated using data exclusively from the borrower's current employment status.
Answer: False
This statement is false. Credit scores are derived from a comprehensive analysis of credit history, including factors such as prior defaults, payment timeliness, and credit utilization. Employment status is not the exclusive or primary determinant.
The movement of financial capital is influenced by the creditworthiness of the entity involved.
Answer: True
This statement is accurate. The flow of financial capital is intrinsically linked to the creditworthiness of the entities involved; a strong reputation for debt repayment enhances an entity's ability to secure credit and attract capital.
The Annual Percentage Rate (APR) standardizes the mandatory costs of credit, including interest and fees, to aid consumer comparison.
Answer: True
This statement is accurate. The Annual Percentage Rate (APR) is a regulatory requirement designed to standardize the presentation of mandatory credit costs, including interest and fees, thereby enabling consumers to effectively compare the total cost of borrowing across various financial products.
What does the Annual Percentage Rate (APR) aim to provide for consumers?
Answer: A standardized measure of the total cost of borrowing.
The Annual Percentage Rate (APR) is designed to provide consumers with a standardized and comprehensive measure of the total cost associated with borrowing, thereby facilitating informed comparisons between different credit offers.
How are interest rates on consumer loans typically determined?
Answer: By a credit score calculated by rating agencies.
Interest rates on consumer loans are predominantly determined by a credit score, which is systematically calculated by credit rating agencies based on an individual's credit history, including payment patterns and default records.
What information is typically used by credit bureaus to calculate credit scores?
Answer: Prior defaults, payment history, and credit utilization.
Credit bureaus utilize comprehensive data from an individual's credit history to calculate credit scores. Key factors include records of prior defaults, the consistency and timeliness of payment history, and the extent to which available credit is utilized.
In 2015, Hungary had the highest proportion of consumer credit relative to total household debt among the countries listed.
Answer: True
This statement is accurate. According to 2015 data, Hungary exhibited the highest proportion of consumer credit relative to total household debt, recorded at 44%, surpassing other listed nations such as Greece and Poland.
Switzerland had the highest share of consumer credit relative to household debt in 2015.
Answer: False
This statement is false. In 2015, Switzerland recorded the lowest share of consumer credit relative to household debt (1%), whereas Hungary had the highest proportion (44%).
The global credit market is significantly smaller than the global equity market.
Answer: False
This statement is false. The global credit market is substantially larger than the global equity market, estimated to be approximately three times its size.
A credit default swap allows a protection buyer to pay a premium to receive compensation if the underlying credit defaults.
Answer: True
This statement is accurate. A credit default swap (CDS) functions as a form of credit insurance, where the buyer pays a premium to the seller in exchange for compensation should a specified credit event, such as default, occur on an underlying debt instrument.
According to 2015 data, which country had the lowest share of consumer credit as a ratio of total household debt?
Answer: Switzerland
Based on 2015 data, Switzerland exhibited the lowest share of consumer credit relative to total household debt, standing at 1%.
Which countries, according to the 2015 table, had the highest share of consumer credit relative to household debt?
Answer: Hungary and Greece
According to the 2015 data, Hungary (44%) and Greece (29%) had the highest shares of consumer credit relative to total household debt among the countries listed.
What is a credit default swap?
Answer: An insurance contract against the risk of a specific debt defaulting.
A credit default swap (CDS) is a financial derivative contract that serves as a form of insurance against the risk of default on a specific debt instrument. The buyer pays a premium to the seller, who agrees to compensate the buyer if the underlying credit event occurs.