ch. 7

The pros and cons of T&E credit cards, such as American Express, include: full payment is due each month a monthly finance charge is due regardless of the balance annual fees are typically low no finance charge is incurred as full payment of the balance owed is due each month annual fees are typically high partial payment of the balance is due each month

-full payment is due each month -no finance charge is incurred as full payment of the balance owed is due each month -annual fees are typically high

What would be the interest cost (simple interest) for a $2,000 loan with a 6% rate for a Half of a year?

60 2000*6%*.5

Two situations when you should avoid credit are: when you don't Blank 1 of 1 or really want the purchase, and when you could pay cash but choose to finance the needed item. (Enter one word per blank.)

need (or require)

The two major categories or types of credit are Blank 1 of 1-end and closed-end credit.

open

Long-term financing is more costly than short-term financing because:

you will pay more in interest charges

The Truth in Lending law of 1969 requires lenders to state the cost of borrowing as a specific Blank 1 of 1 amount so that consumers know exactly what the credit charges are. This is a one word answer.

dollar

Most credit cards carry a special Blank 1 of 1, based on the percentage of the amount borrowed, that is applied when a cash advance is taken out. This is a one word answer.

fee, charge, or rate

Credit cards can be a cheaper alternative to an installment loan if the need is short term (less than a month). This is because of the Blank 1 of 1period that is often allowed by credit card companies.

grace

A married couple that does not talk about money could be

having debt problems

Long-term financing is more costly than short-term financing because of higher Blank 1 of 1 costs.

interest

Credit life insurance is generally ____ expensive compared to equivalent term life insurance.

more

The interest rate on cash advances is often Blank 1 of 1 than the rate on purchases. This is a one word answer.

more

After Chapter 13 bankruptcy, some people find obtaining credit ______.

more difficult

Family members may only charge interest they would have earned on the money if they had deposited it in a ______ account.

passbook

The new Credit CARD Act requires creditors to include a warning on the monthly statement about making only the minimum _____________

payment

There are several reasons that you should borrow from a credit union, including their patience in dealing with borrowers who have good reasons for missed payments, and they provide Blank 1 of 1 service.

personalized

In Chapter 7 bankruptcy, a debtor is required to draw up a _____ listing his or her assets and liabilities.

petition

A credit counseling organization usually provides credit management classes and helps you devise a credit management ___________

plan

The costs of Chapter 13 bankruptcy include court costs, lawyer fees, and Blank 1 of 1 fees.

trustee

The costs to Chapter 13 bankruptcy include:

trustees' fees and costs attorneys' fees court costs

Which of the following are signs of possible debt problems? decreasing the total balance due on credit cards every month using up savings borrowing money to pay old debts having little in savings getting a credit card revoked

using up savings borrowing money to pay old debts having little in savings getting a credit card revoked

Ronnie purchases furniture for $5,000 by using his credit card. The credit card company charges 19.5% interest and indicates that you must make a minimum payment of 3%. Norma purchases furniture for $5,000 by using her credit card. The credit card company charges 19.5% interest and indicates that you must make a minimum payment of 5%. Which of the following statements is true?

Because Norma's minimum payment is larger, the time required to pay off her credit purchase will be lower than the time required to pay off Ronnie's credit purchase.

which of the following are factors that determine a simple interest calculation?

The amount of time for which the principal is borrowed and The amount borrowed or principal amount

Parents or s are often the source of the least expensive loans. T or F

True

True or false: The rule of 78ths is a mathematical formula to determine how much interest has been paid at any point in a loan.

True

Cash advances are obtained through your Blank 1 of 1 card at a bank or through an ATM machine. This is a one word answer and found in the discussion of cash advances. This is a one word answer.

credit

One of the intangible costs of bankruptcy is the difficulty obtaining Blank 1 of 1 in the future.

credit (or loans)

The two main activities of the CCCS are: helping families with debt problems by helping them manage debts teaching families how to avoid heavy debt burdens in the future giving grants to families with heavy debt burdens lending money to families with heavy debt burdens

-helping families with debt problems by helping them manage debts -teaching families how to avoid heavy debt burdens in the future

If you borrow $200 and it cost you $27 in interest with a service charge of $6, what is the finance charge?

33

Rebecca wants to buy a new saddle for her horse. The one she wants usually costs $500, but this week it is on sale for $400. She does not have $400, but she could buy it with $50 down and pay the rest in 6 months with 10 percent interest. Does Rebecca save any money buying the saddle this way?

350*10%*6/12--> 17.5 +350+ 50 downpayment= 500-417.50= 82.50 saved

Which of the following are advantages of borrowing from a credit union? Can get a loan without being a member Personalized service Interest free loans Patient with borrowers

Personalized service Patient with borrowers (You cannot get a loan without being a member, and Credit unions do charge interest on their loans.)

The finance charge is the total dollar amount you pay to use credit.

T

True or false: The Fair Debt Collection Practices Act prohibits certain practices by agencies that collect debts for creditors.

T (Reason: The act regulates the way collection agencies do business. For example, a debt collector may not contact you at inconvenient times or places.)

Patricia Newton is going to buy a new car, and she needs to apply for a loan to cover the purchase. She knows she can get a loan for up to 6 years, but she would prefer a shorter-term loan. She selects a 4-year loan. Patricia is lowering her lender's risk by:

repaying the loan faster.

Dave borrowed $500 on January 1, 2019. The bank charged him a $5 service charge and interest was $50. If Dave paid the $500 in 12 equal monthly payments, what was the APR?

Principal = $500, $ interest amount = $50 + $5 12 equal monthly payments APR Formula = (2 x # of pmts x $ interest amount) / Loan principal x (# of pmts + 1) APR = (2 x 12 x $55) / $500(12+1) APR = 1320/6500 APR = .203 = 20.3%

Your uncle lends you $2,000 less $100 (interest at 5 percent), and you receive $1,900. Use the APR formula to find the true annual percentage rate. Assume you repay the entire loan in one year.

(2 x 1 x $100) / $1,900(1+1) = 5.263%

Installment loans are a cheaper alternative to credit cards because: installment loans are open-ended, meaning there is no due date they are cheaper over many months or years when an extended payment period is needed their interest rates are often lower than credit card rates they often carry no interest rate

-they are cheaper over many months or years when an extended payment period is needed -their interest rates are often lower than credit card rates

What would be the interest cost (simple interest) for a $3,000 loan with a 8% rate for nine months of a year?

180

Damon convinced his aunt to lend him $2,000 to purchase a plasma digital TV. She has agreed to charge only 6 percent simple interest, and he has agreed to repay the loan at the end of one year. How much interest will he pay for the year?

2,000*6%*1= 120

Lee has a $2,000 loan that is to be repaid in two payments, one in the middle of the year, and one at the end of the year. The stated interest rate on his loan is 9.5%. What is the total amount that he will have to pay on the loan?

2,000*9.5%*1/2= 95 + 1,000= 1,095 1,000*9.5%*1/2= 47.5 + 1,000= 1,047.5 1,095 + 1,047.5 = 2142.5

It is said that the least expensive way to borrow is when you borrow on the value of a financial asset. Which of the following loans would meet that test? Certificate of deposit loan Life insurance cash surrender value loan A home equity loan A credit card cash advance

Certificate of deposit loan Life insurance cash surrender value loan

Due to the ____________________________, credit card companies are now required to show you how much time it will take to pay off your credit card debt if you make the minimum payment amount and the total interest you will pay by only paying the minimum payment.

Credit Card Accountability Responsibility and Disclosure Act

Under Simple interest calculations for declining balance method, as the balance you owe ____________ after each payment, the interest due will ____________.

Decreases; decrease

the declining balance method requires that you make ______ payments to pay off a loan and the amount of interest you pay will be _________.

More; lower

Dorothy lacks cash to pay for a $600 dishwasher. She could buy it from the store on credit by making 12 monthly payments of $52.74. The total cost would then be $632.88. Instead, Dorothy decides to deposit $50 a month in the bank until she has saved enough money to pay cash for the dishwasher. One year later, she has saved $642—$600 in deposits plus interest. When she goes back to the store, she finds the dishwasher now costs $660. Its price has gone up 10 percent. Was postponing her purchase a good trade-off for Dorothy?

No

If you have funds available on your credit card, you can obtain a cash advance from: a bank or credit union any retail merchant an ATM

a bank or credit union an ATM

A "float" period can be defined as:

a certain number of days during which no interest is charged.

Sidney took a $200 cash advance by using checks linked to her credit card account. The bank charges a 2 percent cash advance fee on the amount borrowed and offers no grace period on cash advances. Sidney paid the balance in full when the bill arrived. (a) What was the cash advance fee? (b) What was the interest for one month at an APR of 18 percent? (c) What was the total amount Sidney paid?

a. 200*2%= $4 b. $200 x .18 x 1/12 = $3 of monthly interest c. 4+3+200 = 207

The interest rate on cash Blank 1 of 1 is often higher than the rate on purchases.

advances, advance, loan, loans, or borrowing

The first thing a debtor must do in a Chapter 7 bankruptcy is to draw up a petition listing Blank 1 of 1 and liabilities or debts for submission to the court.

assets

The major provisions of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009: require companies to inform consumers of rate increases at least 25 days in advance state that a teaser rate must be good for at least six months limits the issuer's ability to increase the interest rate in the first year prohibit cards being issued to consumers over 60 unless they have a cosigner set a consistent due date for each month

state that a teaser rate must be good for at least six months limits the issuer's ability to increase the interest rate in the first year set a consistent due date for each month

Dave borrowed $500 for one year and paid $50 in interest. The bank charged him a $5 service charge. What is the finance charge on this loan?

50+5= 55

Dave borrowed $500 on January 1, 2019, and paid it all back at once on December 31, 2019. The bank charged him a $5 service charge and interest was $50. What was the APR?

55/500=11%

You have been pricing an MP3 player in several stores. Three stores have the identical price of $300. Each store charges 18 percent APR, has a 30-day grace period, and sends out bills on the first of the month. On further investigation, you find that store A calculates the finance charge by using the average daily balance method, store B uses the adjusted balance method, and store C uses the previous balance method. Assume you purchased the MP3 player on May 5 and made a $100 payment on June 15. What will the finance charge for June be if you made your purchase from store A? From store B? From store C?

Each store charges 18 percent APR, has a 30-day grace period May 5 and made a $100 payment on June 15, so 42 days A: Average Daily Method: ($300 Beg Bal + $200 End Bal)/ 2 x .18 x 1/12 =$3.75 B: Adjusted Balance Method: ($300 Beg Bal - $100 Pmt) x .18 x 1/12 = $3.00 C; Previous Balance Method: $300 Beg Bal x .18 x 1/12 = $4.50

A person filing for relief under the bankruptcy code is called bankrupt, not a debtor.

F

True or false: Family loans are simple arrangements and can benefit both parties and no documentation is recommended.

F (Reason: Family loans can be complicated, and steps should be taken to put family loan terms in writing.)

True or false: Most credit card companies do not charge a fee when a cash advance is made.

False

Which of the following statements is not true? Finance companies offer inexpensive loans Cash advances can be very expensive Credit unions may be more willing to be patient with borrowers than other lending institutions Micro lending organizations generally offer reasonable interest rates

Finance companies offer inexpensive loans

If consumers pay only the minimum payment required each month, then they will pay ___________ total interest charges before their debt is repaid.

Higher

Collection agencies are allowed to:

contact you as early as 8 am.

The most commonly purchased type of credit insurance is

credit life insurance

The three types of credit insurance are: universal life credit property credit accident and health credit life credit card insurance

credit property credit accident and health credit life

If you cannot make a payment on a debt when due, contact the Blank 1 of 1 at once to work out a modified payment plan. This is a one word answer.

creditor

The Fair Debt Collection Practices Act ______ to creditors that collect debts themselves.

does not apply

The rule of 78s formula favors ____.

lenders

Which of the following best explains why credit cards are more dangerous than installment loans? A traditional credit card is tied to your home equity, and, therefore, its use puts your home at risk. A credit card is easier to use than taking out an installment loan. Installment loan interest is tax deductible. By law, lenders cannot collect slow paying installment loans.

A credit card is easier to use than taking out an installment loan.

Before deciding to borrow money, you should ask yourself: Do I need a loan? Can I afford a loan? Can I qualify for a loan? All of these None of these

All of these

Calculating Simple Interest on a Loan: You can buy an item for $100 on an in-store payment plan with the promise to pay $100 in 90 days. Suppose you can buy an identical item for $95 cash. If you buy the item for $100, you are in effect paying $5 for the use of $95 for three months. What is the effective annual rate of interest?

Find the interest rate of paying $5 to borrow $95 for 3 months. $5/3 x 12 = $19.99 ANNUAL interest amount, round up to $20 $20 annual interest/ $95 loan amount = 21.05%

What is the best strategy if you can't make a payment on a debt? Notify the creditor as soon as possible in an attempt to work out a modified payment plan. Wait until the debt is turned over to a collection agency since they will have the authority to work out a payment schedule. Make a partial payment in hopes of making a compensating payment next month. Contact your credit union or bank in hopes of borrowing to make the payment.

Notify the creditor as soon as possible in an attempt to work out a modified payment plan.

For some debtors, bankruptcy had become an acceptable tool of credit management based on the number of declared bankruptcies in 2005.

T

If you want to minimize your borrowing costs, you may need to accept conditions that reduce the risk for your lender.

T

True or false: Loans from finance companies and appliance stores tend to be the highest cost loans.

T

In a Chapter 7 bankruptcy, which of the following debts may be excluded from discharge? Debts arising from fraud Debts arising from embezzlement Debts arising from driving while intoxicated Debts arising from larceny All of these

All of these

True or false: You should avoid credit when you don't need the purchase and when you can afford to pay cash to acquire the item.

T (Reason: If you don't need the item why buy it? And if you have the cash, why incur the cost of financing?)

True or false: The purpose of the Truth in Lending law of 1969 was to give consumers the information needed to compare credit costs on various loans.

T (Reason: The law required the reporting by lenders of the cost of the loan as a dollar amount so comparisons could be made.)

Bobby is trying to decide between two credit cards. One has no annual fee and an interest rate of 18 percent, and the other has an annual fee of $40 and an interest rate of 8.9 percent. (A)If Bobby pays his credit card balance in full each month, which card should he choose? (B) If Bobby just pays the minimum payment and carries a balance from one month to the next, which card should he choose?

A. Card 1: No annual fee, 18% interest, pick this one if plan to pay the card balance before the grace period expires Use $1,000 amount example: $1,000 x .18 = $180 Card 2: $40 annual fee, 8.9% interest, pick this if plan to carry a balance on the card Use $1,000 amount example: $1,000 x .089--> $89 + $40 fee = $129 He should choose the 1st one B. He should choose the 2nd one

Which of the following is generally considered to be expensive sources of loans? Credit unions Appliance companies Bank credit cards Department stores Finance companies

Appliance companies Bank credit cards Department stores Finance companies

Which of the following types of loans are offered by life insurance companies? Cash value of whole life Credit card secured by cash value Second mortgage Unsecured installment loan

Cash value of whole life

An example of a travel and entertainment card is: MasterCard Visa Discover Diners Club

Diners Club

What are the interest cost and the total amount due on a six-month loan of $1,500 at 13.2 percent simple annual interest?

Interest cost:1500*13.2%*(6/12) -->99 Total Amount Due: 1500+99= 1599

After visiting several automobile dealerships, Richard selects the used car he wants. He likes its $10,000 price, but financing through the dealer is no bargain. He has $2,000 cash for a down payment, so he needs an $8,000 loan. In shopping at several banks for an installment loan, he learns that interest on most automobile loans is quoted at add-on rates. That is, during the life of the loan, interest is paid on the full amount borrowed even though a portion of the principal has been paid back. Richard borrows $8,000 for a period of four years at an add-on interest rate of 11 percent. (a) What is the total interest on Richard's loan? (b) What is the total cost of the car? (c) What is the monthly payment? (d) What is the annual percentage rate (APR)?

Loan Principal = $8,000, 11% interest rate, 4 years, Use Add-On Method a. Total Interest = $8,000 x .11 x 4 years = $3,520 b. Total Cost of Car = $10,000 + $3,520 = $13, 520 c. Monthly Payment = ($8,000 + $3,520) / 48 months = $240 d. 2*48*(10000*11%) / 10000(49)--> 21.55%