Chapter 6 - Managing Your Personal Finances

Sheldon has a home valued at $108,000 and an outstanding mortgage of $70,000. If his lender is willing to provide a home equity loan of up to 80% of market value, how much could Sheldon borrow using a home equity loan?

(108000*80%) - 70000 = 16400

Clare's annual gross salary is $36,000, and her after-tax income is $28,800. What is Clare's maximum recommended monthly consumer credit payment?

(28800/12) * 20% = 480

Russ and Lois have a home valued at $96,000 and an outstanding mortgage of $60,000. If their lender is willing to provide a home equity loan of up to 75% of market value, how much could they borrow using a home equity loan?

(96000*75%) - 60000 = 12000

If your monthly before-tax income is $2,000 and your monthly take-home pay is $1,500, your maximum monthly consumer credit payments should not exceed:

1,500 * 20% = 300

As a percent of take-home pay, monthly consumer credit payments should not exceed:

20%

If your total monthly consumer credit payments are $1000, and your monthly take-home pay is $4000 your debt safety ratio

4000/1000 = 25%

If a borrower has a high FICO score, then there is

A high chance that a lower interest rate will be charge for their loan (higher FICO score the better)

Which card is issued as a form of credit by department stores and oil companies

A retail charge card

______ are the credit cards issued in conjunction with a sponsoring group- most commonly some type if charitable, political, or professional organization

Affinity cards

straight bankruptcy

Allows a debtor to retain some other personal assets as per federal regulations

FICO credit scoring system assigns points according to

Amounts owned

Mike has a MasterCard with an annual fee of $25, 18% interest, and a $1,000 credit limit. He always pays the total outstanding balance monthly. His most recent monthly statement lists last month's payment, new charges this month totaling $1,500, and a $30 fee. That fee is most likely the result of

An over the limit fee

Actions that lead to a poor credit rating

Applying for a long-term loan and occasionally being late with a payment

Most expensive method for determining finance charges on revolving credit

Average daily balance (ADB) including new purchases

_____ is a reason that people use credjt

Being able to meet a financial emergency

Which of the following statements about the cash advances that the holder of a credit card can obtain from participating bank is true

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

straight bankruptcy is under

Chapter 7 code

The 5 Cs of credit are:

Character, Capacity, Collateral, Capital, Condition

A proper use of open account credit would be to buy a

Computer

The best way to build a strong credit card history

Consistently make payments on time

A _____ is a type of reporting agency that collects and sells credit information about individual borrowers?

Credit bureau

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:

Debit card

Which of the following cards provides direct access to your checking account

Debit card

a payment made using ___ is equivalent to paying by cash

Debit card

A big disadvantage of a debit card is that

Doesn't provide a line of credit

Chapter 7 of the bankruptcy code

Eliminates most of the financial obligations if the borrower

Which of the following is a result of excess unused credit capacity

FICO score reduced

A FICO score above 500 is considered exceptional True/False

False

A credit card user's credit rating will be hampered if he or she pays only the minimum monthly payment on a credit card True/False

False

A retail charge card can be accessed by writing checks against demand deposit True/False

False

All credit card have annual fees True/False

False

Always paying cash helps in establishing a high level of creditworthiness True/False

False

Credit card with very low minimum payment requirements are in the consumers' best interest True/False

False

Credit reports on individual borrowers are provided by credit card issuers True/false

False

It is necessary to give your SSN for identification when using a credit card True/False

False

Most family have only one source for consumer credit True/False

False

Overspending will help you manage your budget effectively True/False

False

Retail charge cards are cheaper than credit cards provided by financial institutions True/False

False

The intent of the Wage Earner Plan is to eliminate all of a debtor's obligation True/False

False

They key to creditworthiness is to maintain your debt safety ratio at 50% or above True/False

False

Using credit is the ideal way to meet basic living expenses. True/False

False

Your credit bureau file often includes information about your political and religious affiliations True/False

False

Most lenders immediately will ___ the first time that you have difficulty meeting your loan payments

Grant an extension

High FICO score mean

Higher chance of their loan getting approved

Forms of credit is among the cheapest and offers limited tax deductions

Home equity credit lines

Who make the decision whether or not to grant you a credit card

Individual creditors

An improper use of credit

Meeting a financial emergency

Nancy's take-home income is $3,000 per month, and she currently has a $1500 monthly consumer debt. Which of the following statements applies to Nancy's ability to handle additional debt?

Nancy cannot take on additional consumer debt because her debt safety ratio is higher than the lender's guidelines of 20% (1500/3000=0.50 aka 50% > 20%)

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?

No annual fee (frequent use, paying off outstanding balance)

William uses his bank credit card frequently; however, he always pays off the total balance on the card each month. What should William look for in a credit card given the way he uses a credit card?

No annual fee and long grace period (frequently use, pay off outstanding)

Convenience check

Obtain a cash advance from the bank that offers a credit card

A major reason to use credit

Occasionally for convenience

Any credit card purchase will effectively be an interest-free loan if you gave a zero balance when the grace period begins and you

Pay off the entire payment on/before the due date

It is good to use credit for

Paying rent for your home

If the information in an individual borrower's credit report contains an error, they entitled to

Request a correction

A frequent flyer card can be aptly classified as an

Reward card

______ are targeted at people with bad credit histories

Secured credit cards

If you are expecting difficulties in making your payments it is recommended that you:

Talk to the creditors

_____ involves some type of debt restructuring by establishing a debt repayment schedule

The Wage Earner Plan (chapter 13)

With a credit card you can often avoid interest charges if

The account balance is paid in full every month

What does the lender look at before granting credit to an applicant

The applicant's age

Which of the following statement is true about credit scoring systems

The credit scoring systems is based on extensive statistical studies

Debt Safety Ratio Formula

Total Monthly Consumer Credit Payments/ Monthly Take-Home Pay

A Person whole does not pay her credit balance in full every month should look for a credit card with a low interest rate True/False

True

A chapter 7 bankruptcy filing would result in the discharge of most of your debts True/False

True

A credit card application requests information that is routinely used to predict creditworthiness True/False

True

An individual can be overusing credit even if they can afford to make a minimum monthly payment on time True/ False

True

An unsecured personal credit line is a form of revolving credit True/False

True

Arranging for and fully repaying a small loan helps improve creditworthiness True/False

True

Cardholders who fail to make the minimum monthly payment on their credit card account are considered to be in default on their account True/False

True

Credit card issuers must disclose to credit applicants the annual percentage rate (APR) that they charge True/False

True

Credit score systems are often used by lenders to determine applicants' creditworthiness True/False

True

Credit should not be consistently used for purchasing nondurable goods True/False

True

Debit cards work like writing a check True/False

True

Families that have a steady source of income and a reasonable chance to repay debts would choose chapter 13 rather than chapter 7 of the U.S Bankruptcy Code True/False

True

For a fee, local credit bureaus can provide credit information to members about prospective borrowers in their community. True/False

True

If you initiated the phone call, it's okay to give your credit card information when ordering/ purchase from MAJOR catalog houses, airlines, hotels True/False

True

Lenders use the guideline that a borrower's monthly repayment burden should not be more than 20% of the borrower's take-home pay True/False

True

Paying a loan on schedule is one way to build a good credit history True/False

True

The majority of persons filing for bankruptcy choose chapter 7 of the U.S Bankruptcy Code True/False

True

The most common method used by lenders to apply finance charges on credit cards is the average daily balance (ADB) method, including new purchase True/false

True

The purpose of a credit investigation is to evaluate the kind of risk you pose to the lender True/False

True

You should not give your credit card account number over the phone to people or organizations who call you True/False

True

You should review your credit bureau file every year True/False

True

When canceling a credit card, you should cut up the card and _____ that you are canceling your account

inform the issuer in writing

To establish credit, you should first

open savings and checking accounts

Which of the following is usually excluded from a monthly credit card statement

the type of goods purchased

Retail charge cards are advantageous to merchants because

they help build consumer loyalty.