Deck 6: Short-Term Credit Management: Consumer Credit

Question 1

You may review your credit report held by a credit bureau

A)only if you have been denied credit within the past year.
B)only if you have been denied employment because of your credit record.
C)only if you have been denied a home mortgage in the past year.
D)for any reason,including just curiosity.

Answer 1

for any reason,including just curiosity.

Question 2

Which of the following is not usually associated with a revolving credit account?

A)A credit limit
B)A credit card
C)A set monthly payment
D)A monthly minimum payment

Answer 2

A set monthly payment

Question 3

A regular charge account is one

A)that covers a single purchase.
B)that is used primarily as a shopping convenience.
C)that requires an initial security deposit.
D)offered only by travel and entertainment lenders,such as American Express.

Answer 3

that is used primarily as a shopping convenience.

Question 4

A revolving credit account

A)allows you to make purchases up to a credit limit.
B)requires complete repayment each billing period.
C)must be renewed each billing period.
D)is for large purchases with a set repayment schedule.

Question 5

Secured credit cards are

A)issued only to those who are the most credit worthy.
B)issued only to corporations that have been operating for at least five years.
C)useful for those who are trying to overcome a poor credit history.
D)protected by an unlimited line of credit.

Question 6

A closed-end credit account

A)is limited to purchases of less than $1,000.
B)establishes an ongoing line of credit covering future purchases.
C)must be fully repaid by the end of the billing cycle.
D)covers a single purchase with a set repayment schedule.

Question 7

The Equal Credit Opportunity Act (ECOA)provides that

A)minorities and women be given special consideration in granting credit.
B)individuals cannot be denied credit because of gender or minority status.
C)the Federal Government guarantees loans made to minorities and women to encourage lending by financial institutions.
D)financial institutions must meet a federal quota for loans to minorities and women,or lose federal deposit insurance protection.

Question 8

Lenders can discriminate against you on the basis of your

A)income.
B)age.
C)gender.
D)You can not be discriminated against for any of these reasons.

Question 9

Refer to the information above.Under the adjusted balance method,Frank's interest for June will be

A)$1.80.
B)$6.30.
C)$9.30.
D)$10.50.

Question 10

Under the Truth in Lending Act,your financial loss due to a lost or stolen credit card is:

A)zero.
B)limited to $50.
C)limited to $500.
D)unlimited.

Question 11

Under the Fair Credit Reporting Act (FCRA),if you have been denied credit,you have a right to

A)inspect your credit file and have any errors or unsubstantiated entries corrected or removed.
B)sue the credit bureau if your credit file indicates that you should have been granted credit.
C)same response as b,except you can sue only if you are a woman or member of a minority group.
D)nothing;essentially FCRA imposes sanctions only on what information credit bureaus may not keep.

Question 12

Which of the following statements is not true?

A)The credit bureau decides who receives credit.
B)Your employer may check your credit record.
C)The credit bureau retains information on legal actions that may impair your financial strength.
D)Your credit report lists your bank accounts and credit cards.1

Question 13

Credit scores

A)may be reviewed by potential employers and may influence whether or not you are hired
B)are not generally made available to consumers.
C)have been eliminated by most credit agencies because they tend to violate fair credit laws.
D)utilize guidelines established under the Fair Credit Reporting Act for assessing your credit worthiness.

Question 14

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

A)Credit may lead to overspending.
B)There are costs associated with credit.
C)When credit is used to purchase an item,your net worth falls by the amount borrowed.
D)You will have less flexibility with future budgets.

Question 15

In receiving a credit application,lenders often look for

A)character,capital,capacity.
B)earnings,earnestness,eagerness.
C)honesty,honor,net worth.
D)net worth,net income,no-nonsense.

Question 16

A three digit number meant to reflect you ability to bear financial risk is known as your

A)personal identification number.
B)credit score.
C)rico.
D)credit ID.

Question 17

A credit bureau provides

A)a credit report showing your credit history.
B)a decision on whether or not you should be given credit and how much.
C)a questionnaire to be completed by the credit applicant.
D)a place where consumers can get help in managing credit.

Question 18

Which item listed below is probably irrelevant (or poor)advice if you are trying to begin a credit record?

A)Have a telephone installed.
B)Open a checking or savings account.
C)Establish a record of paying all bills promptly with cash.
D)Qualify for a small installment loan.

Question 19

Which of the following is generally not a good reason for using credit?

A)To increase your consumption benefits
B)If you expect prices will fall in the future
C)As a shopping convenience
D)As a source of emergency funds

Question 20

Refer to the information above.Under the previous balance method,Frank's interest for June will be

A)$1.80.
B)$3.00.
C)$10.50.
D)$36.00.

Question 21

A credit card that carries the name of a sponsoring organization is called a(n)

A)affinity card.
B)copyrighted card.
C)trademark card.
D)marketing card.

Question 22

You keep an average outstanding balance on your credit card of $1,000.Your present credit card has an annual premium of $25 and 18% APR on the outstanding balance.Given the following list of annual premiums,what is the maximum amount you would be willing to pay for a credit card that had a 15% APR?

A)$100
B)$90
C)$70
D)$50

Question 23

If you have a dispute over an item on your monthly credit statement,you should

A)not pay any part of the bill until the matter is resolved since a payment is an admission of guilt.
B)call the creditor on the phone,explain the dispute,and request a revised statement.
C)notify the creditor in writing,indicate the nature of your position,and pay any amount that is not disputed.
D)pay the disputed amount before contesting the charge.

Question 24

A promissory note and a security agreement

A)must go together on any consumer loan.
B)are actually the same thing one is used with a credit card while the other applies to a cash loan.
C)are different the promissory note shows details of the loan while the security agreement gives the creditor an interest in the collateral supporting the loan.
D)are part of the loan agreement the borrower gives a promissory note and in return receives a security.

Question 25

When a retailer reduces your credit limit because of an anticipated charge,this is known as

A)credit blocking.
B)a chargeback.
C)a refund credit.
D)a graduated payment.

Question 26

"Credit blocking" is the industry term for

A)illegally denying credit to individuals because of their race or gender.
B)reducing your credit limit because of an anticipated charge.
C)legally denying credit to individuals who have a past record of credit abuse.
D)denying high-risk individuals access to low-cost lines of credit.

Question 27

You have an average outstanding balance on your credit card of $1,000.Which of the following would be your best choice for minimizing the cost of credit?

A)Annual fee of $25 and 10% on the outstanding balance
B)Annual fee of $10 and 12% on the outstanding balance
C)No annual fee and 15% on the outstanding balance
D)Annual fee of $50 and 8% on the outstanding balance

Question 28

Comparing a credit card with a debit card indicates that

A)they are identical except that debt card can be used in more places.
B)they are identical except some lenders prefer the name "debit card" over "credit card."
C)debit cards charge higher rates of interest.
D)consumer protection with a credit card is stronger than it is with a debit card.

Question 29

Page Litton likes to use her credit card to buy gas since she can defer payment for 30 days.However,she notices that her dealer charges 3 cents more per gallon than if she paid with cash.Page estimates paying about $1.00 a gallon for gas,and her monthly credit statement shows an APR of 18 %.Given this information,Page should

A)continue using her card since the opportunity cost of paying in cash is less than 18% a year.
B)pay with cash since its opportunity cost is about 36% a year.
C)continue using her card,the effective cost of using cash is about 36% a year.
D)you can't tell unless you know how much gas she will buy.

Question 30

A grace period on revolving charge accounts

A)is required under the Fair Credit Reporting Act.
B)is equal to the time between when an installment payment is missed and the remaining balance on the loan becomes due.
C)can eliminate all interest charges if the loan balance is fully paid each month.
D)is usually equal to two billing periods.

Question 31

Which item below is not used to determine interest on a consumer loan?

A)Simple interest
B)Discount method
C)Accelerated basis
D)Add-on method

Question 32

A "chargeback" occurs when

A)a credit card holder is charged interest on past purchases.
B)a borrower is charged additional interest for early repayment of a loan.
C)a consumer returns previously charged merchandise.
D)a card issuer charges a disputed amount back to the merchant.

Question 33

Under the two-cycle average daily balance method for computing interest,

A)there is a two-month grace period before any interest is owed on the unpaid balance.
B)you will always pay more interest than under the one-cycle daily balance method.
C)consumers who have a permanent unpaid balance will pay more interest than under the one-cycle daily balance method.
D)a grace period applied in a previous month is eliminated if you fail to completely pay off the balance in the present month.

Question 34

Refer to the information above.Under the average daily balance method including current purchases,Frank's interest for June will be

A)$1.80.
B)$2.60.
C)$7.65.
D)$9.30.

Question 35

The Truth in Lending Act (TILA)requires creditors

A)to inform you of the amount of monthly interest but not how it is determined.
B)to tell you the APR,the interest rate applicable during a period,and the method used to determine the balance to which the rate is applied.
C)to inform you only of the APR;with this,you can determine all other information if you want it.
D)simply to be truthful in any information provided;the kind and amount of such information is up to them.

Question 36

With a debit card,

A)you can charge payments in excess of your line of credit.
B)your purchases are not limited by the amount in your bank deposit.
C)your purchases are immediately deducted from your bank deposit.
D)your purchases are deducted from your bank deposit after a grace period.

Question 37

Interest is computed by applying the annual percentage rate to the outstanding loan balance under the

A)simple interest method.
B)add-on interest method.
C)discount interest method.
D)Rule of 78.

Question 38

Carl Lee lost his wallet at the beach five days ago.Carl is sure there were three credit cards and one debit card in the lost wallet.Assuming he's right and notifies the banks,Carl can lose as much as ________,assuming he has no private insurance protection.

A)$ 50
B)$500
C)$650
D)unlimited losses

Question 39

Refer to the information above.Under the average daily balance method excluding current purchases,Frank's interest for June will be

A)$1.80.
B)$2.60.
C)$7.60.
D)$9.30.

Question 40

Carl Lee lost his wallet at the beach five days ago.Carl is sure there were three credit cards in the lost wallet.Assuming he's right and notifies the banks,Carl can lose as much as ________,assuming he has no private insurance protection.

A)$ 150
B)$500
C)$650
D)unlimited losses

Question 41

Which of the following is not a characteristic of home equity loans?

A)They may generate tax-deductible interest payments.
B)Repayment may be stretched out over many years.
C)The proceeds may be used to finance consumption of consumer goods.
D)They carry higher interest rates than non-secured consumer loans.

Question 42

Which financial institution below would be most likely to lend to a first-time borrower?

A)Commercial bank
B)Savings and loan
C)Specialized consumer finance company
D)General-purpose consumer finance company

Question 43

The "Rule of 78" tends to favor

A)the borrower over the lender if there is not an early repayment of the loan.
B)the lender over the borrower if there is not an early repayment of the loan.
C)the borrower over the lender if there is an early repayment of the loan.
D)the lender over the borrower if there is an early repayment of the loan.

Question 44

Interest on a twelve-month installment loan is to be calculated using the add-on method.If the purchased to be financed is $1,000 and the add-on rate is 6%,then your monthly payment is about

A)$76.67.
B)$86.07.
C)$88.33.
D)$88.65.

Question 45

Under the add-on method for determining payments on a consumer loan,

A)service charges are added to the each monthly payment.
B)a service charge for loan handling is added to the amount borrowed.
C)interest is only added to the final monthly payment on the loan.
D)interest is added to the amount financed in order to determine the total monthly payments.

Question 46

Which of the following is not a home equity scam?

A)Equity stripping
B)Loan flipping
C)Red lining
D)Bait and switch

Question 47

A balloon payment is one that

A)is paid at the outset of a loan.
B)is usually the last installment payment and generally for an amount much greater than the other monthly payments.
C)includes all interest on the loan paid in advance.
D)is a "floating" payment,meaning the lender can demand its payment at any time.

Question 48

The acceleration clause in a loan agreement allows the lender to

A)collect the entire unpaid balance immediately if you miss a payment.
B)add on new collateral to an existing installment loan.
C)collect all unpaid interest immediately if you miss a payment.
D)step up your monthly payments from,say,$100 a month to $150 to have the loan repaid more rapidly.

Question 49

Under the "Rule of 78," the interest earned by the lender is

A)disproportionately pushed to the front of the loan period.
B)calculated using the simple interest method.
C)uniformly spread over the life of the loan.
D)a miscellaneous deduction on your federal tax form.

Question 50

Which lender below most likely would offer the lowest interest rate on the loan indicated?

A)Insurance company (a policy loan)
B)Pawnshop (using your guitar for collateral)
C)Commercial bank automobile loan
D)Finance company automobile loan

Question 51

Under the discount method for calculating monthly payments on a consumer loan,

A)the lender deducts the interest to be paid on the loan from the credit extended you at the beginning of the loan.
B)you deduct the down payment on the sale from the final monthly payment.
C)the lender reduces the monthly payments by the sale price reduction.
D)you reduce the amount owed by interest income from an escrow account.

Question 52

Given an identical contract rate,which of the following methods for determining finance charges provides the smallest monthly payment on an installment loan?

A)Simple interest method
B)Discount method
C)Add-on method
D)The monthly payment is the same under all three methods listed above.

Question 53

Interest is deducted from the credit extended at the beginning of the loan under the

A)simple interest method.
B)add-on interest method.
C)discount interest method.
D)Rule of 78.

Question 54

The Rule of 78 is sometime used to calculate the

A)interest refunded on early repayment of a loan.
B)term of the loan.
C)monthly payment on the loan.
D)balloon payment at the end of the loan.

Question 55

Interest on a twelve-month installment loan is to be calculated using the discount method.If the purchase to be financed is $1,000 and the discount rate is 6%,then your monthly payment is about

A)$76.67.
B)$86.07.
C)$88.33.
D)$88.65.

Question 56

Under the simple interest method

A)the APR is applied to the outstanding balance on the loan.
B)interest is deducted from the credit extended at the beginning of the loan.
C)interest is added to the credit extended at the beginning of the loan.
D)interest is a simple percentage of the initial amount borrowed.

Question 57

The add-on clause on a consumer loan

A)allows you to add on additional loans at the existing rate on your current loans.
B)allows the creditor to add on additional interest when the market rate of interest rises.
C)allows the lender to repossess all goods purchased with the original loan even though your total payments may have been enough to cover an earlier purchase.
D)allows you to extend the term of the loan by adding on additional installments.

Question 58

Interest is added to the amount financed in order to determine total payments under the

A)simple interest method.
B)add-on interest method.
C)discount interest method.
D)rule of 78.

Question 59

A home equity loan

A)is a special type of second mortgage on your home.
B)can no longer provide tax-deductible interest payments.
C)has a fixed term with fixed installment payments.
D)exceeds owner's equity in the home.

Question 60

Student loans need not be repaid

A)if you cannot find a job.
B)if you do not graduate.
C)Either A or B above is correct.
D)None of the above are correct.

Question 61

You can combine your student loans in one convenient package and extend the repayments with what is termed a

A)consolidation loan.
B)joint loan agreement.
C)Perkins loan.
D)national defense loan.

Question 62

The higher the rate of interest you can earn on your investments,the ________ it is to prepay an installment loan.

A)more appealing
B)less appealing
C)There is no connection between the two.
D)The connection can be made more specific;any time your investment rate exceeds the loan APR,you should prepay the loan.

Question 63

An important concern of creditors when evaluating your credit application is how well you have used credit in the past.

Question 64

If you have a tendency to write checks for amounts exceeding your checking balance,you need

A)an unsecured credit line.
B)an overdraft protection credit line.
C)a secured credit card.
D)a debit card.

Question 65

In a straight bankruptcy,you

A)lose everything.
B)must agree to make monthly interest payments to creditors,but need not repay principal.
C)can maintain some equity interests in certain personal assets,such as your house and car.
D)must go to court and the judge decides how much you may keep,if anything.

Question 66

An overdraft protection line of credit

A)can be used to extend payments on a home mortgage.
B)blocks creditors from accessing the equity in your home.
C)is characteristic of revolving charge accounts.
D)can automatically extend credit to cover excess withdrawals from a checking account.

Question 67

A wage-earner plan is a form of bankruptcy that

A)must be used before you can file a straight bankruptcy.
B)forces you to turn over no less than half your future wages until your debts are repaid.
C)allows you to keep your assets.
D)once filed cannot be filed again for six years.

Question 68

If you co-sign a loan

A)you are not responsible for future payments on the loan.Your signature only indicates that you believe the borrower is credit worthy.
B)you are only responsible for the remaining loan payments if the borrower becomes bankrupt.
C)you are only responsible for the portion of the loan that you personally benefited from.
D)you are financially responsible for the outstanding loan balance should the borrower stop repayments.

Question 69

An argument against using credit is that it tends to smooth out consumption over the life cycle.

Question 70

The advice "buy now and avoid future price increases" leads to a greater use of credit,but high rates of return on your investments may make that bad advice.

Question 71

You are considering prepaying an installment loan you took out several months ago.The lender has provided you with the following information.
Remaining months to pay 10
Loan payoff $851.29
Monthly payments $95.00
Balance due in last month of the loan $95.00
Remaining interest on the loan $98.71
You believe you can earn an annual after-tax rate of rate of 16% on your investments in each of the next ten months (1.33% a month).Given the above information,you should

A)prepay the loan;your net gain will be about $35.62.
B)not prepay the loan;your net gain will be about $35.62.
C)prepay the loan;your net gain will be about $14.80.
D)not prepay the loan;your net gain will be about $14.80.

Question 72

Under the current law,lenders must meet quotas in extending credit to women and minorities.

Question 73

You may want to avoid a variable rate consumer loan if you expect

A)rates of interest to rise.
B)rates of interest to remain the same.
C)rates of interest to fall.
D)a decline in the rate of inflation.

Question 74

One reason for using credit is as a shopping convenience.

Question 75

Interest payments are tax deductible on

A)only student loans.
B)all consumer loans.
C)student loans and home equity loans.
D)only home equity loans.

Question 76

In applying for credit,you should omit all data having to do with your net worth since lenders may wish to attach it as collateral.

Question 77

Under the Fair Debt Collection Practices Act (FDCPA),a debt collector

A)can continue collection efforts until you pay off your debts in total.
B)must give you a written notice describing your debt in detail and what to do if you feel you do not owe the debt.
C)cannot use abusive tactics to force you to pay a debt,but can contact your employer and seek his/her help.
D)is permitted all forms of communication with you until the debt is resolved.

Question 78

The only sensible argument for using credit is that you lack sufficient resources to purchase with cash.

Question 79

You cannot be denied credit because of your marital status.

Question 80

Credit counselors often advise individuals to limit their consumer credit (not including home mortgages)to

A)about 20% of take-home pay.
B)an amount no greater than 20% of total assets.
C)about 50% of long-term debt.
D)an amount that leaves 50% of their discretionary income flexible.