Personal Finance - Chapter 6

teaser rate

Initial, temporarily reduced interest rate

Which of the following is not true of the Wage Earner Plan? a. It is also known as Chapter 7 bankruptcy. b. It is a workout procedure involving debt restructuring. c. It may be a viable option for someone with a steady source of income. d. Creditors usually go along with the plan because they would lose more in a straight bankruptcy.

It is also known as Chapter 7 bankruptcy.

Affinity cards. ("Credit cards with a cause")

Standard Visa or MC issued with a charitable, political, or professional organization.

Average daily balance multiplied by the interest rate gives you: a. The amount of interest that can be charged b. The rate of return c. Beta d. The tax rate

The amount of interest that can be charged

A credit card balance of $5,000 at 15% interest with a minimum 2% monthly payment will take more than 32 years to pay off, but by increasing the payment to 3%, you can pay off the balance in half the time. a. True b. False

True

Credit card issuers may charge you a fee even if you do not use your credit card. a. True b. False

True Many bank cards charge annual fees just for the "privilege" of being able to use the card.

Reward cards, such as those that award frequent flyer miles, work best for those who typically do not carry a high balance from one month to the next. a. True b. False

True Most incentive cards carry higher interest rates than regular bank cards. These cards generally work best for those who can use the rebates, charge a lot, and don't carry high monthly balances.

Financial advisors recommend that you carry no more than how many bank credit cards? a. Two b. Ten c. One d. Five

Two

Debt Management Plans are NOT: a. A way to help fix credit problems b. Useless agreements that lock you into more debt c. Formal agreement to make fixed payments to go to each creditor until the debt is paid d. Formal agreements often brokered by a credit counselor

Useless agreements that lock you into more debt

If you pay off a past-due debt: a. You will be black-balled forever for one indiscretion b. No one will notice because they will be happy to have their money c. You may still have a ding on your credit report for that incident d. All is forgiven

You may still have a ding on your credit report for that incident

collateral

a form of security that helps guarantee that the creditor will be repaid.

bankruptcy

a legal process in which some or all of the assets of a debtor are distributed among creditors because the debtor is unable to pay his or her debts.

home equity credit line

a line of credit issued against the existing equity in a home

credit rating

a measure of a person's ability and willingness to make credit payments on time.

retail charge card

a type of credit card issued by retailers that allows customers to charge goods and services up to a preestablished amount

revolving line of credit

a type of open account credit offered by banks and other financial institutions that can be accessed by writing checks against demand deposit or specially designated credit line accounts

cosigning

agreeing to take responsibility for loan payments if the other person fails to make then.

credit

an arrangement to receive cash, goods, or services now and pay for them in the future.

creditor

an entity that lends money.

With open account credit, you must notify the lender anytime you wish to use your credit. a. True b. False

b. False

One drawback of open-ended credit or revolving credit is: a. It is very easy to use b. It can lead to finance charges c. It can help when you don't have cash on you d. It can help you build a credit history

b. It can lead to finance charges

Open-ended credit or revolving credit works like so: a. You pay in advance and use it like a checking account b. You pay in advance and then you get a monthly allowance c. You borrow and then you pay it off d. You borrow but don't have to pay it back

c. You borrow and then you pay it off

Generally speaking, the interest rates on credit cards are a. lower than any other form of consumer credit. b. equal to other forms of consumer credit. c. higher than any other form of consumer credit. d. lower for cash advances.

c. higher than any other form of consumer credit.

Acceptable uses of credit include all of the following except a. using credit for convenience to avoid having to carry cash; convenience users keep track of their expenditures and pay their credit card bills in full each month. b. using credit to spread payments over time for big ticket items, allowing us to use and enjoy these assets now. c. using credit to meet basic living expenses, such as buying groceries on credit because there's no money left from your paycheck. d. using credit to meet financial emergencies, such as borrowing to meet living expenses during a time of unemployment.

c. using credit to meet basic living expenses, such as buying groceries on credit because there's no money left from your paycheck.

If you check your credit card company's website and see that better terms are being offered than you currently have, you should a. stop making your monthly payments. b. call the company and ask for the better deal. c. switch cards immediately. d. do nothing; these are introductory terms for new customers only.

call the company and ask for the better deal.

annual percentage rate (APR)

cost of credit on a yearly basis, expressed as a percentage.

open-end credit

credit as a loan with a certain limit on the amount of money that can be borrowed for a variety of goods and services.

closed-end credit

credit as a one-time loan that is paid back over a specified period of time in payments of equal amounts.

A home equity credit line can be used to: a. Buy a car b. Pay to have a pool put in c. Pay for college tuition d. Any of the above

d. Any of the above

Unsecured loans: a. Can be mortgages with a lien on the house b. Can be auto loans with a lien on the automobile c. Are also known as cash advances d. Are also known as signature loans

d. Are also known as signature loans

Average daily balance is: a. The number of days in the period divided by the largest balance of the month b. The number of days in the period divided by the smallest balance of the month c. The number of days in the period divided by the sum of the balances owed on each day of the period d. The sum of the balances owed on each day of the period divided by the number of days in the period

d. The sum of the balances owed on each day of the period divided by the number of days in the period

Secured loans differ from unsecured loans in that: a. They are kept in a safe deposit box at a bank b. They make you feel really safe c. They are tired down to a particular spot on the ground d. They are backed by some collateral that was pledged

d. They are backed by some collateral that was pledged

Using consumer credit can a. help us attain our financial goals. b. help us raise our overall standard of living. c. cause us great financial pain when used improperly. d. do all of these.

d. do all of these.

title

document showing ownership

It is recommended that your review your card's credit terms and compare offers a. every 3 months. b. every 6 months. c. once per month. d. once per year.

every 6 months.

finance

give or get money for

net income

income received from take-home pay, allowance, gifts, and interests.

line of credit

maximum amount of money a creditor will allow a credit user to borrow.

Debit Card

A bank card that automatically deducts the amount of a purchase from the checking account of the cardholder

reward (co-branded) credit card

A bank credit card that combines features of a traditional bank credit card with an additional incentive, such as rebates and airline mileage. 1. Frequent flyer programs: In this program, the cardholder earns free frequent flyer miles for each dollar charged on his or her credit card. 2. Automobile rebate programs: annual rebates for new car purchases/gas/ maintenance 3. Other merchandise rebates: Norwegian Cruise Line, NASCAR, Starbucks, Marriott Hotels, and Hard Rock Café

Prepaid card

A card that allows you to spend only the amount you have pre-deposited into an account.

Convenience Checks

A convenience check is a cash advance that is used like a regular check. However, the money is charged against your credit limit. There is usually no grace period, and the finance charge is usually higher than for purchases.

FICO score

A credit rating developed by Fair Isaac & Company in the late 1950s, now widely used by lenders and employers. It consists of digit numbers ranging from 300-850.

Which of the following is not a feature of home equity lines of credit? a. They are among the cheapest forms of consumer credit. b. A homeowner can borrow 100% of the market value of the home. c. They are secured with a second mortgage on the home. d. A homeowner is allowed to deduct the interest charges on home equity lines of credit on his or her tax returns.

A homeowner can borrow 100% of the market value of the home.

Home Equity Line of Credit (HELOC)

A line of credit extended to a homeowner that uses the borrower's home as collateral. Once a maximum loan balance is established, the homeowner may draw on the line of credit at his or her discretion. Interest is charged on a predetermined variable rate, which is usually based on prevailing prime rates. Allows taxpayers who itemize their deductions to deduct their interest charges

Unsecured Personal Credit Line

A line of credit made available to an individual on an as-needed basis.

Secured Credit Card

A type of credit card that is backed by a savings account used as collateral on the credit available with the card.

A credit report is: a. Your financial report card b. A consolidated history of your repayment of debt c. A place where companies, utilities, banks and courts can report about your credit d. All of the above

All of the above

Credit Card Act of 2009

Amendments to the Truth-in-Lending law that include requirements for cosigners who applicants under 21 years of age; Billing statements must provide pay off information, including the number of months required to pay off the balance using only minimum payments

credit investigation

An investigation that involves contacting credit references or corresponding with a credit bureau to verify information on a credit application.

If your credit card is stolen, you are responsible for all unauthorized charges. a. True b. False

False

If you obtain a cash advance from your credit card, you will not owe any interest on that amount so long as you pay your balance in full every month. a. True b. False

False Cash advances are loans on which interest begins to accrue immediately.

When you use a "convenience check" sent to you by your credit card issuer, it will not be handled in the same manner as are purchases that you make on your credit card.

False Convenience checks are another way to obtain a cash advance.

When a debit card is lost or stolen, federal banking laws state that the cardholder's maximum liability is $50 if the card is used before it is reported lost or stolen. a. True b. False

False This law applies to credit cards, although many banks choose to extend this protection to their issued debit cards as well.

Your credit card balances are higher than you'd like. A good repayment plan includes which of the following? a. Pay off low-balance cards first. b. Make new charges on low-balance cards. c. Pay off high-balance cards first. d. Pay off high-interest cards first.

Pay off high-interest cards first.

Types of open account credit provided by financial institutions include credit cards, secured and unsecured revolving lines of credit, and overdraft protection lines. a. True b. False

True

Advantages of home equity credit line include all of the following *EXCEPT*: a. The interest rate paid on home equity credit lines is usually lower than other types of credit b. You can use a home equity credit line to pay for things you can't really afford c. They can be very useful if used properly d. Since the house is collateral, the interest paid may be tax deductible

b. You can use a home equity credit line to pay for things you can't really afford GOOD: Also interest rate is often lower than other loans

Special low introductory rates on credit cards are usually good for a. 2 years. b. as long as you keep the card. c. 3 to 6 months. d. 6 to 12 months.

d. 6 to 12 months.

simple interest

interest computed only on the principal.

promptly

on time

portion

part

impostors

people who deceive others by assuming different identities

confidential

private

pledged

promised

Credit cards that combine features of a traditional bank credit card with an incentive, such as cash, merchandise rebates, airlines tickets, or even investments, are known as a. reward cards. b. retail charge cards. c. secured credit cards. d. affinity cards.

reward cards.

Overdraft Protection

simply a line of credit linked to a checking account that enables a depositor to overdraw his or her checking account up to a predetermined limit

minimum monthly payment

smallest amount that one can pay and remain a borrower in good standing.

repossess

take back

Debit cards differ from credit cards in that a. the interest rate is higher. b. they aren't nearly as convenient. c. they work like writing a check. d. there are no monthly statements.

they work like writing a check.

grace period

time period during which no finance charges will be added to an account.

finance charge

total dollar amount paid to use credit.

consumer credit

use of credit for personal needs.