Chapter 5: Consumer Credit: Advantages, Disadvantages, Sources, and Costs

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If you are a cosigner for a loan and the debt is not repaid, then that fact will appear on your credit report.

true

If you purchase something with a credit card, the finance charges you pay on an item could end up being more than the item is worth.

true

The question "what are your assets and net worth?" relates to

Capital

Which of the following electronically subtracts money from your savings or checking account to pay for goods and services?

Debit card

When evaluating your credit application, a lender may NOT

Deny you if you receive public assistance

Which of the following is an example of open-end credit?

Department store credit card

Which of the following is NOT associated with credit cards?

Down payment on a home

Which of the following is NOT a credit bureau?

FICO

A credit card holder who pays the full balance during the grace period each month is actually getting a free loan from the credit card company.

true

A credit file can include your spouse's name and Social Security number.

true

According to the Fair Credit Billing Act from 1975, a consumer may tell his credit card company to stop payment for a defective good if he made a sincere attempt to resolve the problem with the store.

true

Closed-end credit is used for a specific purpose and involves a specific amount.

true

Consumer credit dates back to colonial times when it was extensively used by farmers.

true

The periodic charge for the use of credit is

Interest

Home equity loans should be used for

Major expenses such as home improvements or education

A loan that must be repaid in total on a specified day, usually within 30 to 90 days is

Single lump-sum credit

Bankruptcy courts treat gift cards

The same way they handle unsecured debt

Consumer credit allows businesses to be more efficient or more productive.

false

Consumer credit refers to the use of debit cards for personal needs.

false

During the grace period, finance charges are assessed at only half the normal rate.

false

Experts suggest that you spend more than 20 percent of your after-tax (net) income on consumer credit payments.

false

FICO is a better score to use than VantageScore for consumers with limited credit histories.

false

In the five Cs of credit, capacity refers to the borrower's trustworthiness and stability.

false

In the five Cs of credit, capital refers to the borrower's ability to pay additional debts.

false

In the five Cs of credit, conditions refer to what will happen if the borrower does not repay the loan.

false

The most expensive loans are often provided by parents or other family members.

false

You have a legal right to sue a credit bureau if you observe an error in your file.

false

Credit can indicate stability since lenders consider you a good risk.

true

Economists recognize consumer credit as a major force in the American economy.

true

FICO and VantageScore are two methods used to judge creditworthiness.

true

Which is often considered to offer the least expensive loans?

Parents or family members

The use of property or savings to secure a loan relates to

Collateral

According to the Fair Credit Billing Act from 1975, a creditor must adjust the disputed amount in your account or tell you why the bill is correct within 30 days.

false

Although credit allows immediate satisfaction of needs and desires, a greater advantage is that it increases total purchasing power.

false

Interest paid on a credit card is a tax-deductible.

false

The Annual Percentage Rate is lower than the stated rate for loans that are repaid in monthly payments.

false

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it easier for consumers to file Chapter 7 bankruptcy.

false

The Equal Credit Opportunity Act requires that a lender not turn you down for credit based on your age as long as you are old enough to sign a legal contract, which is usually allowed at age 16.

false

The first sign of stolen identity might be that you get bills for a credit card account that you never opened.

true

The least expensive loans are often provided by parents or other family members.

true

The longer the term for a loan at a given interest rate, the higher the overall interest charges.

true

When used effectively, credit can help a consumer have more and enjoy more.

true

You should keep a record of your credit card number separate form your card.

true

A line of credit is

The maximum dollar amount of credit the lender has made available

Closed-end credit consists of loans made on a continuous basis with periodic bills for at least partial payment.

false

Consumer credit

Dates back to colonial times.

If you have reached the upper limit of debt obligations, your debt-to-equity is about

1

A typical grace period for many credit card issuers is

20 - 25 days

Experts suggest that the debt payments-to-income ratio should be a maximum of

20 percent

FICO socres generally range from

350 to 850

What step can you take if your credit application is denied?

Ask why you were denied credit

Installment credit exploded on the American scene with the advent of the

Automobile

Which of the following is NOT correct?

Credit cards typically offer a "float" of up to 10 days; Credit can increase the amount of money that will be available to spend in the future.

A credit report includes

Credit history

Home equity loans

Have interest that is tax-deductible

If you miss payments on a home equity loan, you can lose your

House

Which of the following is an example of closed-end credit?

Mortgage

When calculating the debt-to-equity ration, the following is NOT included:

Mortgage balance

Which of the following is a valid reason for borrowing?

Purchasing a new dishwasher, Borrowing for a college education, Purchasing a home, and Paying for a medical emergency

The Equal Credit Opportunity Act (ECOA) prohibits a lender form discriminating based on

Race, Nationality, Age, and Sex

Which of the following is the best scoring technique used in credit applications for consumers with limited credit histories?

VantageScore

Before buying goods and services on credit, a consumer should consider all except:

Whether the good or service will be worth more because they were purchased with credit instead of cash

A bankruptcy remains on a credit file for no more than 5 years.

false

A consumer applies for open-end credit to make a single purchase, such as a large appliance.

false

A disadvantage of using credit is its use when making a hotel reservation.

false

A secured credit card is most appropriate for someone with a strong credit background.

false

A trade off of credit is that it increases the amount of money that will available to spend in the future.

false

According to law, a creditor may threaten you credit rating while you are negotiating a billing dispute.

false

Many think that perhaps the greatest disadvantage of using credit is

The temptation to overspend.

If you are denied credit, you can contact the credit bureau and ask for a copy of your credit report. The bureau cannot charge a fee for this service as long as you ask to see your files within

60 days

Before taking out a loan, you should ask yourself whether you can meet all of your essential expenses and still afford the monthly loan payments. This can be determined by:

A and B are correct. ( Adding up basic monthly expenses then subtracting this total form take-home pay, Multiplying your take-home pay by 50 percent and subtracting your current loan payments.)

A cash advance

Accrues interest charges beginning the day the cash advance is made

Which of the following is NOT a valid credit application question?

All of the above are valid credit application questions. (How much of a loan are you requesting?, What is the account number for your checking account?, What is the name of the nearest relative not living with you?, and How many dependents do you have?)

Which of the following questions is NOT needed before deciding how and when to make a major purchase?

All of the above are valid questions to ask. (Do I have the cash I need for the down payment?, Does the purchase fit my budget?, Could I postpone the purchase?, and Could I use the credit I need for this purchase in some better way?)

Which of the following expressions is correct?

As the consumer goes, so goes the U.S. economy.

A credit cardholder who pays off his balances in full each month is known as

Convenience user

When used effectively, credit can result in

Improved lifestyle

A direct loan for personal purposes, home improvements or vacation expenses is called

Installment cash credit

Which of the following is NOT a valid reason for borrowing?

Paying for everyday living expenses

Credit bureaus get their information from all of the following except:

References

A prearranged loan up to a specified amount that a consumer can access by writing a special check is known as

Revolving check credit

Many people expect

Their incomes to increase to make it easier to make payments

Which of the following is the only online source authorized to provide a free credit report each year at your request?

www.annualcreditreport.com

Failure to repay a loan may lead to all except:

All of the answers may be a result of the failure to repay a loan. (Bankruptcy, Loss of income, Loss of a good reputation, and Damage to family relationships)

A loan officer is examining whether or not he/she will offer you a loan today. Specifically, he/she is examining your income and debts. Which of the five Cs is the loan officer reviewing?

Capacity

The question "will you repay the loan?" relates to

Character

Molly purchased a $1,500 HDTV from Best Appliances. She will make 12 equal payments over the next year to pay for it. She is using

Closed-end credit

The add-on interest calculation uses the formula: Interest = Principal (Rate of interest Time).

false

The amount of interest paid is independent of the length of the loan.

false

The debt-to-equity ratio is calculated by dividing your total liabilities, including mortgage, by net worth.

false

The easiest loans to obtain are also the least expensive.

false

The expected rate of inflation should not be considered when determining the amount of interest a creditor should charge.

false

The higher your FICO score, the more risk you pose to creditors.

false

The longer it takes for you to pay off a bill, the less interest you pay.

false

In the five Cs of credit, character refers to the borrower's trustworthiness and stability.

true

Installment sales credit is a loan that allows a consumer to purchase high-priced items.

true

Most information in your credit file may be reported for only 7 years.

true

Open-end credit consists of loans made on a continuous basis with periodic bills for at least partial payment.

true

The Fair Credit Reporting Act, enacted in 1971, places limits on who can obtain your credit report.

true

The Truth in Lending Act requires that creditors explain how they calculate the finance charge.

true


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