Fin. Lit. - Ch. 6-7 Test Study Guide

A single-payment loan used to finance a purchase when the cash to be used for repayment is known to be forthcoming in the near future is a form of: a. loan extension. b. loan rollover. c. cumulative borrowing. d. interim financing. e. collateral note

d. interim financing

Which of the following is not requested in a typical credit card application? a. Housing b. Charge accounts c. Income d. Political affiliations e. Employment

d. political affiliations

A(n) _____ loan is repaid in a series of fixed, scheduled payments rather than in a lump sum a. installment b. standard c. single-payment d. interim e. consolidated

a. installment

William uses his bank credit card frequently; however, he always pays off the total outstanding balance on the card each month. What should William look for in a credit card given the way he uses one? a. No annual fee and a grace period b. A high annual fee and a low interest rate c. A low annual fee and a grace period d. No annual fee and a low interest rate e. A low annual fee and a low interest rate

a. no annual fee and a grace period

_____ loans do not have to be repaid until after you graduate from college. a. Only Direct b. Direct and Parent Loans for Undergraduate Students (PLUS) c. Direct and Perkins d. Only Perkins e. Perkins and Parent Loans for Undergraduate Students (PLUS)

a. only direct

Borrowing from _____ is not advisable. a. relatives b. asset management companies c. consumer finance companies d. commercial banks e. credit unions

a. relatives

With a bank credit card, you can often avoid interest charges if: a. the account balance is paid in full every month. b. the account is a revolving credit account. c. the minimum payment is made every month. d. at least half the account balance is paid every month. e. the account balance is below the credit limit.

a. the account balance is paid in full every month

Jenny's monthly take-home pay is $5,000, and her total monthly payments are $1,000. Which of the following is Jenny's debt safety ratio? a. 5% b. 40% c. 20% d. 35% e. 10%

c. 20%

An improper use of extended credit is buying: a. furniture. b. a piece of land. c. a house. d. an expensive dinner. e. a car

c. a house

The most expensive method for determining finance charges on revolving credit would be the: a. annual percentage rate (APR) method excluding new purchases for student cards. b. annual percentage rate (APR) method including new purchases. c. average daily balance (ADB) method including new purchases. d. average daily balance (ADB) method excluding new purchases. e. annual percentage rate (APR) method excluding new purchases.

c. average daily balance (ADB) method including new purchases

It is good to use credit for: a. paying rent for your home. b. buying groceries. c. buying a car. d. visiting a tourist destination. e. dining at a restaurant

c. buying a car

Which of the following sources of consumer loans often has the most favorable terms for borrowers? a. Asset management companies b. Savings and loan associations c. Consumer finance companies d. Credit unions e. Commercial banks

c. consumer finance companies

James finds it difficult to manage credit but wants the convenience of using a credit card. He wants to get a card that will provide direct access to his checking account. James should get a: a. student credit card. b. gift card. c. debit card. d. membership card. e. retail charge card.

c. debit card

Chapter 7 of the bankruptcy code: a. requires the debtor to pay back the debt in the future. b. sells only the home of the borrower. c. eliminates most of the financial obligations of the borrower. d. restores all the losses incurred by the borrower. e. results in the loss of all of one's assets

c. eliminates most of the financial obligations of the borrower

The decision about whether or not to grant you credit will be made by: a. local credit bureaus. b. the credit cardholder. c. individual creditors. d. national credit bureaus. e. the Federal Trade Commission

c. individual creditors

A legal claim that allows creditors to liquidate loan collateral is a: a. loan rollover. b. loan application. c. lien. d. note. e. security claim.

c. lien

Credit unions lend money to qualified people who are their: a. employees. b. stockholders. c. members. d. suppliers. e. policyholders.

c. members

Which of the following is an example of phishing? a. Using bills in the trash to obtain others' personal information b. Rerouting bills to a different address c. Pretending to be an employee of a financial institution d. Getting information from financial institutions under false pretenses e. Stealing wallets

c. pretending to be an employee of a financial institution

_____ involves some type of debt restructuring by establishing a debt repayment schedule. a. Straight bankruptcy b. Pretexting c. The Wage Earner Plan d. Skimming e. Phishing

c. the Wage Earner plan

Retail charge cards are advantageous to merchants because: a. they help the merchants file for bankruptcy. b. they help the merchants give loans to their suppliers. c. they help build consumer loyalty. d. they help the merchants save taxes. e. they help the merchants get loans

c. they help build consumer loyalty

Which of the following statements regarding credit unions is true? a. They charge higher interest rates than other sources of consumer loans. b. They are profit-making organizations. c. They provide installment loans to their members. d. They are owned and managed by the government. e. They make secured loans only to non-members.

c. they provide installment loans to their members

Which of the following statements regarding a consumer loan is true? a. A consumer loan provides revolving credit to the consumers. b. A consumer loan results from a rather informal process and involves no negotiated contracts. c. A consumer loan provides credit cards and checks to the consumers. d. A consumer loan is used to finance the purchase of very expensive items. e. A consumer loan is used chiefly to make repeated purchases of relatively low-cost goods and services.

e. A consumer loan is used chiefly to make repeated purchases of relatively low-cost goods and services.

Which of the following will lead to a poor credit rating? a. Applying for a long-term loan and occasionally being late with a payment b. Making payments ahead of schedule c. Opening and using a charge account d. Opening checking and savings accounts e. Discussing with the lender if you foresee difficulty in making a payment

e. Discussing with the lender if you foresee difficulty in making a payment

Which of the following statements regarding fixed-rate loans is true? a. The cost of fixed-rate loans decreases with a decrease in the market interest rate. b. The cost of fixed-rate loans increases with an increase in the market interest rate. c. Fixed-rate loans are preferable when interest rates are expected to rise. d. Fixed-rate loans are preferable when interest rates are expected to fall. e. The interest rates on fixed-rate-loans have periodic adjustment dates, at which time monthly payments are adjusted.

e. The interest rates on fixed-rate-loans have periodic adjustment dates, at which time monthly payments are adjusted.

Which of the following cards provides direct access to your checking account? a. Affinity cards b. Retail charge cards c. Reward cards d. Student credit cards e. Bank debit cards

e. bank debit cards

What do sales finance companies do? a. buy installment loans from banks. b. buy installment loans from consumers. c. sell installment loans to retailers. d. sell installment loans to banks. e. buy installment loans from retailers.

e. buy installment loans from retailers

A payment made using a(n) _____ is equivalent to paying by cash. a. student credit card b. reward card c. affinity card d. retail credit card e. debit card

e. debit card

Any credit card purchase will effectively be an interest-free loan if you have a zero balance when the grace period begins and you: a. pay a $5 fee or 3% of the amount charged. b. make the minimum payment. c. pay for the purchase within 6 months. d. receive a cash advance. e. pay off the entire balance on or before the due date.

e. pay off the entire balance on or before the due date

Credit offered in the form of _____ is most common in department and clothing stores and other high-volume outlets, where customers are likely to make several purchases each month. a. affinity cards b. reward credit cards c. collateralized credit cards d. student credit cards e. retail charge cards

e. retail charge cards

A loan rollover means that: a. the loan is repaid without any defaults in payments. b. the new loan will not have any processing fees. c. the interest on the new loan is lower than the previous loan. d. the maturity period of the new loan is longer than the maturity period of the original loan. e. the loan is paid off by taking out another loan

e. the loan is paid off by taking out another loan

If Liza's debt safety ratio is 15% and her monthly take-home pay is $4,500, which of the following equals her total monthly payments? a. $675 b. $1,200 c. $890 d. $500 e. $450

a. $675

Lenders' guidelines say that you are likely to have financial difficulties if your personal credit obligations exceed _____ of your take-home pay. a. 20% b. 3% c. 10% d. 15% e. 25%

a. 20%

Loan repayment under the Parent Loans for Undergraduate Students (PLUS) program normally begins within _____ of loan disbursement. a. 60 days b. 120 days c. 180 days d. 90 days e. 30 days

a. 60 days

Russ and Lois have a home valued at $96,000 with an outstanding mortgage of $60,000. If their lender is willing to provide a home equity loan of up to 75% of the market value of the home, how much can they borrow using a home equity loan? a. $0 b. $12,000 c. $28,000 d. $27,000 e. $36,000

b. $12,000

Which of the following statements about the cash advances that the holder of a bank credit card can obtain from participating banks is true? a. Cash advances are loans on which interest begins to accrue only when the borrower uses them to make purchases. b. Cash advances obtained from the teller window at a bank are limited by the unused credit in the borrower's account. c. Cash advances can be obtained only during the hours the bank is open. d. Cash advances without any limits can be withdrawn from an ATM using credit cards. e. Cash advances are loans obtained from an ATM using credit cards that do not allow merchandise purchases.

b. Cash advances obtained from the teller window at a bank are limited by the unused credit in the borrower's account.

Which of the following is the correct formula for calculating the debt safety ratio? a. Gross Monthly Pay ÷ Monthly Take-Home Pay b. Total Monthly Consumer Credit Payments ÷ Monthly Take-Home Pay c. Monthly Take-Home Pay ÷ Total Monthly Consumer Credit Payments d. Total Monthly Consumer Credit Payments ÷ Gross Monthly Pay e. Gross Monthly Pay ÷ Total Monthly Consumer Credit Payments

b. Total Monthly Consumer Credit Payments ÷ Monthly Take-Home Pay

Which of the following is an improper use of credit? a. Purchasing a big-ticket item b. Buying a short-lived good c. Meeting a financial emergency d. Spreading payments within a budget e. Buying a home

b. buying a short lived good

A legal claim that allows lenders to liquidate loan collateral, in case the borrower defaults, is called a: a. promissory note. b. lien. c. security claim. d. rollover. e. loan contract.

b. lien

A person who pays off his credit balance every month should look for a credit card with a: a. low introductory rate. b. long grace period. c. high annual fee. d. low interest rate on existing balance. e. high interest rate

b. long grace period

Janey makes frequent small purchases and pays off the total outstanding balance on her credit card every month. Which of the following features is most attractive to her when searching for a credit card provider? a. No grace period b. No annual fee c. High over-the-limit fees d. A low required minimum payment percentage e. A high interest rate

b. no annual fees

To establish credit, you should first: a. arrange for a small loan. b. open savings and checking accounts. c. use credit extensively. d. arrange for a large loan from close relatives. e. pay cash for all purchases.

b. open savings and checking accounts

A frequent flyer card can be aptly classified as a(n): a. affinity card. b. reward card. c. student card. d. retail charge card. e. cash advance.

b. reward card

Commercial banks are able to charge lower interest rates than other lending institutions because: a. they make only secured loans. b. they usually take only the best credit risks. c. their depositors require higher rates. d. they get their funds from the money market. e. they make shorter-term loans.

b. they usually take only the best credit risks

Which of the following statements regarding loan collateral is true? a. Loans secured by collateral always have higher finance charges than unsecured loans. b. Collateral is an item of value used to secure the interest portion of a loan. c. Collateral is an item of value used to secure the principal portion of a loan. d. Loans are secured by collateral that is readily marketable at a price high enough to cover the interest portion of the loan. e. Collateral is always required by banks to lend to customers with good credit ratings.

d. Loans are secured by collateral that is readily marketable at a price high enough to cover the interest

Which of the following statements regarding loan maturity is true? a. The longer the loan maturity, the lower the total cost of borrowing. b. The shorter the loan maturity, the lower the monthly payments. c. The longer the loan maturity, the higher the monthly payments. d. The longer the loan maturity, the higher the amount of interest paid. e. The shorter the loan maturity, the higher the total cost of borrowing.

d. The longer the loan maturity, the higher the amount of interest paid.

A straight bankruptcy: a. exempts a debtor from all the tax payments and payments for alimony and child support. b. results in the repayment of debt within 3 to 5 years. c. eliminates all the obligations of a debtor. d. allows a debtor to retain some other personal assets as per federal regulations. e. results in the loss of all the assets of a debtor

d. allows a debtor to retain some other personal assets as per federal regulations

The FICO credit scoring system assigns points according to: a. marital status. b. salary. c. where you live. d. amounts owed. e. employment history

d. amounts owed

A(n) _____ is a type of reporting agency that collects and sells credit information about individual borrowers. a. consumer bureau b. credit scoring house c. bank d. credit bureau e. insurance company

d. credit bureau

When canceling a credit card, you should cut up the card and _____ that you are canceling your account. a. inform the credit bureau in writing b. call to inform the credit bureau c. call to inform the issuer d. inform the issuer in writing e. inform the future lender in writing

d. inform the issuer in writing

Which of the following modes of identity theft involves thieves obtaining your personal information from financial institutions and other sources under false pretenses? a. Skimming b. Dumpster diving c. Phishing d. Pretexting e. Old-fashioned stealing

d. pretexting

If the information in an individual borrower's credit report contains an error, he or she is entitled to: a. sue the credit bureau. b. erase the credit report. c. refuse to provide credit information. d. request a correction. e. withdraw from the credit bureau

d. request a correction

If you are expecting difficulties in making your payments, it is recommended that you: a. transfer your debt to another creditor. b. file a legal complaint. c. declare bankruptcy. d. talk to the creditors. e. obtain more credit.

d. talk to the creditors

The rate of interest charged on _____ loans changes periodically in keeping with prevailing market conditions. a. nominal-rate b. fixed-rate c. standard-rate d. variable-rate e. low-rate

d. variable-rate

Most of your debts would be totally discharged under Chapter _____ of the federal bankruptcy law. a. 12 b. 13 c. 9 d. 15 e. 7

e. 7

______ are the credit cards issued in conjunction with a sponsoring group—most commonly some type of charitable, political, or professional organization. a. Collateralized credit cards b. Retail charge cards c. Reward credit cards d. Secured credit cards e. Affinity cards

e. affinity cards