Credit vs. Cash

Robby is considering taking out a cash advance on his credit card to purchase a new television. His credit card offers cash advances up to $500.00 at an interest rate of 28%. If the television costs $350.00 and Robby plans to pay the balance of in 6 months, how much extra will he pay in interest to purchase the television? a. $29.14 b. $63.18 c. $174.48 d. $379.08

a. $29.14

Sam is getting ready for a big date when he realizes that he has no money. His roommate, Bill, also has no money, but he has a credit card. Knowing that nobody will let Sam use Bill's credit card, Sam asks Bill to pull out a cash advance for $120.00. Bill agrees under the condition that Sam is responsible for all interest that accrues on the cash advance which is a 30% interest rate, compounded monthly. The $120 cash advance is repaid in monthly installments over 5 years. How much should Bill ask Sam to pay in interest for the cash advance? a $3.88 b. $112.80 c. $120.00 d. $232.80

b. $112.80

Which of the following is not a disadvantage to cash advances on a credit card? a. Cash advances are similar to loans in that they need to be paid back with interest. b. Cash advances require a lot of paperwork and are generally difficult to get. c. Cash advances are often the last thing to be paid when paying off your credit card. d. Cash advances often come with an interest rate much higher than your credit card.

b. Cash advances require a lot of paperwork and are generally difficult to get.

Which of the following is not a disadvantage of using credit instead of cash? a. Credit cards increase the likelihood of impulse buying. b. Credit cards can be used to increase your credit score. c. Credit cards generally come with interest and other fees that cash does not. d. Credit cards require a good credit rating and responsible credit maintenance.

b. Credit cards can be used to increase your credit score.

Ralph is purchasing a new gaming system for $300.00. He is trying to decide whether he wants to use cash or his credit card to pay. He has $600.00 available in his checking account to pay for the system in full. Which of the following is not an argument that justifies Ralph's use of his credit card to purchase the gaming system? a. If he uses his credit card, he won't have to walk around with $300 in his wallet. b. With credit, he is not required to pay off his balance for a very long time. That's $300 more in his pocket. c. Ralph can afford to pay off the credit card purchase immediately, and it will help build a good credit rating. d. If he uses his credit card, it will be easier to pay for extra items (cords and controllers) that he wasn't expecting to have to purchase.

b. With credit, he is not required to pay off his balance for a very long time. That's $300 more in his pocket.

Tom has offered to sell Julian his motorcycle for $1,200. Julian knows this is a very good deal since the same motorcycle can be purchased at the dealership for $1,800. Since Julian doesn't have $1,200 and Tom does not accept credit cards, they both think a cash advance might be a good idea. Julian's credit card company can offer him a cash advance for the $1,200 he needs at an interest rate of 26%. He would then pay off the balance in 24 months. Should Julian use the cash advance to purchase the motorcycle? a. No. Julian would be paying too much in interest to warrant using a cash advance. b. Yes. Even with the interest, the total cost of the motorcycle would be less than at the dealership. c. Yes. The interest rate on the cash advance is low. Julian will not have to pay much interest on the cash advance. d. No. The high-interest rate on the cash advance would make the purchase of the motorcycle almost twice the price at the dealership.

b. Yes. Even with the interest, the total cost of the motorcycle would be less than at the dealership.

Sally needs to have some drywall and insulation work done in her house. She has received a quote from a professional drywall contractor to complete her repairs for $1,200. Her neighbor Steve says he can complete the same job for $800. Sally could use a credit card to pay the contractor, but Steve can only accept cash. Sally's credit card has a 14% APR for credit purchases and a 32% interest rate for cash advances. Expecting to pay $50 of the principle plus appropriate interest each month, Sally estimates that it would take her 24 months to pay off the contractor balance and 16 months to pay off the cash advance balance. In the end, would it be cheaper for Sally to hire the contractor or her neighbor to complete the repairs?

Contractor: For $1,200 at 14% for 24 months, Sally would be have to pay $57.62 per month, or $1,382.88 after 24 months. Neighbor Steve: For $800 at 32% for 16 months, Sally would have to pay $62.08 per month or $993.28 after 16 months. Even with the (much) higher interest rate, Sally would pay $389.60 less if she went with Neighbor Steve. Even better is that the monthly payments would be about the same for the given timelines. Sally would still want to weight the benefits of contracted work vs. non-contracted work.

Tim would like to use his income tax return to pay off one of his four credit cards. His previous plan was to pay off all four credit cards in the same timeline of 36 months. He wants to eliminate the card that is charging him the most interest on a monthly basis. The chart below outlines Tim's four credit cards, their balances, and their APRs. Which credit card should Tim use his tax return to pay off? Credit Card - Balance - APR A - $1,260.00 - 12% B - $900.00 - 18% C - $1,290.00 - 9% D - $1,200.00 - 16%

D - $1,200.00 - 16%

Credit cards can only lead to debt that is difficult to eliminate and should be avoided at all costs.

False

The higher interest rate of a cash advance on a credit card with an existing balance can be eliminated by paying the cash advance back within four weeks.

False

Looking for some furniture for her new apartment, Susan visits the local swap meet in search of something cheap. Knowing that most swap meet vendors will not accept credit cards and that she will not have any money until her next payday, Susan decides to take out a $200 cash advance on her credit card at an interest rate of 32%. If Susan had no previous balance on her credit card, and she manages to pay off the balance within 1 month, how much will she have to pay in interest? a. $5.33 b. $32.00 c. $173.33 d. $205.33

a. $5.33

Ralph is purchasing a new gaming system for $300.00. He is trying to decide whether he wants to use cash or his credit card to pay. He has $600.00 available in his checking account. Which of the following is not an argument that justifies Ralph's use of his cash to purchase the gaming system? a. Using cash can help Ralph improve his credit score. b. Using cash may limit overspending or impulse buying. c. Cash doesn't come with any potential "over limit" or "late payment" fees. d. Cash will be the easiest method of payment with very few security measures involved.

a. Using cash can help Ralph improve his credit score.

Bob's car needs a new transmission, a repair that will cost $1,763.00. Bob does not have enough money in his savings account to cover the cost of the repair. To make matters worse, Bob's mechanic, who works out of his home, is unable to accept credit cards. Bob is hesitant to take out a cash advance on his credit card knowing that it will take him 12 months to pay of the balance and that a cash advance comes with a 30% interest rate. If Bob uses a cash advance to pay for the repairs, how much extra will he have to pay in interest? a. $146.92 b. $171.87 c. $299.44 d. $528.90

c. $299.44

Describe the effect an increase in n, the number of payment periods, has on the monthly payment P in the formula a. An increase in n, the number of payment periods, will not change P, the monthly payment. b. An increase in n, the number of payment periods, will create an increase in P, the monthly payment. c. An increase in n, the number of payment periods, will create a decrease in P, the monthly payment. d. An increase in n, the number of payment periods, can increase or decrease P, the monthly payment, depending on the value of PV.

c. An increase in n, the number of payment periods, will create a decrease in P, the monthly payment.

Jason is looking for an engagement ring to offer his girlfriend. He has found a similar ring at each of four different jewelry stores. He doesn't have enough money to pay for the ring in cash, so he is planning on opening a line of credit (credit card) at the store he ends up buying the ring from. The chart below outlines the difference in the price of the rings the different stores offer as well as the difference in credit options. Jason plans to pay off the ring purchase in 36 months. According to the information in the table, which of the jewelry stores will have the cheapest ring in the end? Store - Price ($) - Credit Card APR Jessie's Jewelry - $1,250.00 - 19% Über Pawn - $1,328.00 - 18.5% Diamonds Forever - $1,199.00 - 21% Drake and Family Gold - $1,219.00 - 20% a. Jessie's Jewelry b. Über Pawn c. Diamonds Forever d. Drake and Family Gold

c. Diamonds Forever

Bill was going to purchase a new mountain bike with his credit card, which he thought had an APR of 13%. His plan was to keep his payments around $75 per month for 24 months. He then found out that his credit card actually had an APR of 17%. Which of the following would not allow Bill to purchase a bike while keeping the same monthly payment? a. Purchase a bike that costs less. b. Wait for the bike he wants to go on sale for a cheaper price. c. Purchase the bike in a part of town with a higher sales tax rate. d. Increase the number of months he wants to use to pay off the balance.

c. Purchase the bike in a part of town with a higher sales tax rate.

Tim has four credit cards with the balances and APRs listed in the chart below. What will Tim's total monthly minimum credit card payment need to be to pay off all four credit cards in 24 months? Credit Card - Balance- APR A -$1,260.00 - 12% B - $900.00 - 18% C - $1,290.00 - 9% D - $1,200.00 -16% a. $118.24 b. $162.62 c. $163.00 d. $221.93

d. $221.93

As a New Year's resolution, Jimmy has agreed to pay off his 4 credit cards and completely eliminate his credit card debt within the next 12 months. Listed below are the balances and annual percentage rates for Jimmy's credit cards. In order to pay his credit card debt off in the next 12 months, what will Jimmy's total minimum credit card payment be? Credit Card- Current Balance -APR A- $563.00- 16% B- $2,525.00- 21% C- $972.00- 19% D- $389.00- 17% a. $321.83 b. $361.45 c. $374.65 d. $411.25

d. $411.25

Which of the following is not a disadvantage of using cash instead of credit? a. Using cash will not help you improve your credit rating. b. Using cash can be awkward when making large purchases. c. Using cash generally requires trips to the bank or ATM to keep cash on hand. d. Using cash can make it easier to over-spend since you know exactly how much you have.

d. Using cash can make it easier to over-spend since you know exactly how much you have.

Which answer choice does not represent an advantage to using credit cards over other forms of payment? a. payments made online with credit card b. payments made abroad with credit card c. emergency contact number for lost card d. interest due on outstanding balance

d. interest due on outstanding balance