Chapter 06 - Using Credit

4) Obtaining Cash in a Hurry Many bank credit card issuers charge a transaction fee for non-ATM cash advances. Caroline has a bank credit card. If she takes a non-ATM cash advance, the bank will charge her 2% of the amount of the advance, or a flat fee of $5, whichever is more. Caroline needs to obtain a non-ATM cash advance of $100. What is her transaction fee? $______

$5

4) Obtaining Cash in a Hurry Many bank credit card issuers charge a transaction fee for non-ATM cash advances. Rosa has a bank credit card. If she takes a non-ATM cash advance, the bank will charge her 2% of the amount of the advance, or a flat fee of $5, whichever is more. Rosa needs to obtain a non-ATM cash advance of $200. What is her transaction fee? ________

$5

3) Debt Safety Ratio Alex wants to determine his current debt safety ratio. His monthly take-home pay is $4,500. He compiled the following monthly loan payment information: The total monthly loan payments figure Alex will use when computing his debt safety ratio is __________ and ________ include his house mortgage.

- $2,600 - does

3) Debt Safety Ratio Van wants to determine his current debt safety ratio. His monthly take-home pay is $5,000. He compiled the following monthly loan payment information: The total monthly loan payments figure Van will use when computing his debt safety ratio is ______ and ______________ include his house mortgage.

- $750 - does not

8) Revolving Credit Lines Today your home is worth $125,000. The balance you owe on your mortgage is $5,000. Your equity is $_________________. You __________ have to sell your home in order to gain access to your equity. According to your lending institution's policy, the maximum home equity line of credit is 80% of your home's worth. Eighty percent of your home's worth is $________________. Your lending institution follows the practice of most lenders as described in the previous paragraph. Your line of credit will be $________________. This line of credit is considered a loan that will be __________________________________________.

- 120,000 - do not - 100,000 - 95,000 - secured with an additional mortgage on your home

3) Debt Safety Ratio Van wants to determine his current debt safety ratio. His monthly take-home pay is $5,000. He compiled the following monthly loan payment information: Van's debt safety ratio is _____ and considered _____________________

- 15% - safe-manageable debt

3) Debt Safety Ratio Alex wants to determine his current debt safety ratio. His monthly take-home pay is $4,500. He compiled the following monthly loan payment information: Alex's debt safety ratio is _______ and considered __________________

- 20% - safe-maximum debt

8) Revolving Credit Lines Today your home is worth $275,000. The balance you owe on your mortgage is $75,000. Your equity is $_____________. You _________ have to sell your home in order to gain access to your equity. According to your lending institution's policy, the maximum home equity line of credit is 80% of your home's worth. Eighty percent of your home's worth is $_______________. Your lending institution follows the practice of most lenders as described in the previous paragraph. Your line of credit will be $______________. This line of credit is considered a loan that will be

- 200,000 - do not - 220,000 - 145,000 - secured with an additional mortgage on your house

8) Revolving Credit Lines Today your home is worth $250,000. The balance you owe on your mortgage is $20,000. Your equity is $__________________. You __________ have to sell your home in order to gain access to your equity. According to your lending institution's policy, the maximum home equity line of credit is 80% of your home's worth. Eighty percent of your home's worth is $_________________. Your lending institution follows the practice of most lenders as described in the previous paragraph. Your line of credit will be $________________. This line of credit is considered a loan that will be _________________________________________.

- 230,000 - do not - 200,000 - 180,000 - secured with an additional mortgage on your home

9) Select reasons why you were probably turned down for credit. Check all that apply.

- Debt safety ratio greater than 20% - Inaccurate credit report that reflects a poor credit history - History of personal bankruptcy - False or misleading information on your application - Large amount of available credit relative to income - Absence of checking, savings, or other credit accounts - Pattern of delinquent payments on credit - FICO score less than 350 - Inaccurate credit report that reflects a poor credit history

3) How can periodically computing one's debt safety ratio be useful? Check all that apply.

- It can influence decisions whether to return to school, if a loan will be needed to pay for it. - It can serve as an early warning system of approaching financial trouble, providing time to take preventive measures. - It can influence decisions about looking for a higher- or lower-paying job.

8) What do the three major forms of open (non-credit card) credit have in common? Check all that apply

- They are helpful in emergencies. - They provide funds that are easy to spend unwisely. - They provide funds that can easily be exhausted.

8) Revolving Credit Lines Overdraft protection is linked to your _____________________ in case you overdraw your account. It draws on a line of credit that is usually established ________________________________. You should use your overdraft provision _______________________. Frequent use of your overdraft provision can signal that you're _________________________.

- checking account - for between $500 and $1,000 - only for emergencies - living beyond your means

9) Bad news—your credit application was denied. What are the major factors about you that the lender used to evaluate your creditworthiness? Check all that apply

- condition - character - capacity

3) Debt Safety Ratio Alex's debt safety ratio changed to 15%. His take-home pay must have ______________ or his monthly loan payments must have __________________. Lenders may now be ________ willing to give him a loan than they were before this change.

- decreased - decreased - more

3) Debt Safety Ratio Van's debt safety ratio changed to 20%. His take-home pay must have _________________ or his monthly loan payments must have ________________. Lenders may now be ________ willing to give him a loan than they were before this change.

- decreased - increased - less

8) Revolving Credit Lines Home equity lines of credit enable you to acquire cash based on the _____________________. The majority of lenders extend home equity lines of credit based on either 100% of your equity or some portion, usually 75% to 80% of your home's market value, whichever is _______. If you have an existing mortgage on your home, most lenders will ______________ your maximum line of credit by the outstanding balance of that mortgage.

- equity in your home - less - decrease

7) Debit Cards Nick has decided to conduct his financial business on as much of a cash basis as possible. He always has his checkbook with him and keeps timely and detailed records of his financial transactions. His weekly pay is automatically deposited into his checking account. What is the basis for your recommendation? Nick _________________________ and ____________ carries his checkbook. Nick would probably ____________________ to record transactions and thus, ________ the risk of overdrawing his checking account, especially since he _______________________________________ into his checking account.

- keeps detailed records - always - remember - avoids - has arranged his pay to be directly deposited

5) Credit Card Fees and Charges Edison... For each of the following situations, choose the fee that most closely applies 1) Edison's credit card payment was due on August 1. He made a payment on August 10. Edison will likely be charged _____________________ 2) Most credit card holders have a defined line of credit, which is the maximum amount the financial institution approved for Edison to owe at any time. His line of credit is $15,000. He currently owes $16,000. Edison will likely be charged ____________________ 3) Edison's credit card is issued in the country where he is a citizen. During a recent vacation to another continent, he used his credit card to pay for lodging, meals, and tourist attractions. Edison will likely be charged ____________________-

- late payment fees - over-the-limit charges - foreign transaction fees

8) Knowing how revolving lines of credit work will help you to make informed decisions about using them. Answer the following questions about the various options available through revolving credit lines. Using an unsecured line of credit can help you_________________________________________. Remember that a big danger is that once approved, obtaining cash advances is ____________________. The debt created can _______________________________.

- make purchases sooner than you otherwise planned - very simple - quickly become overwhelming

7) Why is it important for you to know about debit cards and how they work? Here are a couple of reasons. Using a debit card without getting into trouble with it requires ______________________. If you know that you are unlikely or unable to _____________________________ you stand the risk of overdrawing your checking account and having to pay overdraft fees.

- self-discipline - keep good records

8) Knowing how revolving lines of credit work will help you to make informed decisions about using them. Answer the following questions about the various options available through revolving credit lines. Using overdraft protection without getting into trouble with it requires _______________________________________. Remember that the funds used for the protection are ________. As such, there __ a fee attached to using the funds. Ask yourself if the accumulating fees are really worth your overdrafts, for many of which you may have forgotten the original use.

- the self-discipline to use it only in emergencies - a loan - is

8) Knowing how revolving lines of credit work will help you to make informed decisions about using them. Answer the following questions about the various options available through revolving credit lines. An advantage of using a home equity line of credit is ______________________________________________. A big danger is that you ___________ have the cash flow necessary to make the payments. You __________ lose your house.

- the usual long repayment periods of 10 or more years - may not - could

8) Revolving Credit Lines You receive funds from an unsecured personal line of credit ___________________________________________. Securing this type of line of credit _______________________ going through the formality of setting up a new loan. It draws on a line of credit that can be ______________________. Remember, even though acquiring the funds is as simple as writing a check, the funds still represent a loan. Payments are usually structured to be due __________________.

- when you decide to write a check for them - doesn't require - for $25,000 or more - once a month

4) This week Caroline is out of town, and has access to cash advances only by non-ATM methods. For each non-ATM cash advance that she takes, she will be charged 2% of the amount of the advance, or a flat fee of $5, whichever is more. 1) Caroline took four cash advances during the week, each for $25. What is the total of her cash advances for that week? ________ 2) What would the transaction fee be, based on percentage, for each cash advance? ________ 3) What would the minimum transaction fee be for each cash advance? _______ 4) Which transaction fee will be charged for each of Caroline's advances? _______ 5) What will be the total of her transaction fees for the week? _______ 6) If Caroline had taken just one cash advance for $100 at the beginning of the week, what would her transaction fee have been? _______ 7) ________________________________ lower transaction fees by _______

1) $100 2) $0.50 3) $5 4) $5 5) $20 6) $5 7) - One transaction for $100 causes - $15

10) Consider the following case: On August 1, Neha's credit card has a balance of $3,375.75. According to the terms of the card's lending agreement, an interest rate of 14% per year is assessed and the monthly finance charges are calculated using the Average Daily Balance (ADB) including purchases method. During the month, Neha expects to make the purchases listed below and will make a payment of $253.18 on August 23, and has collected the following additional information: Calculated Value: 1) 8/2 - 8/6 2) 8/7 - 8/13 3) 8/14 - 8/21 4) 8/22 - 8/23 5) 8/24 - 8/26 6) 8/27 - 8/1 7) Total 8) Average Daily Balance With Purchases 9) Finance Charge

1) $16,878.75 2) 25,347.42 3) 44,495.12 4) 11,384.60 5) 16,317.36 6) 33,911.82 7) 148,335.07 8) $4,785.00 9) $55.98

4) This week Rosa is out of town, and has access to cash advances only by non-ATM methods. For each non-ATM cash advance that she takes, she will be charged 2% of the amount of the advance, or a flat fee of $5, whichever is more. 1) Rosa took four cash advances during the week, each for $50. What is the total of her cash advances for that week? _____ 2) What would the transaction fee be, based on percentage, for each cash advance? _______ 3) What would the minimum transaction fee be for each cash advance? _______ 4) Which transaction fee will be charged for each of Rosa's advances? _______ 5) What will be the total of her transaction fees for the week? _______ 6) If Rosa had taken just one cash advance for $200 at the beginning of the week, what would her transaction fee have been? ________ 7) ______________________________ lower transaction fees by _______

1) $200 2) $1.00 3) $5 4) $5 5) $20 6) $5 7) - One transaction for $200 causes - $15

10) Consider the following case: On August 1, Neha's credit card has a balance of $3,375.75. According to the terms of the card's lending agreement, an interest rate of 14% per year is assessed and the monthly finance charges are calculated using the Average Daily Balance (ADB) including purchases method. During the month, Neha expects to make the purchases listed below and will make a payment of $253.18 on August 23, and has collected the following additional information: Daily Balance: 1) 8/7 - 8/13 2) 8/14 - 8/21 3) 8/22 - 8/23 4) 8/24 - 8/26 5) 8/27 - 8/1

1) 3,621.06 2) 5,561.89 3) 5,692.30 4) 5,439.12 5) $5,651.97

13. Personal bankruptcy procedures - Wage earner plan and straight bankruptcy In the following table, indicate which items are characteristic of the Wage Earner Plan and which apply to Straight Bankruptcy. 1) Opportunity to start anew 2) Debtor may keep some assets of minimum value as defined by law 3) Most common personal bankruptcy procedure 4) Least common personal bankruptcy procedure 5) New debt payment plan to better match debtor's steady income 6) Defined in Chapter 13 of the U.S. Bankruptcy Code

1) Straight Bankruptcy 2) Straight Bankruptcy 3) Straight Bankruptcy 4) Wage Earner Plan 5) Wage Earner Plan 6) Wage Earner Plan

13. Personal bankruptcy procedures - Wage earner plan and straight bankruptcy In the following table, indicate which items are characteristic of the Wage Earner Plan and which apply to Straight Bankruptcy. 1) Debtor may keep some assets of minimum value as defined by law 2) Most common personal bankruptcy procedure 3) Defined in Chapter 13 of the U.S. Bankruptcy Code 4) Least common personal bankruptcy procedure 5) Opportunity to start anew 6) Preferred by creditors

1) Straight Bankruptcy 2) Straight Bankruptcy 3) Wage Earner Plan 4) Wage Earner Plan 5) Straight Bankruptcy 6) Wage Earner Plan

5) Credit Card Fees and Charges Edison... Edison's credit card has a variable interest rate, within a defined range, that changes periodically. The rate that the financial institution that issued his card uses as a basis to determine the current interest rate is called the base rate. The interest rate that applies to the credit card is computed as the sum of the base rate plus a certain percentage... Today, the base rate is 5%. What is Edison's interest rate today? ______

11%

6) Special Bank Credit Cards for Different Lifestyles and Preferences Paolo has a history of charging a lot on his credit card and doesn't carry a high monthly balance. Paolo loves cars and plans to trade in his cars every two years, if not more often, for new ones. Which credit card is the best choice?

A reward card with an automobile rebate program

6) Special Bank Credit Cards for Different Lifestyles and Preferences Felix just began his first year at a university and has no credit history. Felix has no cash on hand but receives a small monthly stipend from a trust fund. Felix's parents won't guarantee payments on a credit card for Felix because they don't think he will use it responsibly. Felix is going to apply for a credit card because he wants one. Which credit card is the best choice?

A student card

10) Finance Charges on Credit Cards The most common method that banks and retail credit card issuers use to compute finance charges is the average daily balance (ADB) method. You expect to actively use your card. Which variation of the ADB method will be least expensive for you?

ADB excluding new purchases

12) Practices that expose you to credit card fraud and identity theft Credit Card Fraud and Identity Theft Consider the following two alternative behaviors. A) I throw my bills and credit card statements in the trash with the rest of my garbage. B) I refuse to give a merchant my social security number, even if I am requested to do so. Which behavior is likely to reduce your chance of experiencing credit card fraud or identity theft?

Alternative B

6) Special Bank Credit Cards for Different Lifestyles and Preferences Felix just began his first year at a university and has no credit history. Felix has no cash on hand but receives a small monthly stipend from a trust fund. Felix's parents won't guarantee payments on a credit card for Felix because they don't think he will use it responsibly. Felix is going to apply for a credit card because he wants one. Why is that card the best choice?

Both of these. *It's the only card he will probably qualify for.* *It will probably offer appealing promotions such as free music and movie tickets.*

11) Choosing the best credit card Shop Around for the Best Deal Rosa is shopping around for a credit card and does not expect to pay the balance in full each month. Rosa is a big spender who will carry big balances from month to month. What is Rosa's best option?

Pay an annual fee to keep the interest rate as low as possible

1) Debit Card

Purchases made with this plastic card cause funds to be immediately transferred from the account holder's bank account to the seller-as if the account holder was paying with cash. a plastic card that allows the cardholder to make purchases as if using cash. The funds are immediately transferred from the cardholder's bank account to the seller. The card can also be used to make withdrawals from an account holder's bank account, assuming sufficient funds are available in the account. Transactions made using a debit card are susceptible to fraud if used at an ATM or gas station outfitted with a skimmer. However, unlike a bank credit card which provides for a maximum liability of $50 if the card is lost, stolen, or used in fraudulent transactions, the liability associated with a debit card is $50 to $500 depending upon the circumstances of the loss.

10) One way by which Neha can reduce her finance charges, everything else remaining constant, is to:

Request a lower interest rate on her credit card

11) Choosing the best credit card Shop Around for the Best Deal What is Frances's best option? Frances is shopping around for a credit card and expects to pay the balance in full each month.

Select the card with no annual fees and the longest grace period

6) Special Bank Credit Cards for Different Lifestyles and Preferences Van graduated from school and is no longer a student. He just joined the school's alumni association and wants to support its activities without having to remember to periodically write a check. Which credit card is the best choice?

The affinity card sponsored by the alumni association

6) Special Bank Credit Cards for Different Lifestyles and Preferences Van graduated from school and is no longer a student. He just joined the school's alumni association and wants to support its activities without having to remember to periodically write a check. Why is that card the best choice?

The alumni association will receive a portion of the card's profits

6) Special Bank Credit Cards for Different Lifestyles and Preferences Paolo has a history of charging a lot on his credit card and doesn't carry a high monthly balance. Paolo loves cars and plans to trade in his cars every two years, if not more often, for new ones. Why is that card the best choice?

The high-charge volume will provide points to use toward supporting Paolo's relatively expensive plans

10) Finance Charges on Credit Cards Even before you use a new credit card, what information is the institution that issued your card required by law to disclose?

The rate of interest and method used to compute finance charges

4) Obtaining Cash in a Hurry Caroline is parked outside her bank and needs cash today. Her standard checking account balance is sufficient to provide the cash, and she plans to deposit the paycheck she'll receive in a few days to her checking account. Caroline also has a credit card whose terms allow her to obtain a cash advance. Why is this the wisest way to get the cash she needs?

There is no interest charged when she takes her own money out of her checking account, but she would be charged interest beginning immediately if she took a cash advance.

4) Obtaining Cash in a Hurry Rosa is parked outside her bank and needs cash today. Her standard checking account balance is sufficient to provide the cash, and she plans to deposit the paycheck she'll receive in a few days to her checking account. Rosa also has a credit card whose terms allow her to obtain a cash advance. Why is this the wisest way to get the cash she needs?

There is no interest charged when she takes her own money out of her checking account, but she would be charged interest beginning immediately if she took a cash advance.

1) Home Equity Credit Line

This form of open credit is secured, or collateralized, by the existing equity in a home. a type of open credit that is secured, or collateralized, by the existing equity in a home. It generally involves a very low interest rate (compared to regular bank credit cards) and, under the current tax code, allows taxpayers who itemize their deductions to deduct their interest charges. It is the only form of consumer credit that provides for the tax-deductibility of interest payments.

1) Credit Counsilor

This is a professional financial advisor who assists consumers in danger of bankruptcy in formulating a budget that facilitates the repayment of debts and setting reasonable spending limits. a professional financial advisor who assists consumers in danger of bankruptcy in formulating a budget that facilitates the repayment of debts and setting reasonable spending limits. Depending upon the consumer's preference and fee paid, the advisor may also negotiate on behalf of consumer with his or her creditors to reduce the size of the consumer's debt or payments.

1) Reward Card

This refers to a bank credit card that combines features of a traditional bank credit card with an additional incentive, such as cash or merchandise rebates, airline tickets, or investments. a credit card that combines features of a traditional bank credit card with an additional incentive, such as cash or merchandise rebates, airline tickets, or investments. Because of the additional benefits associated with this card, it tends to carry a higher interest rate than that carried on regular bank credit cards.

1) Secured Card

This type of plastic card is secured with some form of collateral, such as a certificate of deposit. a credit card that is secured with some form of collateral, such as a certificate of deposit. In general, this type of card is useful for people with no credit or bad credit histories, because the certificate of deposit can serve as collateral for the card.

3) Debt safety ratio - How much credit can you stand? Debt Safety Ratio = ________________ / _________________

Total Monthly Consumer Credit Payments / Monthly Take-Home Pay

4) Obtaining Cash in a Hurry Caroline is parked outside her bank and needs cash today. Her standard checking account balance is sufficient to provide the cash, and she plans to deposit the paycheck she'll receive in a few days to her checking account. Caroline also has a credit card whose terms allow her to obtain a cash advance. What would be the wisest way for Caroline to get the cash she needs today?

Withdraw the cash from her checking account

4) Obtaining Cash in a Hurry Rosa is parked outside her bank and needs cash today. Her standard checking account balance is sufficient to provide the cash, and she plans to deposit the paycheck she'll receive in a few days to her checking account. Rosa also has a credit card whose terms allow her to obtain a cash advance. What would be the wisest way for Rosa to get the cash she needs today?

Withdraw the cash from her checking account

7) Debit Cards Nick has decided to conduct his financial business on as much of a cash basis as possible. He always has his checkbook with him and keeps timely and detailed records of his financial transactions. His weekly pay is automatically deposited into his checking account. Would you recommend that Nick use a debit card?

Yes

1) Credit Card Act of 2009

a piece of federal legislation that was passed in 2009 and made effective on February 22, 2010, and intended to provide additional protection to credit card holders. The new protections and provisions of this legislation include: (1) the requirement that credit card companies must give cardholders 45 days notice before any interest rate increases or other modifications to the terms of loan agreement; (2) the requirement that a credit card statement must be sent to customers 21 days before the due date; (3) the requirement that college students cannot be issued credit cards unless they have a verifiable source of income or a co-signor; (4) the card's billing statement must provide payoff information, including the number of months necessary to repay the account using only minimum monthly payments; (5) the requirement that mandated interest rate increases can only be applied to new balances, and not to preexisting balances; and (6) a limitation on the number of over-the-limit fees that can be imposed on a cardholder's account per billing cycle.

1) Teaser Rate

another name for the special low introductory interest rate that is offered by banks to attract new customers. It is generally only effective for the first 6- to 12-months of the new cardholder's account.

7) Why is it important for you to know about debit cards and how they work? Here are a couple of reasons. Using a debit card can help you _______________________________.

avoid potential credit problems

10) Finance Charges on Credit Cards The interest rate on cash advances is generally ___________________ the rate on purchases.

higher than

2) Improper uses of credit cards In the following scenarios, select which of these situations applies. Dmitri is shopping with his daughter, who sees the very high-tech computer she's been saving for. Dmitri had a fight with her yesterday, and uses his credit card to buy the computer to make up with her. Dmitri is using his credit to _________

make an impulse purchase, especially an expensive one

2) Improper uses of credit cards In the following scenarios, select which of these situations applies. Paolo had a great date last night, and uses his credit card to purchase a diamond studded watch to present to his date tonight. Paolo is using his credit to _________

make an impulse purchase, especially an expensive one

2) Improper uses of credit cards In the following scenarios, select which of these situations applies. Antonio's checkbook is overdrawn. If he doesn't pay his gas bill tomorrow, service will be immediately terminated. Antonio heats his house with gas and it's the middle of a very cold winter. He uses his credit card to pay his gas bill. Antonio is using his credit to ___________

meet basic living expenses

2) Improper uses of credit cards In the following scenarios, select which of these situations applies. It's getting toward the end of the month and Kenji's cash is running low. He wants to buy a friend's extra logo sweatshirt to wear to tomorrow's big game. It's a cash deal. Kenji has run out of milk and cereal and uses his credit card to buy them at the grocery store. Kenji is using his credit to ________

meet basic living expenses

1) Convenience Check

one means by which to obtain a cash advance from the bank that offers a credit card. A second way to initiate a cash advance is to visit a financial institution and engage in a transaction that is similar to purchasing merchandise or services. Similarly, it is possible to withdraw cash using a credit card from an ATM machine. However, the size of the cash advance may differ depending upon how it is made, with advances made via the ATM being significantly smaller than that conducted at the teller window of the bank.

2) Improper uses of credit cards In the following scenarios, select which of these situations applies. Lucia uses her credit card to pay for concert tickets. Lucia is using her credit to ________

purchase nondurable (short-lived) goods and services

2) Improper uses of credit cards In the following scenarios, select which of these situations applies. When Caroline has lunch or dinner at a nice restaurant, she uses her credit card to pay for the meal and tip. Caroline is using her credit to __________

purchase nondurable (short-lived) goods and services

2) For protection against getting into credit card trouble, except for occasional use for convenience, credit card purchases ____________ outlive the payments.

should

1) Credit Scoring

the process of evaluating the credit worthiness of a credit applicant via the assessment of an applicant's credit report and the calculation of a credit score. In the United States, there are four or five widely used credit scores prepared by a variety of organizations and using different sources of data. For example, the VantageScore system prepares a score using data from the Equifax, Experian, and TransUnion credit bureaus. In contrast, the FICO score, on the other hand, is prepared by using credit report data by Fair Isaac & Co.

1) FICO Score

which was developed by Fair Isaac & Co., is used to indicate a borrower's credit risk. It is based on, among other factors, a borrower's previous use of credit and payment history, the length of his or her credit history, and types of credit used. This number can range from 300 to 850, and is the most widely used credit score in the United States. Loan applicants exhibiting relatively high values might be offered lower interest rates on mortgages or other loans, or a higher credit limit.