Deck 6: Using Credit Cards: The Role of Open Credit

Question 1

Credit purchases made for personal needs like home mortgages or car loans are referred to as revolving credit.

Answer 1

False

Question 2

Kendra always thought the grace period feature of her credit card was such a wonderful idea. Why, in essence, she is getting her purchases interest free during this time. After taking Dr. Art Keown's Personal Finance course she learned a startling truth about grace periods.

A) Grace periods are actually beneficial to the credit card company.
B) There are higher fees associated with grace periods.
C) Most banks eliminate their grace period on new purchases if you don't pay your balance in full.
D) All credit cards carry a grace period.

Answer 2

Most banks eliminate their grace period on new purchases if you don't pay your balance in full.

Question 3

Due to compounding frequency, the actual interest rate or APY you pay is higher than the advertised interest rate or APR.

Answer 3

True

Question 4

The Truth In Lending Act requires that all consumer credit agreements disclose the ________ in bold print?

A) Effective Annual Rate (EAR)
B) Annual Percentage Rate (APR)
C) Monthly Stated Rate (MSR)
D) Nominal Interest Rate (NIR)
E) none of the above

Question 5

Assume a 31-day month to calculate your average daily balance for your credit card bill. Your daily balance for the first 10 days was $1,400, for the next 10 days was $1900, and for the last 10 days was $2700. What will your average daily balance be at the end of the month?

A) $1935.48
B) $19.35
C) $193.58
D) You cannot use the Average Daily Balance Method on this problem

Question 6

Financially savvy people take advantage of the grace period on major purchases and pay the balance off in full; thus avoiding finance charges.

Question 7

For the average consumer there is usually a set limit on open or revolving credit accounts.

Question 8

Taking a cash advance on your credit card for daily living expenses may not be a wise financial decision because interest begins on the cash advance balance amount immediately.

Question 9

Credit cards are a form of ________ credit.

A) open ended
B) revolving
C) installment
D) both A and B above
E) both A and C above

Question 10

Using your credit cards for cash advances is a relatively cheap way to borrow money because you usually do not start paying interest until the next billing period.

Question 11

There is no cash advance fee when you use your credit card at an ATM machine.

Question 12

Which of the following apply to getting a cash advance with a credit card?

A) Cash advances are available at ATM machines.
B) You begin paying interest immediately.
C) There may be a cash advance fee.
D) The interest rate may be higher than on regular purchases.
E) All of the above.

Question 13

Over 70% of the 25 biggest credit card issuers do not charge annual fees.

Question 14

Typically, the credit card issuer allows you a grace period, which means

A) you do not have to make a payment during the current month.
B) you are not charged any interest during this grace period.
C) you must pay your balance off in full to benefit from the grace period.
D) interest charges are reduced during this time.
E) both B and C apply

Question 15

The percentage of the credit card sale the retailer owes to the credit card company is the

A) retailer credit acceptance fee.
B) card usage allowance.
C) franchise fee.
D) merchant's discount fee.
E) interest rebate fee.

Question 16

Changes to your credit card policies and rates are usually announced via "________"; which are notices enclosed with your bill.

A) bill addendums
B) policy wards
C) bill stuffers
D) regal notices
E) none of the above

Question 17

The average daily balance method calculates interest payments based on the ending balance of the previous period.

Question 18

On October 1ˢᵗ Joe charged $900 to his credit card, on October 10ᵗʰ he charged another $1300 to his credit card, and on October 15ᵗʰ he charged an additional $100. His credit card charges him an Annual Percentage Rate (APR) of 18% compounded monthly. Using the Average Daily Balance Method calculate Joe's finance charge for the month of October.

A) $7.12
B) $28.16
C) $212.36
D) $523.14
E) None of the above are correct answers.

Question 19

When you use a credit card at a store, the store is generally charged a fee ranging from 1.5% to 5%. What is this fee called?

A) merchant discount fee
B) merchant back-end charge
C) merchant rate
D) discount rate
E) none of the above

Question 20

Which method sums the outstanding balances owed each day during the billing period and divides by the number of days in the period?

A) average daily balance
B) previous balance
C) adjusted balance
D) balance calculation method
E) simple interest

Question 21

Compare and contrast the average, previous, and adjusted balance methods.

Question 22

Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR.
What is the current APY on this credit card?

A) 18%
B) 18.66%
C) 18.99%
D) 19.56%
E) none of the above

Question 23

When you withdraw cash from an ATM using your credit card

A) You begin paying interest immediately.
B) You are not charged any interest until after the date the payment is due.
C) The interest fee is lower than that for purchases.
D) You're using a relatively inexpensive way to borrow money.

Question 24

Teaser rates are very low. How long do they last? Is there any real benefit in them?

Question 25

Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR.
What is the APY on Monty's default or penalty rate?

A) 36%
B) 36.99%
C) 42.58%
D) 48.66%

Question 26

Which of the following is not an advantage of credit cards?

A) convenience or ease of shopping
B) emergency use
C) allows for online shopping
D) the finance charge that accrues on the account if not paid off in full each month
E) allows for consumption before the purchase is fully paid for

Question 27

Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR.
What advice would you give to Monty concerning his use of credit cards?

A) Learn to live within your means.
B) Learn the difference between a want and a need--gambling in Vegas is not a need.
C) Seek out a non-profit credit counseling company.
D) All of the above

Question 28

Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR.
If Monty buys a new television for $800 this month and sends in a credit card payment of $1,200 when he gets his statement, how much interest will he pay on the television for the month?

A) 18%
B) 1.5%
C) None, since he paid for the television in full during the grace period.
D) None of the above answers is correct.

Question 29

In an emergency, you used your credit card for a cash advance of $100. You just received your statement and your total balance due is $985.00. You want to be sure to pay for the recent cash advance so you send in a payment of $400. Your credit card has an APR of 12%. How much of your $400 payment will apply to the cash advance balance?

A) Since it was the most recent charge, $100 of the new payment will apply to the cash advance balance.
B) It doesn't make any difference since the $985 balance includes the cash advance so the $400 payment will lower your total balance regardless.
C) You can't answer this question as it depends on what the interest rate for cash advances is.
D) None of the above is correct.

Question 30

Sometimes retailers will give you up to a 5% discount if you pay cash for their products instead of using your credit card. Why?

A) It is just good customer service, especially for repeat customers.
B) They are getting close to their monthly charge limit and don't want to go over it.
C) They are saving on the Merchants Discount Fee so they pass the savings on to you.
D) Its much less paper work to process cash transactions.

Question 31

Research has determined that undergraduate college students tend to behave in similar manners with regards to their credit card usage. As noted in Chapter 6, which of the following behaviors are indicative of undergraduate students' credit card behaviors?

A) Their parents frequently pay their credit card balances for them.
B) They make more than their minimum payment each month but still tend to carry a balance on their cards.
C) They pay off some of their cards in full each month and make minimum payments on other cards each month.
D) All of the above are typical behaviors exhibited by undergraduates with regards to their credit cards.

Question 32

Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR.
Using the Adjusted Balance Method: If Monty sends in a payment for $1,000, how much will the finance charge be on his remaining balance? (Use the $6,000 balance for your calculations).

A) $75
B) $90
C) $110
D) There is not enough information to solve this question.

Question 33

List the five benefits or advantages associated with credit cards. What are the two major disadvantages?

Question 34

Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR.
It is now three months later and Monty has missed two payments in a row and he is now paying the default or penalty rate on his balance. How much interest per month will Monty be accruing on his unpaid balance?

A) 18%
B) 1.5%
C) 36%
D) 3%

Question 35

Using your credit card for a cash advance in an emergency is probably a good idea. Using cash advances for non-emergencies is a terrible idea. Explain the characteristics that make cash advances very dangerous.

Question 36

Assuming the APR on your credit card is 18% and your average daily balance this month was $10,000, what will your interest or finance charges for the month be?

A) $180
B) $60
C) $150
D) $1.50

Question 37

One of the ugliest secrets about using your credit card for a cash advance is that ________.

A) there is usually a 2% to 4% up front fee on the amount
B) the APR on the cash advance is typically higher than the APR for normal purchases
C) payments do not apply to cash advance balances unless the balance for regular credit purchases is zero.
D) all of the above apply to cash advances
E) all but B apply to cash advances

Question 38

Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR.
What will be Monty's minimum payment due?

A) $90
B) $20
C) $240
D) $1,080
E) none of the above

Question 39

Alan has a credit limit and a balance of $3,000 on his Visa card. His car broke down, he charged the $500 repairs to his Visa which he knows put him over his credit limit for the month. His payment is due on the 20th so he made sure that he had his $750 payment to the post office on the 20th. Most likely, what penalties or fees, if any, will he incur?

A) Only the penalty APR, depending on his credit card company.
B) Only the over-the-limit fee.
C) Only the late fee, since his payment will lower his balance below his credit limit.
D) He will likely incur the penalty APR, as well as an over-the-limit fee and a late fee--because VISA has to receive his payment in its office by the 20th, not have it postmarked by the 20th.
E) None of the above choices accurately describes the situation.

Question 40

Which of the following is not a disadvantage of credit cards?

A) They allow the consumer the ability to rent cars and make online reservations.
B) They make it easy to lose control of spending.
C) In general they are an expensive way to borrow money.
D) Using them means you will have less spendable money in the future.
E) All of the above are cons.

Question 41

Which of the following are important to convenience users of credit cards?

A) low annual fee
B) interest-free grace period
C) card benefits and perks
D) only A and B
E) all of the above

Question 42

Jerome has three major credit cards and makes payments on them each month. He has had one of them for six years, another for three years, and the last for eleven months. Making just the minimum payment has become automatic at this point, and Jerome barely even looks at the statements. Jerome is beginning to think that his approach to credit may be faulty, and he wants fo find out how to adjust it. He just applied for two additional credit cards.
Jerome would be considered a

A) credit user.
B) convenience user.
C) combination credit and convenience user.
D) T&E card user.
E) traditional charge account user.

Question 43

What is the main distinguishing feature(s) for T&E cards?

A) They do not offer revolving credit.
B) The full balance must be paid each month.
C) There is no annual fee.
D) both A and B above
E) both A and C above

Question 44

A(n) ________ card is a credit card that does not offer revolving credit and requires full payment of the balance at the end of each month.

A) T&E
B) premium
C) affinity
D) traditional charge account
E) single-purpose

Question 45

Which of the following is not a single-purpose credit card?

A) Shell Oil
B) Bank of America Visa
C) Toys R Us
D) Sears
E) Macy's

Question 46

A single-purpose card is a credit card that can be used only at a specific company.

Question 47

The major differences between a premium prestige card and a regular credit card include

A) higher interest rates.
B) higher credit limits.
C) additional perks and benefits.
D) both A and B above
E) both B and C above

Question 48

Which of the following statements is most correct regarding a secured credit card?

A) It is a valuable form of credit insurance - you are protected against loss if the card is lost or stolen.
B) It is useful to someone who has bad credit or no credit established yet.
C) It provides a higher level of user security, using technology to prevent illegal use.
D) Compared to non-secured credit cards, it always carries a much lower rate of interest.
E) None of the above are correct.

Question 49

Jerome has three major credit cards and makes payments on them each month. He has had one of them for six years, another for three years, and the last for eleven months. Making just the minimum payment has become automatic at this point, and Jerome barely even looks at the statements. Jerome is beginning to think that his approach to credit may be faulty, and he wants fo find out how to adjust it. He just applied for two additional credit cards.
Most likely, Jerome is

A) unaware of how much of his payments go toward interest.
B) not getting the benefits of a grace period.
C) obligating his future income.
D) All of the above are correct.

Question 50

A convenience user doesn't really care what the APY is on their credit cards.

Question 51

Nancy tried to use her Macy's credit card at K-Mart but was unsuccessful. Why?

A) K-Mart only accepts K-Mart credit cards.
B) Her Macy's credit card is a single purpose card and can only be used at Macy's.

Question 52

A secured credit card is a good tool to help establish credit.

Question 53

Jerome has three major credit cards and makes payments on them each month. He has had one of them for six years, another for three years, and the last for eleven months. Making just the minimum payment has become automatic at this point, and Jerome barely even looks at the statements. Jerome is beginning to think that his approach to credit may be faulty, and he wants fo find out how to adjust it. He just applied for two additional credit cards.
What advice might you give to Jerome?

A) Keep making timely, minimum payments.
B) Get a cash advance to pay down the balances on the cards.
C) Consider using savings to pay off current credit card debt.
D) All of this advice would be helpful to Jerome.

Question 54

Jerome has three major credit cards and makes payments on them each month. He has had one of them for six years, another for three years, and the last for eleven months. Making just the minimum payment has become automatic at this point, and Jerome barely even looks at the statements. Jerome is beginning to think that his approach to credit may be faulty, and he wants fo find out how to adjust it. He just applied for two additional credit cards.
Based on his credit card usage, which of the following aspects of a credit card should be most important to Jerome?

A) the APR on the unpaid balance
B) a low annual fee
C) perks and benefits, like frequent flier miles
D) None of the above are important to Jerome.

Question 55

To a credit user, the perks and benefits are the most important determinant when choosing a credit card.

Question 56

For the convenience credit card user the interest rate is ________.

A) irresistible
B) irrelevant
C) irregular
D) intimidating

Question 57

A convenience user of credit cards is someone who pays off the credit card balance each month.

Question 58

Credit cards issued in conjunction with particular charities or organizations, like the Sierra Club or the Humane Society, that send a portion of their annual fee or percentage of their purchases back to the sponsoring organization are known as

A) premium cards.
B) prestige cards.
C) affinity cards.
D) secured credit cards.
E) traditional charge accounts.

Question 59

Only Prestige or Premium credit cards offer a grace period.

Question 60

The choice of a credit card is a matter of personal credit card philosophy. If you are a credit user, the most important decision factor is the card's

A) length of grace period.
B) annual fee.
C) APR on the unpaid balance.
D) minimum payment.
E) late payment fee.

Question 61

Roxanne has always maintained an excellent credit rating over the years. She has an annual income of $23,000, has lived at her current residence three years, and has worked at the same job for eight years. Susan works in a clerical position, has two credit cards and maintains two bank accounts. Which one of the following items of evaluation would Roxanne score the highest on?

A) employment history
B) annual income
C) length of residence
D) All of the above are correct answers.

Question 62

Consider the "Five Cs of Credit." The category that considers the size of your investment holding or portfolio is

A) collateral.
B) capital.
C) capacity.
D) character.
E) none of the above

Question 63

Your credit score may affect how much you pay for Auto Insurance.

Question 64

By law you have certain rights in connection with the credit bureau. They are

A) the right to view your personal credit report.
B) the right to point out errors found in your file.
C) the right to request the credit bureau to correct mistakes in your file.
D) the right to file a statement presenting your view of a disputed issue.
E) all of the above

Question 65

Which of the following is not a typical potential problem that can occur in a credit bureau file?

A) You may be mixed up with someone else with a similar name.
B) Accounts may be listed as still open that are actually closed.
C) Accounts may be listed that you never had.
D) The wrong credit bureau handles your case.
E) A creditor may fail to report a payment or payments.

Question 66

Your credit score affects

A) the rate you pay on your credit cards.
B) the size of your credit line.
C) your mortgage rate.
D) the amount of junk mail offering additional credit cards that you receive.
E) All of the above are correct answers.

Question 67

What rights would a college friend of yours have whose credit card application was denied?

A) the right to view her credit report
B) the right to have the file be accurate
C) the right to point out errors in her file
D) the right to request mistakes in the file be corrected
E) All of the above are correct answers.

Question 68

Credit scoring is

A) quite expensive for the lender.
B) not a flawless method of determining creditworthiness.
C) an inefficient but necessary process.
D) all of the above

Question 69

A low FICO score

A) is a good credit score.
B) can cost you quite a bit when you get a mortgage loan.
C) may result in a credit card rate half the rate of that paid by those with a high FICO score.
D) is the only factor the lender considers when determining whether to give you credit.

Question 70

A credit bureau is a private organization that maintains credit information on individuals, which it allows subscribers to access for a fee.

Question 71

The process of mathematically evaluating your creditworthiness to obtain credit is called

A) credit scoring.
B) credit evaluation.
C) credit references.
D) credit history.
E) credit statistics.

Question 72

Your credit card was stolen, and you did not realize that it was stolen until you received your most recent billing statement. You contacted the credit card company immediately after you read your statement. Fraudulent charges were as follows: $500 for a VCR, $400 for a new set of tires, $100 cash withdrawal, and $25 in interest charges on the above items. You did not carry credit card insurance. How much is your potential maximum liability?

A) $25.00
B) $50.00
C) $900.00
D) $1,000.00
E) $1,025.00

Question 73

The highest FICO a consumer can achieve is ________.

A) 300
B) 450
C) 850
D) 925
E) None of the above is correct.

Question 74

________ is not information generally found in your credit report.

A) Employment information
B) Personal credit history
C) College attended, grades, etc.
D) Your public financial history
E) Past inquiries regarding your credit report

Question 75

One of the more important factors in determining your credit score is the length of your credit history.

Question 76

It is against the law for your potential employer to use your credit score for employment considerations.

Question 77

A company that gathers and sells consumers' financial history to creditors is a

A) credit card company.
B) credit bureau.
C) credit investigation bureau.
D) credit recovery firm.
E) credit issuance firm.

Question 78

Which of the five Cs of credit would your actual home be in relation to your mortage?

A) character
B) capacity
C) collateral
D) capital
E) conditions

Question 79

Getting a credit card while a college student is an excellent idea because

A) it helps you learn about credit.
B) you can shop online and make reservations.
C) it works well for emergencies.
D) when used correctly it allows you to build up a solid credit history.
E) all of the above

Question 80

One of the following lists constitutes the five Cs of credit. Select the correct one.

A) character, capacity, capital, collateral, characteristics
B) character, capacity, capital, collateral, co-insurance
C) character, capacity, capital, collateral, careful
D) character, capacity, capital, collateral, conditions
E) character, capacity, capital, collateral, credence