Deck 7: Choosing a Source of Credit: The Costs of Credit Alternatives

Question 1

The annual percentage rate is the percentage cost of credit on a yearly basis.

Answer 1

True

Question 2

With the add-on interest method, interest is calculated on the full amount of the original principal.

Answer 2

True

Question 3

The finance charge is the total dollar amount you pay to use credit.

Answer 3

True

Question 4

With collateral, you will probably pay a higher interest rate on your loan than you would without collateral.

Question 5

Buying on credit is almost always cheaper than paying cash.

Question 6

You can often obtain medium-priced loans from commercial banks and credit unions.

Question 7

If you want to reduce your borrowing costs, you may need to accept conditions that lower the risk for your lender.

Question 8

You may be able to borrow at a lower interest rate if you accept a shorter-term loan.

Question 9

If creditors add finance charges after subtracting payments made during the billing period, this is called the previous balance method.

Question 10

The most basic method of calculating interest is the compound interest calculation.

Question 11

When more than one payment is made on a simple interest loan, the method of computing interest is known as the declining balance method.

Question 12

After you have selected a product, you should buy it immediately before the store runs out of it.

Question 13

Parents or family members are often the source of the least expensive loans.

Question 14

Two key concepts that you should keep in mind when borrowing are the finance charge and the annual percentage rate.

Question 15

The least expensive loans are available from finance companies and retailers.

Question 16

The fairest method of calculating interest is the average daily balance method.

Question 17

The two most common methods of calculating interest are compound and simple interest formulas.

Question 18

The fairest method of calculating interest is the adjusted balance method.

Question 19

Credit unions rarely offer the same range of consumer loans that banks and other financial institutions do.

Question 20

If creditors give you no credit for payments made during the billing period, it is called the adjusted balance method.

Question 21

The consumer credit laws require that an advance notice be given before repossessing a car.

Question 22

The Consumer Credit Counseling Service counseling is usually free.

Question 23

In addition to the Consumer Credit Counseling Service, universities, credit unions, military bases, and state and federal housing authorities sometimes provide credit counseling services.

Question 24

The rule of 78s formula dictates that you pay less interest at the beginning of a loan.

Question 25

Overindulgence of children is a signal of potential debt problems.

Question 26

Inflation increases the purchasing power of money.

Question 27

The Truth in Lending law does not set the interest rates or tell the creditor how to make interest calculations.

Question 28

"Keeping up with the Joneses" is one of the reasons for indebtedness.

Question 29

For some debtors, bankruptcy has become an acceptable tool of credit management.

Question 30

Banks often encourage you to make the maximum payment.

Question 31

The Consumer Credit Counseling Service will refinance all of your existing debts for you.

Question 32

If you want to take advantage of the interest-free period on your credit card, you must pay your bill in full every month.

Question 33

Anyone overburdened by credit obligations can phone, write, or visit a Consumer Credit Counseling Service office.

Question 34

Under the rule of 78s, loans for a year or less usually do not allow for a finance charge rebate.

Question 35

The Fair Debt Collection Practices Act regulates the ways debt collection agencies do business.

Question 36

Credit life insurance provides for the repayment of the insured loan if the borrower dies.

Question 37

The most commonly purchased type of credit insurance is credit life insurance.

Question 38

There is never a charge for any service provided by a Consumer Credit Counseling Service office.

Question 39

An increasing number of bankruptcy filers are well-educated, middle-class baby boomers.

Question 40

You can deduct interest paid on consumer loans for state and federal income tax returns.

Question 41

There are no costs involved in filing for a bankruptcy.

Question 42

Your bankcard has an APR of 18% and there is a 2% fee for cash advances. The bank starts charging interest on cash advances immediately. You get a cash advance of $600 on the first day of the month. You get your credit card bill at the end of the month. What is the total finance charge you will pay on this cash advance for the month? Assume each month has 30 days.

A) $12
B) $9
C) $21
D) $0
E) $2
Finance charge = [.02 × $600] + [(.18/12) × $600] = $21

Question 43

In a straight bankruptcy, many, but not all, debts are forgiven.

Question 44

If your credit company invites you to skip a monthly payment without a penalty, they are doing you a favor.

Question 45

You have the right to file your own bankruptcy case and represent yourself at all court hearings.

Question 46

Chapter 7 bankruptcy is also known as straight bankruptcy.

Question 47

Which one of the following financing methods provides a float period?

A) Installment loan
B) Credit card
C) Lump-sum loan
D) Home equity line of credit
E) Auto loan

Question 48

Float can be defined as:

A) the interest charged during one billing period.
B) the principal balance due on a loan.
C) a home equity loan.
D) a period of time during which no interest is charged.
E) a lump-sum loan from a credit union.

Question 49

You have two choices in declaring personal bankruptcy: Chapter 7 and Chapter 13 bankruptcy.

Question 50

By evaluating your credit options, you may:

A) reduce your finance charges.
B) reconsider your decision to borrow money.
C) discover a less expensive type of loan.
D) find a lender that charges a lower rate.
E) All of these

Question 51

If you declare a Chapter 7 bankruptcy, you do not have to pay alimony, child support, or educational loans.

Question 52

Which one of the following is often the source of the least expensive loan?

A) Parents or family members
B) Banks
C) Savings and loan associations
D) Finance companies
E) Loan sharks

Question 53

In a Chapter 13 bankruptcy, the debtor normally keeps all or most of his or her property.

Question 54

A person filing for relief under the bankruptcy code is called a bankrupt, not a debtor.

Question 55

Both Chapter 7 and Chapter 13 bankruptcy are considered an easy way out of debt.

Question 56

The most expensive loans are available from:

A) parents.
B) friends.
C) banks.
D) finance companies.
E) credit unions.

Question 57

You can often obtain medium-priced loans from:

A) parents or family members.
B) American Express.
C) Diners Club.
D) finance companies.
E) commercial banks and credit unions.

Question 58

One of the drawbacks of borrowing from parents or family members is that such loans:

A) tend to be more expensive than other types of loans.
B) must be interest-free.
C) may create tension within the family.
D) are limited to oral agreements.
E) are legally prohibited from establishing repayment dates and terms.

Question 59

Membership in credit unions has been:

A) growing steadily.
B) declining gradually.
C) static.
D) restricted by the Tax Reform Act of 1986.
E) restricted by state laws.

Question 60

Credit unions will provide loans to non-members in some situations.

Question 61

This morning, you received a phone call regarding a debt you allegedly owe. If you dispute this debt, you must write to the debt collector and request verification of the obligation. How many days do you have to send this letter?

A) 5
B) 10
C) 15
D) 20
E) 30

Question 62

If you default on your automobile loan:

A) an advance notice to you is required before your car is repossessed.
B) no advance notice is required before repossession.
C) the federal consumer credit laws give you protection from your car being repossessed.
D) you don't have to pay the full balance due on your automobile loan.
E) you pay fifty percent of the balance due on your automobile loan.

Question 63

If creditors add finance charges after subtracting payments made during the billing period, this is called the:

A) APR method.
B) discount method.
C) previous balance method.
D) adjusted balance method.
E) average daily balance method.

Question 64

If you find that you cannot make your payments, the first thing you should do is:

A) skip town.
B) declare personal bankruptcy.
C) borrow from a loan shark to make the payment.
D) let the borrower go to a collection agency.
E) contact your creditors and try to work out a modified payment plan with them.

Question 65

A few months ago, you sent a certified letter to a debt collector and requested verification of a debt the collector says you owe. You know the letter was received by the collector but you have received no response to your request. Today, you received a letter threatening court action. What should you do?

A) Pay the debt and protect your credit rating
B) Insist that communications about the debt cease
C) Renegotiate payment terms with the creditor
D) Sue the collection agency
E) Pay half the outstanding balance

Question 66

If you receive a phone call from a debt collector:

A) hang up on him or her.
B) expect follow-up written communication.
C) dispute the fact that you owe the money.
D) threaten the collector with a law suit.
E) contact your attorney immediately.

Question 67

Which formula dictates that you pay more interest at the beginning of the loan and pay less and less interest as the debt is reduced?

A) Adjusted balance method
B) Previous balance method
C) The rule of 78s
D) Average daily balance
E) Accelerated balance

Question 68

Which federal law, passed in 1969, requires creditors to state the cost of borrowing in common language?

A) Fair Credit Reporting Act
B) Fair Credit Billing Act
C) Equal Credit Opportunity Act
D) Fair Debt Collection Practices Act
E) Truth in Lending Act

Question 69

If you borrow $100 at 10 percent simple annual interest and repay it in one lump-sum at the end of one year, you will repay:

A) $100.
B) $105.
C) $110.
D) $115.
E) $120.

Question 70

According to consumer affairs experts, the nation's number one family financial problem is:

A) poor money management.
B) over-indebtedness.
C) medical costs.
D) insurance costs.
E) unemployment.

Question 71

The total dollar amount you pay to use credit is called the:

A) finance charge.
B) annual percentage rate.
C) price of the good/service purchased.
D) amortized rebate.
E) interest rate.

Question 72

The Federal Trade Commission enforces the:

A) Truth in Lending Act.
B) Equal Credit Opportunity Act.
C) Fair Credit Billing Act.
D) Fair Debt Collection Practices Act.
E) Fair Credit Reporting Act.

Question 73

The most commonly purchased type of credit insurance is:

A) credit life insurance.
B) credit accident insurance.
C) credit health insurance.
D) credit property insurance.
E) credit disability insurance.

Question 74

If you receive a phone call from a debt collector, s/he must send you a written notice within ____________ days.

A) 5
B) 10
C) 15
D) 20
E) 30

Question 75

Which one of the following is not a danger signal of potential debt problems?

A) Paying the minimum balance due each month
B) Receiving notice of prompt payment from creditors
C) Using savings to pay for major purchases
D) Repaying loans faster than required
E) Depending on overtime and moonlighting to meet expenses

Question 76

Which interest formula may be used by creditors to determine how much interest you have paid at any point in a loan?

A) Simple interest formula
B) Compound interest formula
C) Multiple compound interest formula
D) The rule of 78s
E) The rule of 72s

Question 77

What is(are) the signal(s) of potential debt problems?

A) Paying only the minimum balance each month
B) Missing payments or paying late
C) Using savings to pay normal bills
D) Depending on overtime to meet normal expenses
E) All of these are danger signals

Question 78

Which type of credit insurance repays your debt in the event of a loss of income due to illness or injury?

A) Credit life insurance
B) Credit accident and health insurance
C) Credit property insurance
D) Credit casualty insurance
E) Credit disability insurance

Question 79

If creditors give you no credit for payments made during the billing period, this is called the:

A) APR method.
B) discount method.
C) previous balance method.
D) adjusted balance method.
E) average daily balance method.

Question 80

What is the number one reason why consumers default on their debts?

A) Medical expenses
B) Defective goods and services
C) Excessive use of credit
D) Fraudulent use of credit
E) Consumer fraud