Chapter 6: Introduction to Consumer Credit

Which of the following is an example of closed-end credit mentioned in the video? Automobile Loans Credit cards Overdraft protection on your checking account Automobile Loans and Overdraft protection on your checking account Automobile Loans, Credit cards, and Overdraft protection on your checking account

Automobile Loans Examples of closed-end credit include home mortgages, automobile loans, and some installment loans.

____________________________ is more common and has a _______________ interest rate charged by most lenders. Closed-end credit; higher Closed-end credit; lower Open-end credit; higher Open-end credit; lower Open-end credit; stable

Closed-end credit; lower Closed-end credit is more common and has a lower interest rate charged by most lenders for open-end credit.

When compared to __________________, ___________________ is often more difficult to obtain because the lender must rely upon your word that you will pay back the loan. Closed-end credit; a bond Open-end credit; a bond Open-end credit; a loan Closed-end credit; open-end credit Open-end credit; closed-end credit

Closed-end credit; open-end credit When compared to closed-end credit, open-end credit is often more difficult to obtain because the lender must rely upon your word that you will pay back the loan.

According to the video, what should you do if your identity is stolen? ~Contact the creditors for any accounts that have been tampered with or opened fraudulently. ~Contact the police, but do not file a police report until they have captured the fraudulent individual. ~Contact the fraud department of each of the three major credit bureaus. ~Contact the creditors for any accounts that have been tampered with or opened fraudulently and Contact the fraud department of each of the three major credit bureaus. ~Contact the creditors for any accounts that have been tampered with or opened fraudulently, Contact the police, but do not file a police report until they have captured the fraudulent individual, and ~Contact the fraud department of each of the three major credit bureaus.

Contact the creditors for any accounts that have been tampered with or opened fraudulently and Contact the fraud department of each of the three major credit bureaus. Explanation The video lists three things that you should do if your identity is stolen: 1. Contact the fraud department of each of the three major credit bureaus.2. Contact the creditors for any accounts that have been tampered with or opened fraudulently.3. File a police report.

Which of the following is mentioned in the video as the top identity theft issue? Credit Card Fraud Government Documents Phone or Utilities Fraud Credit Card Fraud and Government Documents Credit Card Fraud, Government Documents, and Phone or Utilities Fraud Correct

Credit Card Fraud, Government Documents, and Phone or Utilities Fraud

Louise's monthly gross income is $2,000. Her employer withholds $400 in federal, state, and local income taxes and $160 in Social Security taxes per month. Louise contributes $80 per month for her IRA. Her monthly credit payments for Visa, MasterCard, and Discover cards are $35, $30, and $20, respectively. Her monthly payment on an automobile loan is $285. (a) What is Louise's debt payments-to-income ratio? (Enter your answer as a percent rounded to 1 decimal place.) (b) Is Louise living within her means?

Explanation (a) Net income=Gross income − Taxes − IRA contribution =$2,000 − 400 − 160 − 80 =$1,360 Debt payments=Credit card payments + Auto loan payment =$35 + 30 + 20 + 285 =$370 Debt payments-to-income ratio=Debt payments / Net income =$370 / $1,360 =0.272, or 27.2% (b) Louise is not living within her means because her debt payments-to-income ratio exceeds 20 percent of her net income.

What is your debt payments-to-income ratio if your debt payments total $684 and your net income is $2,000 per month? (Enter your answer as a percent rounded to 1 decimal place.)

Explanation Debt payments-to-income ratio=Debt payments / Net income =$684 / $2,000 =0.342, or 34.2%

Carl's house payment is $1,050 per month and his car payment is $385 per month. If Carl's take-home pay is $2,800 per month, what percentage does Carl spend on his home? (Enter your answer as a percent rounded to 1 decimal place.)

Explanation Loan payments-to-income ratio=Loan payments / Net income =$1,050 / $2,800 =0.375, or 37.5%

Carl's house payment is $1,050 per month and his car payment is $385 per month. If Carl's take-home pay is $2,800 per month, what percentage does Carl spend on his car payment? (Enter your answer as a percent rounded to 2 decimal places.)

Explanation Loan payments-to-income ratio=Loan payments / Net income =$385 / $2,800 =0.1375, or 13.75%

Carl's house payment is $1,050 per month and his car payment is $385 per month. If Carl's take-home pay is $2,800 per month, what percentage does Carl spend on his home and car? (Enter your answer as a percent rounded to 2 decimal places.)

Explanation Loan payments-to-income ratio=Loan payments / Net income =($1,050 + 385) / $2,800 =0.5125, or 51.25%

The disposable income from your part-time job in 2019 was $12,000. In 2018, you borrowed $500 at 18 percent interest. You repaid your loan with interest in 2019. How much would you have available for spending in 2019? (Do not round intermediate calculations.)

Explanation Loan repayment=Principal + Interest =$500 + (0.18 × $500) =$590 Spending amount available in 2019=Disposable income − Loan repayment =$12,000 − 590 =$11,410

A few years ago, Michael purchased a home for $200,000. Today, the home is worth $300,000. His remaining mortgage balance is $100,000. Assuming Michael can borrow up to 80 percent of the market value of his home, what is the maximum amount he can borrow?

Explanation Maximum loan amount=0.80 × Market value =0.80 × $300,000 =$240,000 Maximum loan available=Maximum loan amount − Current loan balance =$240,000 − 100,000 =$140,000

Drew's monthly net income is $4,000. What is the maximum he should use on debt payments?

Explanation The recommended maximum debt payments-to-income ratio is 20 percent. Thus, the maximum monthly debt payment amount is: Maximum monthly debt payment=0.20 × Monthly income =0.20 × $4,000 =$800

Robert owns a $140,000 town house and still has an unpaid mortgage of $110,000. In addition to his mortgage, he has the following liabilities: Liabilities: Visa: $565 MasterCard: $480 Discover card: $395 Education loan: $920 Personal bank loan: $800 Auto loan: $4,250 Total: $7,410 Robert's net worth (not including his home) is about $21,000. This equity is in mutual funds, an automobile, a coin collection, furniture, and other personal property. (a) What is Robert's debt-to-equity ratio? (Round your answer to 2 decimal places.) (b) Has he reached the upper limit of debt obligations?

Explanation: (a) The debt-to-equity ratio excludes both the value of a home and the mortgage on that home. Thus, these items are omitted from the following calculations. Total debt=$565 + 480 + 395 + 920 + 800 + 4,250 =$7,410 Debt-to-equity ratio=Total debt / Total equity =$7,410 / $21,000 =0.35 (b) Robert's debt-to-equity ratio is less than the upper limit of debt obligations which is defined as a debt-to-equity ratio of 1.

Suppose that your monthly net income is $2,400. Your monthly debt payments include your student loan payment and a gas credit card. They total $360. What is your debt payments-to-income ratio? (Enter your answer as a percent rounded to the nearest whole number.)

Explanation: Debt payments-to-income ratio=Debt payments / Net income =$360 / $2,400 =0.15, or 15%

Lexi currently has a net worth of $110,465 and liabilities equal to $24,735. What does her debt ratio indicate? For every $1 of net worth, Lexi has 82 cents of liabilities. For every $1 of net worth, Lexi has 45 cents of liabilities. For every $1 of net worth, Lexi has 38 cents of liabilities. For every $1 of net worth, Lexi has 22 cents of liabilities. For every $1 of net worth, Lexi has 18 cents of liabilities.

For every $1 of net worth, Lexi has 22 cents of liabilities. Explanation: Debt Ratio = Liabilities/Net Worth = $24,735/$110,465 = 0.22 This ratio indicates that for every $1 of net worth, Lexi has 22 cents of liabilities.

All of the following are factors mentioned in the video that individuals should consider before obtaining a home equity loan, except: High annual fees Location of home Deductible interest Costs and risks of loan Lender's fees

Location of home The video discusses factors that individuals should consider before obtaining a home equity loan, including interest rates, lenders fees, inactivity fees, high annual fees, interest-only payments, terms and conditions, deductible interest, reasons for the loan, and the costs and risks of the loan.

Kim is trying to decide whether she can afford a loan she needs in order to go to chiropractic school. Right now Kim is living at home and works in a shoe store, earning a gross income of $820 per month. Her employer deducts $145 for taxes from her monthly pay. Kim also pays $95 on several credit card debts each month. The loan she needs for chiropractic school will cost an additional $120 per month. Help Kim make her decision by calculating her debt payments-to-income ratio with and without the college loan. (Remember the 20 percent rule.) (Enter your answers as a percent rounded to 2 decimal places.)

Ratio with college loan: 31.85% Ratio without college loan: 14.07% Explanation: Net income=Gross income − Taxes =$820 − 145 =$675 Current debt plus college loan: Debt payments-to-income ratio=Debt payments / Net income =($95 + 120) / $675 =0.3185, or 31.85% Current debt without college loan: Debt payments-to-income ratio=Debt payments / Net income =$95 / $675 =0.1407, or 14.07% If Kim adds the college debt to her current credit card debt, her debt payments-to-income ratio will exceed the recommended 20 percent limit. However, if Kim can pay off her credit card debt, then the college loan is affordable as seen here: College loan only: Debt payments-to-income ratio=Debt payments / Net income =$120 / $675 =0.1778, or 17.78%

All of the following are reasons mentioned in the video of why homeowners obtain home equity loans, except: To pay for family vacations. To pay for medical expenses for a family member. To pay for a remodeling project. To reduce or eliminate debts. To pay for the cost of education for someone in the family.

To pay for family vacations. Home equity loans are often used to pay for a remodeling project, the cost of education for someone in the family, medical expenses for a family member, or to reduce or eliminate debts.

According to the video, the quickest way to improve your debt-to-equity ratio is: To decrease your assets. To increase your net worth. To decrease your net worth. To take on more debt. To pay off some of your debts.

To pay off some of your debts.

According to the video, all of the following are some additional options to avoid identity theft, except: Shred sensitive information. Use as few online sources as possible. Create strong passwords and PINS. Use virtual credit card numbers. Be cautious about giving out personal information.

Use as few online sources as possible. Explanation Additional options to avoid identity theft mentioned in the video include: 1. Use virtual credit card numbers 2. Be cautious of giving out personal information. 3. Shred sensitive information. 4. Monitor your credit. 5. Create strong passwords and PINS.

Landon is looking to obtain a home equity loan. A lender will loan 65% of the home's current market value, which is $200,000. Landon currently owes $90,000 on his original home mortgage. What is his home equity credit limit available? $130,000 $110,000 $70,000 $40,000 $31,500

$40,000 Explanation: Approximate Loan Value = Market Value of Home x Lender's Percentage = $200,000 x 0.65 = $130,000 Approximate Credit Limit Available = App. Loan Value - Balance Due on Mortgages = $130,000 - $90,000 = $40,000

Rachel currently has a net worth of $132,250 and liabilities equal to $38,650. What is her debt ratio? 0.03 0.23 0.29 0.51 0.77

0.29 Explanation: Debt Ratio = Liabilities/Net Worth = $38,650/$132,250 = 0.29