Personal Finance 1st Edition by Jack R. Kapoor

Exercise 17

1     What are the general rules for measuring credit capacity?

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2     What can happen if you cosign a loan?

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3     What can you do to build and maintain your credit rating?

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4     What is the Fair Credit Reporting Act?

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5     How do you correct erroneous information in your credit file?

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6     What are your legal remedies if a credit reporting agency engages in unfair reporting practices?

Action Application Talk to a person who has cosigned a loan. What experiences did this person have as a cosigner?

Step 1 of 5

1) General rules for measuring credit capacity:

General rules for measuring credit capacity are:

a)Debt Payments-to-income ratio:

It is calculated by dividing monthly debt payments (not including house payment which is a long term liability) by net monthly income.

b)Debt-to-Equity ratio:

(i)It is calculated by dividing total liabilities by net worth, but do not include the value of your home and the amount of its mortgage.

(ii)If the debt-to-equity ratio is about 1, then it implies that the investor has probably reached the upper limit of debt obligations.