FINC 2400 Chapter 8

Which of the following is not a method by which financial institutions calculate finance charges on credit cards? A) Previous balance method B) Ending balance method C) Average daily balance method D) Adjusted balance method

B

Which of the following may not be a feature of some credit cards? A) Credit limits B) Annual fees C) Grace periods D) Cash advances

B

Which of the following personal information should not be asked on a credit card application? A) Stocks and bonds owned B) Race or ethnic group C) Employment history D) Expenses and commitments

B

Which of the following personal information would not be asked on a credit card application? A) Cash inflows B) Country of birth C) Capital and collateral D) Cash outflows

B

A personal credit card statement does not contain which of the following? A) Previous balance B) Current balance C) Account number D) Who purchased the item

D

Cash advances are A) a good way to finance your purchases. B) cheaper than a line of credit. C) not shown on the credit card statement. D) easy to obtain at an ATM.

D

Which of the following is not correct about cash advances? A) There is no grace period for cash advances. B) The interest rate for cash advances is higher than for purchases. C) A cash advance is like a loan. D) A transaction fee of 5% may be charged.

D

A credit card statement will not show the method of calculating finance charges.

FALSE

Because of the short-term nature of credit card lending, the condition of the economy is not considered.

FALSE

The interest you pay when using credit cards can have a major impact on the total amount you owe.

TRUE

An alternative to MasterCard, Visa, and American Express credit cards is a retail or proprietary card that is issued for use at a specific retail establishment.

TRUE

Because credit card interest rates are usually quite high, you should pay off your credit card balances before you invest funds anywhere else.

TRUE

Cash advances on credit cards normally cost you interest from the date of the advance and also a transaction fee of 1 to 2 %.

TRUE

Congress has passed regulations that protect consumers who use credit card services.

TRUE

Credit card companies offer many incentives, such as airline miles and bonuses to get you to use their cards.

TRUE

Credit cards can eliminate the need for carrying large amounts of cash.

TRUE

Credit limits may be as high as $10,000 for those credit card holders who have an exceptional credit history.

TRUE

Even if you cannot pay your credit card bill in full, you should still attempt to pay as much as possible so that you can minimize finance charges.

TRUE

Finance charges apply only to balances that were not paid in full before their due date in the current billing period.

TRUE

If you pay your total credit card balance before the grace period, you normally are not charged any interest.

TRUE

It is not difficult to find a credit card company that is eager to extend credit to you.

TRUE

One advantage of credit cards is that you can receive free financing if you pay off your balance each month.

TRUE

One disadvantage of a proprietary credit card is that it limits your purchases to a single merchant

TRUE

One of the disadvantages of credit cards is that they allow you to spend beyond your means.

TRUE

Some credit cards offer card users cash rewards if they exceed a certain spending level each month.

TRUE

The annual percentage rate (APR) is useful because it allows you to easily compare financing costs among various possible creditors.

TRUE

The annual percentage rate (APR) on credit is the simple interest rate after including any fees (such as an application processing fee) imposed by the creditor.

TRUE

To properly manage your money you should use a credit card only if you will have the cash to cover the payment when you receive your credit card statement.

TRUE

A credit card whose interest rate changes as a specific market interest rate changes is said to have a A) variable rate. B) fixed rate. C) constant rate. D) tiered rate.

A

All of the following are true of prestige credit cards except they A) have a longer grace period than other cards. B) may have substantially higher fees. C) provide extra benefits to cardholders. D) are given to individuals who have an exceptional credit standing.

A

You have a credit card on which your beginning balance for the month was $400. On the 10th of the month you took out a cash advance of $500. During the month you made purchases of $250. Assuming that the interest rate on purchases is 15% (1.25% per month), the rate on cash advances is 18% (1.5% per month), and there is a 1% fee on all cash advances, what would you have to pay to pay off your account if your due date is the 30th of the month. A) $1,165.00 B) $1,222.50 C) $1,305.00 D) $1,342.50

Answer: A Explanation: A) Beginning balance $400 Interest on beginning balance ($400 × 0.15)/12 $5 Cash advance $500 Service charge on cash advance ($500 × 0.01) $5 Interest on cash advance ($500 × 0.18) ÷ 3 × 2 $5 Current month's purchases $250 Total pay-off amount $1,165

What is the interest cost and the total amount due on a six-month loan of $1,500 at 13.2% simple annual interest? A) $99; $1,500 B) $99; $1,599 C) $198; $1,698 D) $198; $1,500

Answer: B Explanation: B) $1,500 × .132 × 6/12 = $99; $1,500 + $99 = $1,599

New regulations that provide clearer and more favorable financing rules for individual credit card users do all of the following except A) prohibit interest rate increases if you miss a payment on another credit card. B) cap the amount of any increase to 5%. C) require a 45 day notice of any credit card interest rate increase. D) prohibit the rate on existing credit card balances from being increased unless you are at least 60 days late on payments.

B

All of the following are provisions of the Credit CARD Act of 2009 except A) cardholders must be given at least 21 days from the day in which the bill is mailed to make a payment. B) cardholders younger than age 21 must show proof of their income or have a co-signer. C) cardholders can spend beyond the limit imposed on the credit card. D) promotional interest rates must be offered for a period of at least six months.

C

Credit card companies' fees cannot exceed ________of the initial credit limit. A) more than 5% B) more than 10% C) more than 50% D) more than 25%

D

Why is it important to carefully consider your credit cards when developing a budget, financial plan and personal financial objectives? A) You should include more than the minimum payments in the budget to pay off the balances as soon as possible and minimize interest expense. B) Evaluate relative interest rates of all cards and other loans, and investments to understand how best to prioritize payments and decide on best use of excess cash flow. C) Financial plan should really focus on investing excess cash flow for retirement. D) Both A and B are correct

D

If you have credit problems, you should contact a credit repair service instead of trying to resolve the issues yourself

FALSE

The Consumer Financial Protection Bureau was created in 2010 to ensure that credit card companies are treated fairly.

FALSE

You should cancel any credit card that is not sponsored by a company that sells necessities.

FALSE

You should invest in risky investments instead of paying off your credit card debt because the return might be higher than the cost of financing.

FALSE

A self-imposed credit limit indicates that you will use a credit card only if you will have the cash to cover the payment when you receive your credit card statement.

TRUE

Identifying specific goals for managing your credit is an important part of your personal financial plan.

TRUE

If you have exhausted all efforts to resolve an excessive credit card balance, personal bankruptcy may be your only option.

TRUE

Your credit card statement must state how long it will take you to pay off the existing balance due when paying only the minimum amount each month.

TRUE

There is no cost to the merchant when you use a MasterCard or Visa credit card.

FALSE

When applying for a credit card, the amount of savings that you have will not be a factor in the credit card company's decision.

FALSE

When using credit cards, there is no way to keep track of individual expenditures.

FALSE

Advantages of using credit include the ability to make purchases without cash and the convenience of not carrying checks.

TRUE

It is good financial planning to pay only the minimum credit card payment and thus maintain a balance since interest rates are low on credit cards.

FALSE

MasterCard and Visa credit cards are not accepted by gas stations such as Shell, which issue their own credit cards.

FALSE

By reviewing your credit card statement, you can determine all of the following except A) total purchases made year-to-date. B) your available credit remaining. C) if a payment can be made that will avoid interest charges. D) how much time you have to make a payment.

A

Credit cards have all of the following advantages except A) they allow you to borrow cash interest free for 60 days. B) make purchases without carrying cash. C) obtain free financing until the bill is due. D) itemized monthly statement

A

In comparing credit cards to other forms of credit, which of the following is true? A) Credit cards are generally the most expensive form of credit. B) You should invest funds before paying off your credit cards. C) It is prudent to borrow from some cards to pay off other credit cards. D) All of the above.

A

Jill just borrowed $6,000 and will be charged a simple interest rate of 12 percent. Jill will pay ________ interest for borrowing the money on September 1 and repaying the money on December 31. A) $240 B) $420 C) $720 D) $1,200

A

When using your credit card frequently, it is wise to A) pay off the balance every month. B) make only the minimum payment to conserve cash. C) use the card that offers the most points regardless of other provisions. D) Both A and C are correct.

A

Which of the following are good tips on the use of a credit card? A) Treat it as a means of convenience B) Use it as a source of funds C) Make the minimum required monthly payment D) All of the above

A

Which of the following is not true about annual fees on credit cards? A) The fees are the same on all credit cards. B) The fees may be high, amounting to several hundred dollars per year for some prestige cards. C) Many cards do not have annual fees. D) Some cards may waive the fees for individuals who pay their credit card bills in a timely manner

A

Which of the following is not true regarding cash advances on credit cards? A) They are treated just like other charges on your credit card. B) There is a charge for interest from the time you take the advance to the time you pay it off. C) There is also a transaction fee on most cash advances. D) The grace period does not apply to cash advances.

A

Which of the following is not true regarding payroll cards? A) The employer can require employees to accept their wages on these cards. B) Employers use payroll cards because they are cheaper than issuing payroll checks. C) Fees are frequently associated with the cards. D) The cards are convenient for employees who lack bank accounts.

A

Which of the following methods of calculating finance charges on credit cards is least favorable to the cardholder? A) Previous balance method B) Ending balance method C) Average daily balance method D) Adjusted balance method

A

Which of the following statements is true about bank credit cards like VISA and MasterCard? A) They are an excellent source of emergency funds for unexpected expenses. B) Their interest rate is generally lower than a loan at a credit union. C) Like home equity loans, the interest paid on credit cards is tax deductible. D) Their interest rate is lower than home equity lines of credit.

A

You are presented two choices to borrow funds for a significant unexpected expenditure. it will take at least three years to pay off the loan assuming you make more than the minimum payment. Which choice is the least cost alternative in terms of interest paid over the life of the loan? A) A credit card with a variable interest rate of 4 % over the prime rate; for info, the latest forecast is for prime to stay below 5% throughout the life of your loan. B) An interest only balloon payment loan for 3 years with 10% interest, but your monthly payments would be half of those compared to the credit card. C) There is not enough information to make the decision. D) Both A and B are about equal since the interest only payment aspect offsets the slightly higher interest rate on the credit card

A

John is considering pursuing one of two credit cards. Credit card "A" has no annual fee and charges an interest rate of 12.5%. Credit card "B" has an annual fee of $45 but charges an interest rate of 9%. If John is likely to have an average credit card balance of $2,000, the lowest annual expenses John could have with one of these two cards would be A) $225. B) $180. C) $250. D) $240.

Answer: A Explanation: A) Credit card "A": $2000 × .125 = $250 Credit card "B": $2000 × .09 = $180 + $45 = $225

Assuming you were charged simple interest of 5% on a loan of $1,000 that requires you to repay in two payments, one at the end of the first six months and one at the end of the second six months, total payments on the loan would be A) $1,037.50. B) $525.00. C) $512.50. D) $1,000.00.

Answer: A Explanation: A) First payment: $1,000 × .05 × 6/12 = $25; $25 + $500 = $525.00 Second payment: $500 × .05 × 6/12 = $12.50; $12.50 + $500 = $512.50 $1,037.50

Compute the new balance on a credit card assuming that: · Beginning balance = $450 · Purchases during the month = $300 · Payments made within the grace period = $250 · Interest rate = 18% A) $550 B) $503 C) $516 D) $1,000

Answer: B Explanation: B) Beginning balance $450 Less payment $250 Balance subject to interest $200 Interest ($200 × 0.015) $3 Current month's purchases $300 New balance $503

As of November 14, Ben has an outstanding credit card balance of $1,100 from purchases made over the past month. The new billing period begins on November 15. Assume Ben's outstanding balance for the first 15 days of this new billing period (Nov. 15-29) is $1,100. Then on November 29, the financial institution receives a payment of $600 from Ben, reducing his balance to $500. This is the balance for the remaining 15 days. Using the adjusted balance method and a monthly interest rate of 2.5%, Ben's finance charge would be A) $15.00. B) $12.50. C) $27.50. D) $20.00.

Answer: B Explanation: B) $500 × .025 = $12.50

Assuming you were charged simple interest on a loan of $4,900 which requires you to repay in one year $5,292, what rate of interest would you be charged? (Round interest rate to the nearest hundredth percent if necessary.) A) 9.26% B) 8% C) 7.41% D) 11% Answer:

Answer: B Explanation: B) ($5,292 - $4,900)/$4,900 = 8%

You are considering applying for one of two credit cards. Credit card "A" has an annual fee of $30 and charges interest of 10%. Credit card "B" has no annual fee, but charges an interest rate of 15%. If you carry an average balance of $500 on your credit card, the lowest total annual expenses you could have with one of these two credit cards would be A) $50. B) $80. C) $75. D) $90.

Answer: C Explanation: C) Card "A" $500 × 0.10 = $50 + $30 = $80 Card "B" $500 × 0.15 = $75

As of November 14, Ben has an outstanding credit card balance of $1,100 from purchases made over the past month. The new billing period begins on November 15. Assume Ben's outstanding balance for the first 15 days of this new billing period (Nov. 15-29) is $1,100. Then on November 29, the financial institution receives a payment of $600 from Ben, reducing his balance to $500. This is the balance for the remaining 15 days. Using the previous balance method and a monthly interest rate of 2.5%, Ben's finance charge would be A) $15.00. B) $12.50. C) $27.50. D) $20.00.

Answer: C Explanation: C) $1100 × .025 = $27.50

Bill borrowed $3,600 and will be charged a simple interest rate of 18%. Bill will pay ________ interest for borrowing the money on April 1 and repaying the money on December 31. A) $468 B) $648 C) $486 D) $162 Answer:

Answer: C Explanation: C) $3600 × .18 × 9/12 = $486

) In comparing credit cards to other forms of credit, which of the following is false? A) Credit cards are generally the most expensive form of credit. B) You should pay the most expensive debt off first. C) Credit cards can be viewed as a source of funds. D) A home equity loan is a way of combining credit card and other debt.

C

Suppose you have a credit card balance of $500 that you were unable to pay off. During the current month you purchase another $250 worth of products. You made a payment during the grace period of $300. Assuming your retail credit card company charges an annual interest rate of 22%, compute your new balance. A) $510 B) $250 C) $494 D) $454 Answer:

Answer: D Explanation: D) Beginning balance: $500 Less payment: $300 Balance subject to interest $200 Interest ($200 × .22) $44 Current month's purchases $250 New balance $294

As of November 14, Ben has an outstanding credit card balance of $1,100 from purchases made over the past month. The new billing period begins on November 15. Assume Ben's outstanding balance for the first 15 days of this new billing period (Nov. 15-29) is $1,100. Then on November 29, the financial institution receives a payment of $600 from Ben, reducing his balance to $500. This is the balance for the remaining 15 days. Using the average daily balance method and a monthly interest rate of 2.5%, Ben's finance charge would be A) $15.00. B) $12.50. C) $27.50. D) $20.00.

Answer: D Explanation: D) ($1100 + $500)/2 = $1600/2 = $800 × .025 = $20

All of the following are true of the grace period on credit cards except it A) is usually about 20 days. B) applies only to cash advances. C) is the time in between the time the statement is "closed" and the time the payment is due. D) amounts to free credit time.

B

Ben owes $3500 on his credit card which bears an interest rate of 1.5% per month or 19.6% per year. Since Ben is maxed out on his credit limit he is no longer charging anything to the card, but is only making the required monthly minimum payment which is 1.25% of the outstanding balance. How much of Ben's next payment will go towards paying off the outstanding balance? A) $10 per month B) $0; Ben is not even paying enough to pay the monthly interest charge. C) $8.75 D) 443.75

B

Credit has its advantages and disadvantages. Which of the following is false? A) Credit cards should be used with discipline. B) You should spend up to the limit on all your credit cards. C) Cash advances are available through a credit card. D) Bankruptcy is the worst-case scenario from poor credit management.

B

For good financial management, you should treat a credit card as A) a source of funds. B) a means of convenience. C) a way to finance everything. D) an inexpensive form of financing.

B

If a credit card has a provision allowing you to make purchases beyond the stated credit limit for a fee, it is referred to as A) a purchase protection plan. B) over limit protection. C) a grace period. D) a first forgiveness provision.

B

On a credit card, a finance charge is applied to A) any purchase. B) any balance not previously paid. C) current purchases. D) future purchases.

B

The annual percentage rate (APR) is all of the following except A) a simple interest rate for borrowing money for a year. B) it requires a complex formula to compute. C) it includes fees such as application processing fees. D) it allows easy comparison of financing costs among various creditors.

B

When obtaining a credit card you should try to obtain A) the highest maximum limit possible. B) a maximum limit high enough to cover necessary monthly purchases. C) a maximum limit high enough to cover anything you might wish to purchase. D) the lowest maximum limit possible to restrict your usage.

B

A credit card issued by a financial institution and secured by funds deposited by the cardholder is a A) prepaid card. B) protected card. C) secured card. D) proprietary card.

C

APR means A) actual percentage rate. B) applied percentage rate. C) annual percentage rate. D) all-banks percentage rate.

C

Credit cards are generally used for such purchases as A) cars. B) homes. C) meals, clothing, and groceries. D) stocks.

C

If you borrowed $8,700 at 6% for one year, what would your total interest be if you are charged simple interest? A) $600 B) $9,222 C) $522 D) $600 Answer:

C

If you find yourself with an excessive credit card balance, the first thing you should do is A) borrow funds from family members. B) quit school and get a job. C) spend as little as possible. D) file for personal bankruptcy.

C

On your credit card statement, the amount that you owe the financial institution now is called the A) previous balance. B) minimum payment. C) new balance. D) payments.

C

Some credit card companies will waive the annual fee on a credit card if A) you use the card infrequently. B) you carry a large balance from month to month. C) you pay your bills in a timely manner. D) Credit card companies never waive annual fees.

C

The easiest way to establish credit is to A) purchase a new car with a car loan. B) purchase a house with a mortgage. C) obtain a credit card. D) pay cash for all your purchases.

C

When making payments on a credit card, the amount paid is first applied to ________ and the remainder is applied to ________. A) late fees; interest B) balance due; late fees C) interest for the month; balance due D) The entire payment is applied to the balance due.

C

Which of the following is not a method for computing interest on credit cards? A) Previous balance method B) Average daily balance method C) Present value of future payment method D) Adjusted balance method

C

Which of the following statements is not true of prepaid cards? A) Many fees may be associated with them. B) Some prepaid cards can be used to withdraw cash from ATM's. C) They can be useful in rebuilding an individual's credit record. D) They offer less protection against theft than standard credit cards.

C

MasterCard, Visa, and American Express credit cards all allow you to pay only a portion of your amount due and finance the remainder from month to month.

FALSE

Prestige cards always charge higher interest rates, but offer extra benefits such as access to private jet programs and concierge service at hotels.

FALSE

"Wise" use of credit cards includes the following behaviors A) tracking your purchases. B) paying off the entire card balance monthly to avoid interest charges. C) using credit if you find something "you just have to have." D) Both A and B are correct.

D

All of the following are disadvantages of proprietary credit cards except A) your purchases are limited to a single merchant per card. B) you may need several credit cards. C) you receive several billing statements. D) it takes considerable time to process your application to allow you to begin obtaining credit

D

Credit cards with tiered interest rates charge cardholders who A) carry large balances a lower rate. B) pay off their balance monthly a higher rate. C) make early payments a higher rate. D) carry large balances a higher rate.

D

In comparing credit cards, which of the following is false? A) Some cards are more widely accepted than others. B) Some cards offer a teaser interest rate. C) Some cards charge an annual fee and others do not. D) Some cards allow you to always carry a balance from month-to-month with no interest.

D

It is a good practice to review your credit card statement online as often as daily or weekly in order to A) make sure there are no fraudulent charges. B) make sure there are no duplicate or erroneous charges from merchants. C) monitor your spending patterns. D) A, B and C are all correct.

D

Sandy had a beginning balance on her MasterCard statement of $300. This month she had purchases of $400, payments of $300, and a $100 cash advance. To avoid interest charges, Sandy must make a payment of A) $400. B) $500. C) $100. D) Sandy cannot avoid interest charges.

D

The ________ method charges interest based on the balance at the beginning of the new billing period. A) new cycle B) adjusted balance C) average daily balance D) previous balance

D

When you apply for a credit card, the potential creditor will look at which of the following as a source of future debt payments if necessary? A) Cash outflows B) Credit history C) Potential inheritances D) Balances in savings accounts

D

The interest charged on purchases and cash advances on credit cards is computed in the same way.

FALSE

The previous balance method takes into account the time that you pay off any part of the outstanding balance

FALSE

The simple interest rate includes any fees charged by the creditor.

FALSE

Credit cards are commonly used to pay for items such as clothing, car repairs, or a new car.

FALSE

Creditors are willing to extend credit when the economy is weak to stimulate purchases

FALSE

If it takes you four years to pay off a loan, you have to pay the total annual interest four times.

FALSE

If you discover an error on your credit card statement, you should not pay any portion of the balance until the matter has been resolved.

FALSE

If your credit card company decides to increase your interest rate, it must notify you 30 days in advance.

FALSE

) Financial institutions issuing MasterCard and Visa credit cards typically charge a high rate of interest on the credit extended.

TRUE

) One advantage of using a credit card is that you receive a list of your purchases, which enables you to keep track of your spending.

TRUE

A credit card statement lists purchases that were made with the credit card as well as any balance carried forward from the previous statement.

TRUE