Financial Literacy Pt. 3

Group Insurance. It is generally worthwhile to buy insurance through a group, if you can, since the group handles the sales, saving money for the insurance company. The health insurance offered by most employers is group health insurance since the employees of a company form their own group. Other groups offering insurance may include labor unions and professional associations such as those formed by lawyers and doctors. Many companies and other groups also offer group life and disability insurance and a few even offer group property and casualty insurance as well. Why is group insurance generally less expensive than policies sold by insurance agents? A. Selling costs are lower. B. It is worse insurance. C. Groups make higher profits. D. It is the law.

A. Selling costs are lower. Because the group handles the distribution of the insurance to a lot of people, the selling costs are lower than insurance sold directly by agents who must be compensated for their time.

The Truth-in-Lending Law requires lenders to tell you the annual percent rate of interest (APR). These are shown to you, by law, on the Truth in Lending disclosure form. Stuart buys a $24,000 car with a down payment of $2,000. He is given a 3-year loan with an APR of 10.4 percent. What is the amount financed on this loan? A. $20,000 B. $22,000 C. $18,000 D. $21,031

B. $22,000 If the car costs $24,000 and he puts down $2,000, he ends up borrowing the difference which is $22,000.

Federal law protects you if your credit card is lost or stolen or if you get cheated on something you bought with your credit card. Lost or stolen cards. If your credit card is lost or stolen and somebody else uses it to buy things, the maximum amount that you can legally be charged under federal law is $50 per credit card. This is the limit even if a crook uses it to run up thousands of dollars in charges. If you report your loss to the credit card company immediately by calling the telephone number on your credit card bill (or report online if allowed), you may be able to prevent anyone from using your missing card. In that case, you won't be charged anything at all. In recent years some credit card issuers began advertising that its customers would not be responsible for any loss whatsoever if their card or card number was stolen and misused. While credit card companies can waive the $50 maximum charge set by law, not all do so and may choose to impose this charge at some time in the future. However, you may not be charged more than $50, even if you don't report the loss of your card to the company until it shows up on your bill. Billing Errors. It is important to review all charges to your card when you get your bill to be sure that you aren't being charged for something that you never bought or that you aren't being charged twice for the same thing. If a bad guy learns your credit card number, he can use it to order online or by phone from a catalog. The first you will know of it is when it shows up on your credit card bill. Also, dishonest or careless merchants have been known to run your card through twice, so you can pay double for the same thing if you aren't careful. According to Federal law, you have 60 days to report billing errors to the credit card company. This can generally be done online. The credit card company then has a maximum of 90 days to handle your complaint. Unsatisfactory Goods or Services. Another terrific advantage of buying with a credit card is that it can help you resolve disputes with the seller. Federal law gives you the right to refuse to pay for anything you bought on the card that is undelivered or damaged. You must first try to resolve the problem with the seller, and if that fails, you can notify the credit card company that you contest the charge. They must contact the seller to try to resolve the problem. If you have truly been ripped off, you may end up not being charged for the defective product or service. If your credit card is stolen and the thief runs up a total of $1,000, but you notify the issuer of the card as soon as you discover it's missing, what is the maximum amount you could be held responsible to pay? A. None B. $50 C. $1000 D. $500

B. $50 By law, you cannot be charged for more than $50 in purchases made by someone who is using your lost or stolen card illegally. To encourage cardholders to make online purchases with their credit cards, some card issuers have even dropped the $50 charge for lost or stolen cards. If you report the lost or stolen card immediately, the company may stop purchases so you do not even owe the $50.

There are lots of things you can't easily do without a credit card in the United States. These include renting a car or a hotel room, making an airplane reservation or, in some cases, even reserving a table at a restaurant. For these situations and for many other reasons, most Americans who can get credit cards have them and use them. You can also use a debit card for many of these functions. Many hotels and rental car companies, for example, will accept a debit card, but will put a block of several hundred dollars on your account to protect themselves until you check out of your room or return the car. This is your money that you cannot use until the block has been lifted. The major difference between a debit card and a credit card is that a debit card generally only allows you to spend the money you have in your account while a credit card allows you to automatically borrow money to pay for your purchase. What exactly is a credit card? Very simply, it is a means of identifying the user as a person with an open-end line of credit. This contrasts with closed-end credit, such as installment loans, where you borrow a certain amount of money, generally for a specific purchase, and pay back the loan in regular installments. With open-end credit, often called revolving credit, you can buy many different things at different times and pay off your loan in a very flexible way. With open-end credit, you are given a credit line that you cannot exceed. If your credit line is $1,000, you can charge up to $1,000 worth of purchases to it, but no more. In order to make an additional purchase, you must pay off some of your debt or incur an over-the-limit fee. Let's take an example. Sondra has a Visa credit card with a $1,000 line of credit ("credit line"). She has already run up a balance of $850 on the card when she goes to pick up her car at the garage. The bill for repairs is $175 and she hands them her Visa card. The charge is turned down, because the $175 charge will put her over her credit limit. She is asked to pay in another way. If Sondra makes a credit card payment that reduces her balance to $700, she can now charge up to $300 additional dollars on the card. If she pays off her entire balance, she can charge up to $1,000 on the card. Your credit line will be printed on your monthly credit card statement, generally on the first page. Here's what Sondra's statement showed before she made her payment: Under the Federal CARD Act that went into effect in 2010, banks cannot charge a credit card customer a penalty for going over his or her credit line unless the customer "opts in" or agrees to accept the penalty (often about $35) in exchange for allowing the over-limit purchase to go through. If the credit card user has not opted in to the "over limit" provision, charges that exceed the credit line will be denied. https://s3.amazonaws.com/moneyskillv2/storage/image/HS/Mod29Q1.PNG Don recently received his first credit card, a MasterCard with a credit line of $500. In the first month he had it, he ran up charges of $475. How much of that must he pay if he wants to charge an airline ticket which costs $200 on his card without going over his credit limit? A. All of it B. $125 C. $75 D. $175

D. $175 If he pays $175, it would reduce his outstanding credit balance to $300 leaving him with an available balance of $200 to buy his airline ticket

These days our "identity" exists as records on a number of computers ranging from banks in which we have our money, credit card companies, schools, doctors, credit bureaus and even the computer that contains our record of birth. Since our identity is valuable to us, it is valuable to others as well and there exists a group of thieves who will literally steal our "good name" by getting hold of and using your identity. They do this by finding out your personal information such as your name, credit card numbers and Social Security number. Then, they use this information to buy things or apply for loans in our name. Before you know it, your credit cards may have been maxed out and your credit rating may have been destroyed. A great deal of identity theft now occurs online. Since many web sites use your (easy to obtain) email address as your user ID (which is often the same), all crooks have to do is find out your password to transfer your bank funds or order items through your online shopping accounts to be delivered to them. If they get your Social Security number and your credit card number as well, there is no end to the damage they can cause. We may also expose some important parts of our identity when we throw out our trash or recyclables. The following common-sense measures may help you keep your identity from being stolen: • Password protect critical accounts such as your credit card, bank, brokerage and phone accounts. Do not use a single password for all of your accounts! Avoid using easily available (or guessed) information like your mother's maiden name, your birth date, the last four digits of your Social Security number or your phone number, or a series of consecutive numbers like 1234. • Keep your personal information in a safe place in your home or dorm room, especially if you have roommates or visitors, or are having work done. • Never give out personal information on the phone, through the mail, or on the Internet unless you have initiated the contact or are sure you know who you are dealing with. If a bank or brokerage firm asks us for personal information (such as account number or Social Security number) in an email, never reply, since it is a crook "phishing" for your identity. • Never throw bills or credit card statements with your identity in the trash and especially never in the recycling bin since it is easy to steal. Shred or rip into little pieces all mail that identifies your accounts. To be especially safe, it is useful to put the pieces into different garbage pails to make them harder to reconstruct. • Read your credit card, bank and phone statements carefully each month to spot transactions or calls that you never made. If you get an email from your bank on its official stationery that asks for your account number, what should you do? A. Give them the account number but never give them your Social Security number. B. Don't reply to the email. C. Reply by email that you will not give them that information. D. If the email looks genuine, send them the information they requested.

B. Don't reply to the email. Don't reply to the email at all because they are just "phishing" for account holders and if you reply, they will know that you are one. This information alone could help them rip off your identity. Always think "if they are really my bank, wouldn't they know this information already?"

The amount of property insurance we carry certainly depends on the value of the property we want to insure. However, it depends on a number of other things as well, including the cost of the insurance, the importance of the property to us and whether we have the money to replace it without insurance. Sometimes we don't have much choice about the amount of property insurance we must carry. If we own a home, the dwelling (not including the land which cannot be destroyed by fire) must be insured for at least 80% of its value in order to be paid for partial damage from fire. This is called the "80% Rule." Since homes are seldom completely destroyed by fire, it would be unreasonable to insure the home for, say, only 50 percent of its value and expect the insurance company to pick up the full cost for damages to only one-quarter of the dwelling. Of course, if the house is totally destroyed, the homeowner can collect the full amount for which it had been insured. The Brown family just bought a home for $200,000. Of that amount, the land is valued at $50,000. How much would the Browns have to carry in fire insurance in order to collect the full amount from a fire that caused $50,000 in damages? A. $120,000 B. $200,000 C. $50,000 D. $160,000

A. $120,000 The "80% rule" says that a home must be insured for 80% of its value in order to be paid in full for partial damages due to a fire. Since the land is worth $50,000, the value of the house is $150,000. Multiplying this by 80% gives us $150,000 x .8 = $120,000

A defined benefit pension plan pays a retired worker a set amount of money per year, for life. It is called a "defined benefit" plan because the benefit (the amount paid out) is defined as a set amount so that workers will know how much retirement income they can expect to receive. While many retired people love defined benefit plans because they can count on the regular income (like Social Security), many corporations have found them to be a big drain on earnings and have discontinued offering them to their employees. Even the largest companies, nearly all of whom used to offer defined benefit plans, no longer do so. As of 2017, only 16 percent of Fortune 500 companies offered defined benefit pensions to new hires. Unless you plan to work for the government or in public education, it is not likely that you will be able to receive a defined benefit pension. The amount that a retired person gets from a defined benefit pension plan generally depends on three things:#1. The final salary (often averaged over the final three or five years).#2. The number of years worked for the company.#3. The percentage of final salary used in the retirement formula. Annual retirement benefits = final salary x years worked x percentage. If a person worked for 20 years, retired with a final average salary of $50,000 and the percentage is 1.5 percent, annual retirement benefits = $50,000 x 20 x .015 = $15,000 per year. Some defined benefit pension plans are not as generous as they appear because they have Social Security offsets. This means that the employer deducts some or all of your Social Security from the amount the company will pay to you. Before you take a job with a defined benefit pension plan, you better ask about this. Private defined benefit pension plans do offer the advantage of being insured by the federal Pension Benefit Guarantee Corporation (PBGC). If the companies go bankrupt and cannot pay the pensions, the PBGC will pay the full pension for employees who retire at age 65 and are owed pensions up to a specified annual limit. For those retiring early and those with higher pension benefits, such as airline pilots, the annual amount paid by the PBGC will be lower (sometimes much lower) than the pensions that they earned. Brenda plans to become a high school teacher and work from the time she is 25 until she is 55. Her school district offers a defined benefit pension plan which pays 1.65 percent of final earnings multiplied by years worked. Brenda knows that teachers with 30 years of experience make about $50,000 per year in her district. How much can Brenda plan to receive as an annual pension in today's dollars? A. $24,750 B. $29,700 C. $27,225 D. $30,000

A. $24,750 Her benefits will equal her final salary: $50,000 x 30 years worked) x .0165 = $24,750.

In the U.S., the government pays much of the insurance cost for those over age 65 (Medicare) as well as many others with low income (Medicaid). These groups total about one fourth of the population. The rest of us have to look out for ourselves by getting private insurance, through work or individually. Most health insurance policies pay for visits to the doctor's office as well as hospital expenses. However, most also force you to self-insure for part of your medical expenses through deductibles and co-payments. A deductible specifies the amount of money that a policyholder must pay out of his or her own pocket before the insurance company starts paying the medical expenses. Deductibles commonly start at about $100 per year, but can be as high as $1,000 or more. Generally speaking, the higher the deductible, the lower the premium that is charged for the policy. The purpose of a deductible is two-fold. First, the insurance company gets you to pay for some of your own medical expenses, lowering their costs. Second, if you have to pay for a visit to the doctor's office, you might think twice about seeing the doctor for a minor ailment such as a cold or the flu, which will go away after a few days. This also saves money for the insurance company. Loren has a $200 annual (calendar year) deductible on her health insurance plan. By the end of 2018, she had paid $175 in medical expenses. On January 4, 2019 she went to the doctor for the first time that year and was charged $60 for an office visit. How much of that must she pay for herself? A. $60 B. None C. $100 D. $50

A. $60 Loren's deductible of $200 means that she must pay the first $200 in medical expenses each calendar year. In 2019, the insurance company would pay none of her medical expenses until she spent $200 herself so she must pay the full bill of $60 for the office visit.

The market for many types of insurance is very competitive which means that you often can save a great deal of money by shopping around. One of the greatest costs an insurance company has is the cost of selling the insurance. There are a number of ways in which insurance is sold. Insurance Agents. Insurance agents are people who sell policies of insurance companies to consumers. Some agents work directly for insurance companies while others are independent agents or brokers who work for themselves selling the policies of many different companies. Insurance agents are often well trained and experienced and can help you make difficult insurance decisions. As you might expect, professionals of this type are well paid and their pay largely comes in the form of commissions which are a percentage of the price you pay for your policy. When you deal personally with an agent who gives you a great deal of his or her time, you would expect to pay more for the policy than if no agent were directly involved. Direct Writers. Some insurance companies, such as USAA and GEICO, will sell you a policy over the telephone. Many offer quotes and sell policies over the Internet so you can compare prices of many different companies. These companies are called direct writers since they deal with you directly and do not use expensive agents. As a result, their costs are often lower than policies written by companies that use agents. Leslie, a graduate student who rents an apartment, just turned 25 and is shopping for basic insurance coverage that she can get on her car. Which of the following is likely to provide her with the least expensive coverage? A. A direct writer who posts its lowest rate for basic coverage online. B. An insurance agent who lives in her town. C. A company that offers bundled rates if you buy both your home and auto insurance with it. D. An insurance agent with an office in her town.

A. A direct writer who posts its lowest rate for basic coverage online. Leslie will probably find that the least expensive policy is available through a direct seller who sells online or by phone by posting its rates so they can be compared with other direct sellers. This is the result of competition among the direct sellers who don't have the expense of human agents or brokers who must be paid commissions. A bundled rate might save Leslie some money if she owned a house (which she doesn't).

The Individual Retirement Account (IRA) is a private retirement account that you can set up directly with your bank or broker. If you are single and work for yourself or if you work for an employer who does not offer a qualified pension plan such as a defined benefit, defined contribution, profit sharing or 401(k) plan, you can contribute up to $6,000 to your IRA in 2019 ($7,000 for those over age 50). Even if you work for an employer with a qualified pension plan, as a single person you can still contribute up to $6,000 if your income isn't over $64,000 per year in 2019. Above that income, the tax-deferred amount you can contribute to your IRA goes down. If you're married and one of you has a qualified plan at work, the amount you can contribute to an IRA may be also reduced. The advantage of contributing to a traditional IRA is that you can deduct your contribution from your income for tax purposes, just like a salary reduction (401k) plan. Also, just like the other qualified plans, the earnings on your savings in the IRA will not be taxed until you pull the money out at retirement. Most people can also contribute to a Roth IRA where you put in after-tax money (no tax benefits going in) but you can pull both your savings and the earnings on that savings out tax-free when you retire. For this reason, the Roth IRA is sometimes called the "reverse IRA." An IRA has one more important purpose. If you stop working for an employer who offers any type of retirement savings plan, including a 401(k), you can take your retirement money out of that company's pension plan and roll it over into your IRA without having to pay taxes on it. Once you are 59 ½ years old, you can take money out of your IRA and pay taxes only on the money that you withdraw. If you take money out of an IRA before that age, there is a substantial tax penalty. A retirement plan that lets you put aside pre-tax money in your own account (not an account at your employer) is known as: A. An IRA B. A defined contribution plan C. A 401(k) D. A defined benefit plan

A. An IRA An IRA lets you set up your own retirement account with a bank or broker and put aside up to $6,000 per year in 2019 if you have earned income from a job or self-employment.

Once you have retired, there are two ways you can use your retirement savings from all of the plans we have discussed, plus money you have saved on your own, outside of any retirement plan. First, you can spend the money as you need it. The problem with this is that you may live too long and run out of money. A second method is to convert some or all of your retirement income into an annuity. An annuity is a product offered by insurance companies that will pay you a fixed amount of money per year, regardless of how long you live. In short, an annuity is the opposite of a life insurance policy. You buy life insurance to pay money if you don't live long enough. You buy an annuity to pay money if you live too long! The insurance company uses life expectancy data and current interest rates to determine payments to annuity policyholders. Those who live short lives will get back less than they deposited while those who live long lives will get back more. If you convert your untaxed retirement savings into an annuity at retirement, you don't have to pay taxes on the money until you receive the payments from the annuity. Therefore, an annuity gives you additional tax savings as well as a safety net if you live too long. If you like to know that you have a guaranteed income for life, your annuity adds to the fixed payments you can expect from Social Security and your defined benefit pension (if you have one). Julia's grandmother will retire next year at age 66. She is afraid that her Social Security and pension money won't be enough for her to live on. She doesn't want to use all her savings because her parents lived into their 90s, and her savings aren't enough to last that long. Which of the following financial products may be useful to her? A. An annuity B. Growth stocks C. A life insurance policy D. A 401(k)

A. An annuity If she put some of her money into an annuity, she will be guaranteed a set income for life, no matter how long she lives.

Aside from Social Security and defined benefit pension plans (for those lucky enough to have them), the rest of the income after you stop working will come from money that you must save and invest yourself. Therefore, the amount of savings you will have when you retire depends on three things: the amount you save, when you save it and the rate of return on those savings. There are a number of work-related retirement savings plans that we will discuss in this module, including defined contribution and 401(k) plans that offer tax benefits to workers. We will also talk about other retirement savings plans such as IRAs and Keogh plans for those who are self-employed or who don't have a pension plan at work. Your retirement income will be determined by the amount that you have saved. If you start saving for your retirement when you are young, compound interest will grow that money tremendously over the years. If you put away the same amount when you are older, it will be worth far less when you retire. If you invest $1,000, one time, in a retirement stock account with average returns of 10 percent per year when you are 21, that $1,000 will be worth $80,179 when you retire at age 67. If you wait until you are 50 to put in that $1,000, it will be worth only $5,054 when you retire. More dramatically, if you put aside $1,000 per year (with a 10 percent return, which has been the average return on stocks since 1926) during the 46 years from age 21 to 67, you will have $870,975 when you retire. However, if you put in nothing for half those years, (age 21 to 44) and doubled your annual contribution to $2,000 from age 45 to 67, you will have put in exactly the same amount, $46,000. However, at retirement, the late double-saver will find savings to total just $174,995, or about 20 percent of the amount of the person who started saving early. Bob and Cindy are the same age. At age 25 Cindy began saving $2,000 a year while Bob saved nothing. At age 50, Bob realized that he needed money for retirement and started saving $4,000 per year while Cindy kept saving her $2,000. Now they are both 75 years old. Who has the most money in his or her retirement account? A. Cindy, because her money has grown for a longer time at compound interest. B. They would each have the same amount because they put away exactly the same. C. Bob, because he saved more each year. D. Cindy, because she has put away more money.

A. Cindy, because her money has grown for a longer time at compound interest. Even though they both saved the same amount of money, Cindy will have much more than Bob at retirement because she started saving younger and her money has grown more because of compound interest.

Credit life insurance is a type of term insurance that some people purchase when they take out a large loan to buy things such as a home or a car. If they die, the remaining balance on the loan is paid off so the heirs of the person who died own the property outright. As the loan balance decreases over time, so does the amount of credit life insurance coverage. Credit life insurance is generally regarded as expensive term insurance because of its premium cost relative to the (declining) benefits received as the loan is paid off. You have just purchased an automobile from a dealer and have agreed to a 4-year auto loan. You are also offered a 4-year life insurance policy that would pay off the loan in the event that you died. Which of the following best describes this type of policy? A. Credit life insurance B. Term life insurance C. Universal life insurance D. Whole life insurance

A. Credit life insurance Credit life insurance is a relatively expensive type of term insurance that is sold for the term of a loan and will pay off the loan in the event that the policy-holder dies.

These days, nearly all student loans are made directly by the Federal Government. While the highest interest rates they charge are generally lower than those available from private lenders, there are some conditions attached to make sure that the Federal Government gets its money back. One such condition is that borrowers cannot generally get out of repaying the loan by declaring personal bankruptcy. Even if you are lured into a worthless program offered by a for-profit college, once you borrow that money to pay for the program, you must repay the loan, no matter what! Margaret was convinced to enroll in a private, for-profit college to learn how to be a psychologist's assistant. She borrowed $25,000 in federal student loans to earn her degree and, after graduation, found out that few psychologists employed assistants and ended up unemployed and unable to repay her student loans. Which of the following is NOT likely to be a possible solution to her student debt problem? A. Declaring personal bankruptcy, which discharges all of her debt. B. Selling her car to make payments on the student loan until she finds a job. C. Working with the Consumer Credit Counseling Center to restructure her debts and pay them off over time. D. Minimizing costs by moving back home and getting a job to pay off her debts.

A. Declaring personal bankruptcy, which discharges all of her debt. All of the answers listed above are possible solutions to Margaret's student debt problems except for declaring personal bankruptcy. As opposed to most other types of debt, government student loans may not be discharged through bankruptcy except under very rare circumstances.

Here are some specific ways in which identity thieves can use your personal information. Credit card fraud: They may open new credit card accounts in your name. When they use the accounts and don't pay the bills, the delinquent accounts appear on your credit report, or a debt collector contacts you. They may change the billing address on your credit card so that you no longer receive bills, and then run up charges on your account. Because your bills are now sent to a different address, it may be some time before you realize there's a problem. Phone or utilities fraud: They may open a new phone or cell phone account in your name, or run up charges on your existing account. They may use your name to get utility services like electricity, heating, or cable TV. Bank/finance fraud: They may create counterfeit checks using your name or stealing your checking account number. They may open a bank account in your name and write bad checks. They may clone your ATM or debit card or simply use the account numbers to make electronic withdrawals in your name, draining your accounts. They may take out a car, home or personal loan in your name. Government documents fraud: They may get a driver's license or official ID card issued in your name but with their picture. They may use your name and Social Security number to get government benefits. They may file a fraudulent tax return using your information. Other fraud: They may get a job using your Social Security number. They may rent a house or get medical services using your name. They may give your personal information to police during an arrest. If they don't show up for their court date, a warrant for arrest is issued in your name. What of the following statements about identity thieves is false? A. Identify thieves would never take out a loan in your name. B. They may open a bank account in your name and write bad checks. C. They may open new credit card accounts or utilities in your name and not pay the bill, which will have a negative impact on your credit report. D. They may give your personal information to police during an arrest; not show up for their court date, which could result in a warrant for arrest in your name.

A. Identify thieves would never take out a loan in your name. Taking out a loan in your name is one of the many ways that an identify thief may use your personal information for their gain.

Most students who borrow money through the U.S. Department of Education to pay for their college education receive either a Direct Subsidized Loan or a Direct Unsubsidized Loan. These loans are the primary type of loan made to college students by the Federal Government. Some direct loans are subsidized for students with demonstrated financial need. Direct Subsidized Stafford Loans are for students with financial need. These loans charge no interest and require no repayment while the student is in school and for a 6-month grace period after the student finishes. Maximum loan amounts and interest rates change periodically and can be found on the Federal student Aid website. Direct Unsubsidized Loans are available for all students, regardless of financial need. However, unlike the subsidized loan, interest is charged from the time your first payment is received. You can pay the interest while you are in school or you can allow it to accumulate ("accrue") and be added to the amount that you borrowed. You don't have to begin making payment on your loan until the end of the grace period, but interest on the loan keeps accruing so the longer you wait to begin paying off your loan, the more you will owe and the higher your payments will become. When does the Federal Government begin to charge interest on amounts borrowed on a Direct Unsubsidized Student Loan? A. Immediately, as soon as the first amount is borrowed. B. At graduation. C. When the last loan is made. D. 6 months after graduation.

A. Immediately, as soon as the first amount is borrowed. With a Direct Unsubsidized loan, interest is charged on all money loaned to the student from the time the first loan is made. There is no grace period on the unsubsidized loans.

Even if we are willing to self-insure for damage to our property, we can't if that property is being financed by someone else. Lenders generally demand that you take out insurance to protect them if the property is damaged. If we have a mortgage on our home (and most people do) the mortgage contract requires that we have property insurance on the home. If we are leasing or buying a car on credit, we must carry collision insurance, which is a type of property insurance for the car. Most property insurance policies have deductibles that will allow you to self-insure for the first part of the loss. Collision insurance on a car will generally allow you to choose a deductible from $50 to $500 or $1,000. The cost of collision insurance goes down considerably as the amount of your deductible goes up. The insurance company knows that with a large deductible it won't have to process a lot of small claims. Also, the insurance company figures that drivers may be more careful when they risk a lot of their own money if they have an accident. While you don't need to carry any collision insurance if you own your car outright, you may want to carry collision insurance if you don't have much money and need your car to get to work. And if you can't get your hands on a lot of cash, like $500, you may want to carry collision insurance with a lower deductible, even if it is expensive. Sometimes, you just have no choice. Kevin owns a 2002 Ford Escort with a lot of miles on it that he needs to get to his job 10 miles away. The car is worth only about $1,000 but it costs him $200 per year to keep collision insurance on it with a $100 deductible. Kevin never has more than about $100 in the bank and has no one to fall back on in an emergency. Which of the following would be the best advice you could give to Kevin regarding his collision insurance? A. Keep paying for collision insurance even though it is expensive. B. Reduce the size of the deductible to cut the cost of the insurance. C. Increase his liability insurance. D. Drop the collision insurance altogether to save the money.

A. Keep paying for collision insurance even though it is expensive. While the insurance is expensive, the $200 he pays is insuring more than just a $1,000 car. It is also insuring Kevin's ability to get to work and earn an income. His risk is too great if he doesn't have the collision insurance. Reducing the amount of his deductible increases the cost of the insurance, and increasing liability insurance coverage does nothing for Kevin if he loses the use of his car.

When the rate of inflation increases, it tends to cause more problems for people who are retired than for those who are still working. If you are working and the prices of things you buy go up, you will generally find that your pay goes up to help offset price inflation. However, if you are retired, you will probably find that your income does not adjust as well to increases in the prices of goods and services that you buy. To help retired people cope with inflation, Congress indexed Social Security which means that Social Security payments adjust automatically to the cost of living. If inflation is 3 percent in a year, Social Security payments are increased by 3 percent as well so that older Americans can continue to pay their bills. Unfortunately, most other sources of retirement income are not indexed to the cost of living. If a retired person receives a defined benefit pension of $800 per month, in nearly all cases that payment remains the same, regardless of the rate of inflation. The same is true of any other source of retirement income that is fixed in dollar amount, such as the income earned on bonds. Inflation can cause difficulty in many ways. Which group would have the greatest problem during periods of high inflation? A. Older people living on fixed retirement income. B. Young working couples with children. C. Young couples with no children who both work. D. Older, working couples saving for retirement.

A. Older people living on fixed retirement income. The fixed income of people who are retired does not adjust to inflation, so they have to pay more for the same goods even though their income stays the same. Working people generally find that their income will go up to offset inflation, so they are hurt less by inflation than retired people living on fixed retirement income.

Today's retired people are far from affluent. In 2019, the median income of households in the U.S. headed by someone 70-74 was only $46,797, according to the Current Population Survey of the U.S. Government. For households headed by someone aged 75 and older, it was just $31,893, less than half the income of households headed by person aged 55 to 65, most of whom were probably still working. This is hardly enough retirement money to support the "good life" that many of us look forward to in our golden years even if population changes don't make things worse. For someone who retired at 65 in 2018, Social Security benefits replaced about 39 percent of past earnings. Social Security benefits represent about 33 percent of the income of the elderly according to the Social Security Administration. Other sources of income for older adults are earnings from full- or part-time jobs, pension benefits from a former employer, and interest and dividends earned on retirement savings. Retirement income paid by a company is called: A. Pension B. Social Security C. Rents and profits D. 401k

A. Pension Retirement income paid by a company to a former employee is called a "pension." Only 17 percent of the total income earned by those over 65 was in the form of pension income from a private company or branch of the government.

The group insurance plan that you get through work may also give you coverage for visits to the dentist, medicines and visits to the eye doctor. About three-quarters of Americans are covered by private dental insurance plans. However, this leaves the other quarter of the population without any sort of dental insurance at all. Dental insurance is designed to cut dental costs by covering preventive dental care such as regular cleanings and examinations. These preventive care procedures are far less expensive than dental procedures needed to fix teeth that have not been well cared for. While dental insurance covers preventative procedures such as regular cleaning and medical procedures such as filling cavities, elective procedures, such as orthodonture (braces), are generally not covered. When elective procedures are covered, they generally require a co-payment of 50 percent. Why do many employer-sponsored dental insurance plans encourage visits to the dental office twice a year by making them free? A. Regular cleaning and checkups can reduce the cost of expensive dental work. B. To run up the costs that they must pay. C. To increase the number of teeth that will be pulled. D. The plans were written by dentists.

A. Regular cleaning and checkups can reduce the cost of expensive dental work. The insurance companies want to limit the money they pay out for expensive dental work and have found that regular exams and cleaning will prevent more expensive work in the future.

Some companies offer profit sharing plans to their employees instead of defined contribution plans. These are like defined contribution plans in that each employee has a separate account. However, unlike defined contribution plans, employees decide how much to put in the retirement plans each year. If the employer has a bad year, very little if anything may be contributed toward the employee's retirement. Many employers offer 401(k) plans and other types of salary reduction plans including 403(b) and 457 plans for those who work for non-profits or the government. These retirement plans allow employees to contribute their own money to a retirement fund in their name. The major benefit to employees is that their taxable income is reduced by the amount of their contribution, cutting the taxes that they pay that year. They also do not have to pay income tax on the money earned in their retirement account until it is taken out. The downside is that when they retire and take the money out, they have to pay taxes on the money they contributed plus the earnings on that money. Hopefully, they will be in a lower tax bracket when they retire. In 2019, most employees could put away as much as $19,000 in a salary reduction plan. Older workers, age 50 or over, can put in as much as $25,000 to help catch up for contributions they had not made when they were younger. The fact that they can deduct this amount from their income for calculating taxes is especially important for older workers who usually make the top money of their careers. They are in a high tax bracket and often can afford to save a big part of their salary. Many employers encourage their employees to save by matching all or part of what the employees put into their 401(k)s. If you are a younger worker in a low tax bracket, an unmatched contribution to your 401(k) may not seem so attractive. However, if your employer offers a 50 percent match, you give up a lot by not making your 401(k) contribution. You are generally given a number of investment options for your 401(k) money, including different types of mutual funds, bank CDs and even stock in your own company. Since stocks tend to have higher returns than other types of investments over long periods of time, many young workers will invest their money in these higher risk/higher return investments to build their retirement income for the future. However, unlike a defined benefit pension plan, the U.S. government does not guarantee 401(k) plans. If you invest in stock and the stock falls in value, the money that you will have in retirement falls as well. Another name for a 401(k) is: A. Salary reduction plan B. Roth IRA C. Defined benefit plan D. Profit-sharing plan

A. Salary reduction plan A 401(k) plan is a salary reduction plan because it reduces your salary, for tax purposes, by the amount of the contribution you make.

A general-purpose credit card may be used at many different stores. These cards are often imprinted with the logo of an association like MasterCard, Visa, American Express or Discover. Most general-purpose credit cards use debt that is unsecured. This means that the things you buy with your card do not serve as collateral for your loan. If you buy a washing machine on your Visa card and then cannot make the payments on it, Visa does not have the right to come to your house and take back your washing machine. If, however, your credit card is issued by a store and can only be used at that store, such as a Macy's card or a Neiman Marcus card, many of the things you buy at that store do serve as collateral for your debt. When you sign up for a store card, you generally sign a statement that gives the credit card issuer a security interest in the hard goods that you buy. Hard goods include things such as appliances and tools, which can be resold if they are taken back by the lender. Soft goods such as clothing are not included because they are generally pretty worthless once they have been worn. Eric bought a garden tractor at Sears using his Sears credit card. Soon after, he lost his job and could not make any payments on his Sears credit card, not even the minimum required payment. Which of the following statements is true? A. Sears can take back the tractor. B. Sears can seize any goods Eric bought at Sears including clothes. C. Sears cannot seize any of Eric's goods since a Sears credit card loan is not secured. D. Sears can seize Eric's car and house as well as his tractor.

A. Sears can take back the tractor. Most store credit cards allow the lender to use the hard goods you have bought on their cards as collateral for your card debt. A garden tractor is a hard good and can be taken back if Eric does not pay his debt.

Since we can't afford to buy insurance to protect us from every risk, we have to be smart in how we handle it. There are three essential ways of handling risk. We can avoid or reduce it, keep some of it, or transfer it to others. The correct choice depends upon a number of things. Avoid or Reduce Risk. A lot of risk can be avoided or reduced. If we drive carefully, take vitamins, shovel our sidewalk when it snows, stop smoking, put up a smoke detector or lose weight, we are reducing risk. The cost of extreme risk avoidance may be high. If you refuse to fly, you may limit your job opportunities. If you drive too slowly, you give up time you could be using more profitably. Keep Some Risk. We naturally tend to keep or "assume" certain risks. A quarter may get stuck in the Coke machine, we may have a flat tire, the milk may go bad, the sink may get clogged, calling for the services of a plumber, and so on. While we might be able to get insurance for some of these things, if the size of our "loss" is too small, the cost of dealing with the paperwork alone may make not make it worthwhile. Therefore, we tend to self-insure for some of our risk. The more risk we self-insure, the less we pay for insurance. As we will see in this module, it is important to figure out the right amount of self-insurance to balance between cost and protection. If we have an automobile policy with a $500 deductible on collision, that $500 is: A. Self-insurance B. Liability insurance C. Comprehensive insurance D. Collision insurance

A. Self-insurance The $500 deductible is self-insurance in that we agree to pay the first $500 if our car is damaged, with insurance kicking in only for damage above that amount.

Cash Value life insurance (sometimes called permanent or whole life insurance) combines a savings feature with life insurance. An advantage of cash value life insurance is that the premiums you pay remain the same for the same amount of coverage, as long as you live. Your premium does not go up as you get older. A second advantage is that you build up a savings balance, called the "cash value" which you can use when the policy is paid up or terminated. However, to pay for both of these features, cash value life insurance is far more expensive than term insurance for the same coverage when you are younger. As an example, a 27 year old, non-smoking male can buy $100,000 of term life insurance for as little as $98 per year. The cost of $100,000 of cash value life insurance would be at least 5 times as much. This means that when you have young children and your need for life insurance is greatest, you probably can only afford term insurance. Brittany is 26 with two young children and is the primary earner in her family. She needs at least a half million dollars in life insurance coverage but can spare only about $500 per year in premiums. What type of life insurance would you advise her to get? A. Term B. No insurance C. Cash value D. Both cash value and term

A. Term For $500 per year, she will be able to buy more than $500,000 in term life insurance coverage but less than $50,000 in cash value coverage. Given her need for a lot of insurance, term is better for her.

We must have liability insurance to own a car if insurance is required in our state or if we are leasing or buying the car on credit. And even when liability insurance is required, the amount of coverage we must have is pretty low, sometimes as little as $25,000. If we cause a serious accident, $25,000 isn't going to give us a lot of protection. If we are young or poor, or both, we are not likely to be sued to pay the entire amount of damages caused by the car we own. If you have caused substantial damage to someone, say in the form of an automobile accident, your insurance company will generally try to settle the case without going to trial. If damages are likely to exceed the amount of your liability coverage, the insurance company will generally offer to pay the limit of your policy, such as $25,000. This puts the folks you have hit in a tough position. They can take the maximum amount of the insurance coverage you have and walk away, or they can sue to take your personal property if damages are greater than the insurance. If they sue, they must pay legal expenses and court costs (at least initially) and, if they are successful, wait up to several years to collect damages. If you have no assets for them to collect, you may be able to declare personal bankruptcy and be relieved of the responsibility of paying damages for the accident. It is not surprising, therefore, that lawyers tend to sue primarily those who have assets that can be used to pay the claim. Such people are said to have "deep pockets." Since the likelihood that we will be sued and the amount that we can lose in a lawsuit are related to the value of our assets, we tend to choose the amount of liability insurance based on our wealth. On the other hand, the amount of property insurance we need depends on the value of the particular property we are insuring. If you are a student with no assets of any value and have liability insurance on an old car that pays a maximum of $50,000 per accident, what is most likely to happen if you cause an accident that results in $75,000 in damage to the passengers in another car? A. They will accept the $50,000 maximum offered by your insurance company B. They will sue for the entire $75,000 C. They will sue you, personally, for more than $100,000 D. They will not pursue any action against you or your insurance company

A. They will accept the $50,000 maximum offered by your insurance company If you have no assets of any value and very little income, as a student, the other side will probably settle for the $50,000 which is the liability limit of your insurance. Since you don't have "deep pockets," chances are that they couldn't collect much more from you in an expensive lawsuit.

This module concerns three ways we have to keep our financial support coming, even if we can't work. The first is life insurance, which pays money to those dependent on our income in case we die. The second is a will, which allows us to leave money to those who depend on it if we die. The third is disability insurance, which pays money to us if we are still alive, but can no longer work.Life Insurance: The primary purpose of life insurance is to allow survivors to maintain their standards of living in the absence of a breadwinner. If a mom or dad dies, they want their children to be able to do the things the parents planned for them when they were alive. This might include going to college, having a beautiful wedding, and almost certainly being able to stay in the family home. What is the primary purpose of life insurance? A. To help maintain the standard of living of those who depend on our income. B. To help save money for old age. C. To pay us an income if we are injured and can't work. D. To pay back our parents for the money they spent on us if we die.

A. To help maintain the standard of living of those who depend on our income. The primary purpose of life insurance is to allow survivors to maintain their standard of living in the absence of a breadwinner.

It is fair to say that a lot of us borrow for non-productive purposes in order to enjoy things that we can't afford with the money we have now. Sometimes this use of credit is unavoidable, for example, if we have a serious illness or lose our job. Other times we use credit purely for fun, as when we go on vacation or buy a new TV or piece of jewelry. Sometimes we borrow for pleasure when our incomes are low figuring that we will repay the loans in the future when our incomes are higher. Is this a bad idea? Many people (including the banks that are willing to lend the money to these young borrowers) don't think so. They feel that there are periods of the life cycle when we will earn more than we need and periods when we feel we need more than we have. As long as we will have the ability to repay the money in the future, all we are doing is "smoothing" or adjusting our lifetime consumption to match our lifetime income. The downside of life cycle smoothing is that something can go wrong to prevent us from repaying our loans. A personal situation, such as illness, loss of a job or increase in the size of our family can turn an expected future surplus into a future deficit. It is also possible that the economy, which looks so promising today, will be much worse when we need to pay back our loan. Maybe we won't be making the income that we expect to be making at that time. As we will see shortly, credit difficulties are no fun. For this reason, people are urged to be cautious when they borrow today to increase their standard of living. It could backfire! Under which of the following circumstances would it be financially beneficial to you to borrow money to buy something now and repay it with future income? A. When you need to buy a car to get a much better paying job. B. When you really need a two-week vacation. C. When some clothes you like go on sale. D. When the interest on the loan is greater than the interest you get on your savings.

A. When you need to buy a car to get a much better paying job. Buying a car in order to get a much better paying job is the only circumstance listed which has a positive financial benefit.

As we mentioned earlier, Federal law says that if you are turned down for credit, you get to see your credit report for free. Also, you can see it once a year for free or pay to see your credit report at any time, even if you have already seen your once-per-year free report. Since so many lenders are sending information about so many people to the credit bureaus, it is not unusual that mistakes are made. Your name may be similar to someone else's and before you know it, your clean credit report may be dirtied up by the other person's bad credit habits. Also, a credit report can only have negative information on you that is less than 7 years old. The only exception is if you filed for bankruptcy in which case it can be reported for 10 years. If you missed a number of payments 8 years ago and find that on your credit report, you can have it removed. To protect your good name, you should write to the credit bureau telling them what's wrong with the report. By law, they must write back to you, either telling you that they will correct your report or telling you that they stick with the information they had in your report. If you still think they are wrong, you can write a comment of up to 100 words that must be sent out to everyone who requests your credit report in the future. To protect yourself, you should order another copy of your credit report after about 3 months to be sure that it is in order. Morgan's credit report says that she still owes $30,000 on a trailer. The trouble is that Morgan doesn't own a trailer and never has. What should she do? A. Write to the credit bureau asking them to remove the information about the trailer loan. B. Write to her Senator to make this kind of reporting illegal. C. Pay off the loan to clean up her report. D. Find out who owns the trailer and tell them to pay off their loan.

A. Write to the credit bureau asking them to remove the information about the trailer loan. Federal law says that if Morgan tells the credit bureau about the error, the bureau must investigate it and clear it up.

There are basically three types of health insurance plans. Fee-for-service plans allow you to choose your own doctors. If you want to see a specialist, such as a sports doctor or a gynecologist, you are free to do so and your expenses (up to a limit) will be either paid to the doctor directly or reimbursed to you. While this type of plan gives you the greatest freedom to choose your health provider, it also tends to be more expensive than other plans. In a fee-for-service health insurance plan, who gets to choose your doctor? A. You B. Your health insurer C. Your employer D. Your primary physician

A. You In a fee-for-service plan the person who is insured gets to choose his or her doctor.

In addition to deductibles and copayments, your health insurance policy may also have limits on certain types of medical services. Frequently they will cover your prescription drug expenses only to a certain amount per year. Specialized services, such as general physicals, psychological counseling or eye exams may also be limited. In order to keep you from going broke as your medical expenses mount, most plans include a copayment cap, which limits the total expenses that you have to pay in a year. For example, you may have a policy with a $100 deductible, a 20% copayment and an annual copayment cap of $500. In this case, you pay the first $100 in medical expenses and then pay 20 percent of the next $2,500 to pay your copayment cap of $500 (20% of $2,500 is $500). The insurance company pays for all expenses above $2,600. To find the total level of medical expenses you must reach each year before you stop paying, divide the copayment cap by the copayment percent and add the deductible. In this example, the copayment cap of $500 is divided 20 percent which is $500/.2 = $2,500. Add the $100 deductible and you find that when you total medical expenses reach $2,600 per year, you no longer have to pay. Barry has a medical insurance plan with a $100 deductible and a 20 percent employee copayment above the deductible with an annual copayment cap of $1,500. What is the total level of medical expenses he must reach each year before he can stop paying? A. $1,500 B. $7,600 C. $7,500 D. $500

B. $7,600 To find the total level of medical expenses Barry must reach each year before he can stop paying, divide the copayment cap by the copayment percent and add the deductible. In this example, the copayment cap of $1,500 is divided 20 percent which is $1,500/.2 = $7,500. Add the $100 deductible to find that when Barry's total medical expenses reach $7,600 per year, he no longer has to pay.

A federal credit law went into effect in 2018. If you place a credit freeze, potential creditors and other third parties will not be able to get access to your credit report unless you temporarily lift the freeze. This means that it's unlikely that any identity thief would be able to open a new account in your name. Placing a credit freeze does not affect your credit score, nor does it keep you from getting your free annual credit report, or from buying your credit report or score. Under certain circumstances, the Social Security Administration may issue you a new Social Security number - at your request - if, after trying to resolve the problems brought on by identity theft, you continue to experience problems. Consider this option carefully. A new Social Security number may not resolve your identity theft problems, and may actually create new problems. For example, a new Social Security number does not necessarily ensure a new credit record because credit bureaus may combine the credit records from your old Social Security number with those from your new Social Security number. Even when old credit information is not associated with your new Social Security number, the absence of any credit history under your new Social Security number may make it more difficult for you to get credit. And finally, there's no guarantee that an identity thief wouldn't also misuse a new Social Security number. Which of the following statement(s) is FALSE about getting a new Social Security number to resolve your problems brought on by identity theft? A. Even when the old credit information is not associated with your new Social Security number, the absence of any credit history under your new Social Security number may make it more difficult for you to get credit. B. A new Social Security number guarantees that an identity thief will not misuse your information. C. A new Social Security number does not necessarily ensure a new credit record because credit bureaus may combine the credit records from your old Social Security number with those from your new Social Security number. D. It may be more difficult to get new credit with a new Social Security Number.

B. A new Social Security number guarantees that an identity thief will not misuse your information. There is no guarantee that a new Social Security number wouldn't also be misused by an identity thief

The FTC estimates that as many as 9 million Americans have their identities stolen each year. The crime of using your name takes many forms. Identity thieves may rent an apartment, obtain a credit card, or establish a telephone account in your name. You may not find out about the theft until you review your credit report or a credit card statement and notice charges you didn't make-or until a debt collector contacts you. Identity theft is serious. While some identity theft victims can resolve their problems quickly, others spend hundreds of dollars and many hours repairing damage to their good name and credit record. Some consumers, victimized by identity theft, may lose out on job opportunities, or be denied loans for education, housing or cars because of negative information on their credit reports. In rare cases, they may even be arrested for crimes they did not commit. Identity theft starts with the misuse of your personal identifying information such as your name and Social Security number, credit card numbers, or other financial account information. For identity thieves, this information is as good as gold. Identity thieves may use a variety of methods to get hold of your information, including: Dumpster Diving. They rummage through trash looking for bills or other paper with your personal information on it. Skimming. They steal your credit/debit card numbers by using a special storage device (or writing it down or taking a cell phone photo) when processing your card. Phishing. They pretend to be financial institutions or companies and call or send spam or pop-up messages to get you to reveal your personal information. Hacking. They hack into your email or other online accounts to access your personal information, or into a company's database to access its records. Changing Your Address. They divert your billing statements to another location by completing a change of address form. Old-Fashioned Stealing. They steal wallets and purses; mail, including bank and credit card statements; pre-approved credit offers; and new checks or tax information. They steal personnel records, or bribe employees who have access. Pretexting. They use false pretenses to obtain your personal information from financial institutions, telephone companies, and other sources. What answer best describes something that identity thieves can do to get your personal information? A. Rummage through your trash. B. All of the other choices are correct. C. Complete a change of address form to divert billing statement. D. Pretend to be from a financial institution or company by emailing or calling you.

B. All of the other choices are correct. The correct answer is that all of the other choices are correct. Identity thieves are known to rummage through trash looking for bills or other papers with your personal information; they will call or email you pretending to be a financial institution, they will change your billing statement address to another location, they might steal your wallet or mail, and bribe employees or steal your personal records.

General purpose credit cards can be used almost everywhere and include a revolving credit feature that lets you pay off your balance immediately or over time. The most popular of these general-purpose cards are "bank cards" issued by banks that are members of Visa and MasterCard. Also included among general-purpose cards are those from American Express and Discover, which are not bank cards but work just like them. Very few general-purpose credit cards charge an annual fee unless you want extra services, such as frequent flier miles for every dollar you spend. Store cards are issued by a single company, such as a store or gasoline company, and cannot be used anywhere else. These cards also tend to have a revolving credit feature and tend to not charge an annual fee. Travel and entertainment cards are issued by American Express, Diners Club and Carte Blanche to businesses and people who tend to charge a lot every month and who pay their complete bill every time. Therefore, they do not offer revolving credit on their standard card (although American Express allows users to have revolving credit if they want it). These cards charge an annual fee and are not accepted as often as the general-purpose cards, partly because the percent fee that they take from the merchants is higher than it is for the general-purpose cards. Secured credit cards are bank cards which are generally used by those people who can't get a regular credit card, often because they have a bad credit record. To get a secured credit card, you generally open up a savings account in the bank that is issuing the Visa or MasterCard to you, and the balance in your savings account becomes the credit limit on your card. In this way, the bank uses your own bank balance as security for the card. Sometimes these are called "prepaid" cards. With the increasing acceptance of debit cards for purchases, the need for secured cards has declined since debit cards accomplish the same things. What is the main reason why some places don't accept American Express credit cards? A. American Express has higher finance charges for its card holders. B. American Express takes a higher percentage of the transaction from the merchant than do the bank cards. C. They don't like the American Express Company. D. American Express charges an annual fee to its cardholders.

B. American Express takes a higher percentage of the transaction from the merchant than do the bank cards. American Express tends to charge higher merchant fees (percentage of the transaction) than the bank card companies, in part because American Express gets little or no additional income from finance charges.

There are a number of reasons why you might want to prepay an installment loan by either paying it all off at once or by repaying it faster than the contract calls for. Paying a loan balance off sooner than scheduled may save you interest expense. • Perhaps, you have come into some money through a gift or a bonus and you want to reduce your debt.• Perhaps, market interest rates have come down and you can refinance your current loan, which has an APR of 12 percent with a new loan at 8 percent.• Perhaps, you want to save extra money for the future, in a way that you can't easily get to it (forced saving), by making double payments or extra payments on your loan. Lenders may include prepayment penalties in their loan agreements to offset administrative and marketing costs associated with a new loan. For example, homebuyers may be offered a mortgage with their choice of two rates; a higher rate without a prepayment penalty and a more attractive, lower rate with a prepayment penalty. The Truth-in-Lending disclosure must give you the terms of any prepayment penalty for you to choose what is best for you and your situation. Paying off a loan balance early: A. Is always a good idea. B. Can save you money if there is no prepayment penalty. C. Will always save you money. D. Is never a good idea.

B. Can save you money if there is no prepayment penalty. Paying off a loan balance early can save you money by eliminating future interest payments on that loan. However, if there is a prepayment penalty, this may offset or be greater than any interest saved.

In 2015, four out of five American families used borrowed money to help support their lifestyles, according to the Pew Charitable Trusts. This situation is hardly getting better with an estimated 7 in 10 college students ending school with student loans. Just, why are we so dependent on credit and what do we use it for? These are issues we will explore in this module. American families use credit primarily for four things: the mortgage they use to buy their home , credit cards they use to buy almost everything else, auto loans and student loans. Of these four types of debts, the highest outstanding balance is for home mortgage loans and the lowest is for retail credit cards. What type of debt has the highest consumer debt balance? A. Educational loans B. Home-mortgage debt C. Vehicle loans D. Credit card debt

B. Home-mortgage debt The largest amount of outstanding debts is for mortgage balances.

Since a bad credit record can keep you from borrowing money at reasonable rates, receiving a credit card, owning a home or even getting a good job, it is important to establish and keep a good credit record. According to Equifax, the following factors will lower your credit score: Having only a short credit history. Anything less than 7 years of credit history is considered short and less than 3 years is too little for the credit bureau to make an accurate rating. This means that it is useful for young people to establish a credit record by having, for example, a cell phone in their own name. Of course, a bad credit record is worse than no credit record, so don't borrow more than you can afford to pay back, without question and on time. Missing Payments. If you miss payments or pay late, you will lose points on your credit score even if you pay a late fee. If you miss 3 or more payments in a row, this is very bad because lenders may think they will never be paid. The following factors will raise your credit score: Having no negative public records, such as being sued or declaring bankruptcy. Having low outstanding credit balances. Having a limited amount of available credit on your lines. Having a lot of credit cards with high lines is bad, even if current balances are low, because you could suddenly run up a lot of debt. Not applying for more credit in the past 6 months. A lot of credit inquiries in a short time may indicate that you are in trouble and are shopping for credit. Cassandra is a 21-year-old who is still in college. She wants a credit card so she can order items online. Her mother offers to let Cassandra use her card, but Cassandra would like it in her own name. What is the advantage of having it in her own name? A. She will be given more time to pay her bills. B. If she pays her bills promptly she is establishing a good credit history. C. She will get a finance charge with a lower APR. D. Her credit score will go up by 200 points.

B. If she pays her bills promptly she is establishing a good credit history. Having a credit card in your own name is an excellent way to build a good credit rating that will be useful in the future. However, this only works if credit card bills are paid promptly, every time.

Consumer credit cards typically use the average daily balance method to determine your finance charges. For every day in the billing cycle a balance is calculated by adding any new purchases to the outstanding balance from the day before and subtracting any payment that they have received from you. Each day's balance is multiplied by the daily periodic rate which is the annual percent rate (APR) divided by 365. An average is taken of these daily balances over your billing cycle and this equals your average daily balance including new purchases. If you do not plan to pay off the entire balance when you get your statement, you should pay as early as possible (well before the payment due date) since the amount of your payment will lower the average daily balance for the next period as soon as it is received. If your credit card company uses the Average Daily Balance method of determining the balance it uses to figure your finance charges, which of the following is true: A. If you always pay off your balance by the payment due date, finance charges will be very high. B. If you didn't pay off your balance last month, you can save finance charges by sending in your payment before the payment due date. C. You never pay finance charges on the previous period's balance. D. If you don't pay off your balance each month, finance charges apply only to the part of the balance that hadn't been paid off and not to new purchases.

B. If you didn't pay off your balance last month, you can save finance charges by sending in your payment before the payment due date. If you didn't pay off your balance last month, you can save finance charges by sending in your payment before the payment due date. This payment is subtracted from the amount that you owe on the day it is received and it will lower your average daily balance for the rest of the current month.

Fraud alerts can help prevent an identity thief from opening any more accounts in your name. Contact the toll-free fraud number of any of the three consumer reporting agencies below to place a fraud alert on your credit report. You only need to contact one of the three companies to place an alert. The company you call is required to contact the other two, which will place an alert on their versions of your report, too. You may want to make a copy of these numbers in case you need to use them in the future. TransUnion: 1-800-680-7289; www.transunion.com; TransUnion Fraud Victim Assistance, P.O. Box 2000, Chester, PA 19016 Equifax: 1-800-525-6285; www.equifax.com; P.O. Box 740256, Atlanta, GA 30374 Experian: 1-888-EXPERIAN (397-3742); www.experian.com; P.O. Box 9554, Allen, TX 75013 When you place the fraud alert in your file, you're entitled to order one free copy of your credit report from each of the three consumer reporting companies. Once you get your credit reports, review them carefully. Look for inquiries from companies you haven't contacted, accounts you didn't open, and debts on your accounts that you can't explain. Check that information, like your Social Security number, address(es), name or initials, and employers are correct. If you find fraudulent or inaccurate information, get it removed. When you correct your credit report, use an Identity Theft Report with a cover letter explaining your request, to get the fastest and most complete results. Continue to check your credit reports periodically, especially for the first year after you discover the identity theft, to make sure no new fraudulent activity has occurred. Which of the following statements is true about placing a fraud alert with the consumer reporting companies? A. You only need to contact two of the consumer reporting companies. B. You only need to contact one of the three consumer reporting companies to place a fraud alert. C. You don't need to contact any of the consumers reporting company. D. You need to contact all three of the consumer reporting companies.

B. You only need to contact one of the three consumer reporting companies to place a fraud alert. You only need to contact one of the three consumer reporting companies to place a fraud alert. The company you call is required to contact the other two, which will place an alert on their versions of your report.

Most working Americans are provided with health insurance benefits through work. This is particularly true for employees of larger organizations, but it is relatively easy for smaller employers to obtain health coverage for their workers through industry associations. Getting health insurance at work is so important to most people that the COBRA law forces companies (with 20 or more employees) who offer health insurance to cover employees who quit or were laid off for 18 months after they leave the company. Former employees have to pay the full cost of the insurance, which is generally more than they had been paying when they were working since many companies pick up a portion of health insurance costs as a fringe benefit. Most group policies cover the employee, his or her spouse, and any dependent children. In most cases, children who are still in high school or college can be covered by their parents' policy, up to a certain age. If a parent loses his or her job and the COBRA benefits run out, the children may become uninsured. Under the Affordable Care Act, which is still in effect, families that lose their health insurance will be required to purchase private insurance and the cost may be subsidized by the government if a family's income is below a certain level. Many young people receive health insurance benefits through their parents. Which of the following statements is true about health insurance coverage? A. You are covered by your parents' insurance until you marry, regardless of your age. B. If your parents become unemployed, your insurance coverage provided by their employer may stop, regardless of your age. C. Young people don't need health insurance because they are so healthy. D. You continue to be covered by your parents' insurance as long as you live at home, regardless of your age.

B. If your parents become unemployed, your insurance coverage provided by their employer may stop, regardless of your age. If you are covered by the group health insurance of your parents and they become unemployed, their insurance coverage may stop. If they work for a company with 20 or more employees, they may be able to pay extra to extend the coverage through COBRA for an additional 18 months. Under the current national health care act, your family must purchase private insurance when the employer policy runs out. Subsidies are available for those who can't afford the private insurance.

Social Security, which takes so much from your paycheck now, turns out to have some great life insurance benefits. If you die and leave young children and a spouse who stays at home, they may be entitled to receive hundreds of thousands of dollars from Social Security over time. This can help cut your own need for life insurance. There are two major types of survivors' benefits paid by Social Security. One is for children under the age of 18 (or up to 19 if the child is still in high school). The other is for a parent who is caring for children under the age of 16. Social Security survivors' benefits, which depend on a worker's lifetime earnings, can be very helpful. Eduardo has died leaving a wife and three young children. They currently receive $3,000 per month in Social Security survivor's benefits but Eduardo's widow worries that inflation will reduce the purchasing power of this money to the point where she won't be able to support her family. Which is the following is true? A. There is no inflation and we won't have to worry about it in the future B. Inflation won't hurt her because her Social Security payments are adjusted for the cost of living C. Eduardo's widow is right to worry about inflation D. The maximum a family can get from Social Security survivor's benefits is just $1,000 per month

B. Inflation won't hurt her because her Social Security payments are adjusted for the cost of living Social Security payments, including survivor's benefits, are adjusted for the cost of living.

Students who wish to apply for Federal Student Aid must complete the FAFSA (Free Application for Federal Student Aid) application. The Department of Education will process your application, and you will be sent a Student Aid Report (SAR) and the results will be sent electronically to the schools listed on your application. You will be given an Expected Family Contribution (EFC) number that is used to determine your eligibility for federal student aid. The lower your EFC, the less your family must contribute toward your education and the higher your federal student aid eligibility. For the 2019-2020 school year, your family will not have to contribute anything if your family income is not over $26,000. Before applying for a student loan, which must be repaid, students should apply for federal grants that do not have to be repaid. The largest category of grants for undergraduate education is the Pell Grant. Pell Grants, which can be as high as $6,195 per year in the 2019-2020 school year, are considered to be the foundation of federal financial aid, to which grants and loans from other sources might be added. The amount you get depends on both your financial need and the cost of your school. What is the advantage of a Pell Grant over a student loan? A. The interest rate is very low. B. It doesn't have to be repaid. C. The interest on it doesn't begin until 6 months after graduation. D. You only pay interest on it when you graduate.

B. It doesn't have to be repaid. A Pell Grant does not have to be repaid since grants are given to you, not loaned to you.

There are two basic types of life insurance, term and cash value. Term life insurance covers you for a specific period of time or term, generally five years. After that term is up, you generally have the right to renew the policy for another term, but at an increasingly higher price. This price increase is due to the fact that as you get older, your chances of dying in any year increase at an increasing rate. When you are 21, only 1.4 of every 1,000 men and .4 of every 1,000 women who are your age are expected to die that year. However, when you are 50 years old, these figures jump to 5.5 for men and 3.3 for women and when you are 70, they are 25.5 for men and 17.2 for women. Term life insurance is pure insurance and does not include any savings with it. If you pay your term insurance premium (payment) every year from the time you are 21 until you are 70 and then stop paying, you will never get a penny back from the life insurance company. All you have gotten is the assurance each year that if you had died, your survivors would have received the amount of your policy. As you get older, what happens to the cost of term insurance? A. It decreases. B. It increases at an increasing rate. C. It increases at a steady rate at about 1 percent per year. D. It increases at a decreasing rate.

B. It increases at an increasing rate. As we get older, the probability that we will die in any year increases at an increasing rate, thereby increasing the cost of term insurance. A 25-year-old has a very low chance of dying in any year. A person who is 50 years old has a higher probability of dying in any year.

As the result of the CARD Act, which was implemented in 2010, it is far more difficult for a young person, under the age of 21 to get a credit card. According to this Act, credit card issuers cannot give a credit card to anyone under the age of 21 unless they have a co-signer (such as a parent) over the age of 21 or they can prove they have enough income to repay the credit card debt. Many people use credit cards to make purchases instead of using cash or checks. Compared to cash, credit cards offer a number of advantages: Credit cards are safer than cash, which can be lost or stolen. If a credit card is lost or stolen, by law you can't lose more than $50. Credit cards can be used to pay for emergencies, such as an unexpected car repair, if you don't have enough cash with you. If you pay with a credit card, you can get your money back if the item you bought doesn't work. If you pay your credit card bill in full every month, you get to use the credit company's money for free (you pay no interest) from the time you make a purchase until you pay your bill. You are given a record of what you spend on your credit card. This can be useful to help stay on a budget, or you can use it at tax time to prove you purchased things you can deduct on your taxes. It is easier to buy some things with a credit card than with cash. A good example is gasoline which can be paid for at the self-service pump with a credit card but which generally requires a trip to the cashier to pay with cash. Credit cards or debit cards generally must be used to buy things online or over the phone. Credit cards or debit cards are often required if you want to rent a car or a hotel room. If the rental car companies or hotels don't insist on a credit card, they often require you to put up a huge amount of cash, such as $500. Compared to checks, most credit cards offer the additional advantage of having no monthly fees (aside from finance charges on unpaid balances) and no charge for every transaction you make. The disadvantage of using a credit card is that you might be tempted to spend more than you have. If you use cash, you stop spending when your pocket or purse is empty. If you use checks or a debit card, you stop spending when your bank balance reaches zero. With a credit card, however, you can spend more than you have in cash and your bank account (up to your credit limit) since you are allowed to spend the money belonging to the credit card company. The hard part is paying it back! Which of the following is an advantage of using cash over a credit card? A. It's easier to buy things online. B. It is easier to control the amount you spend. C. It is easier to rent a car. D. It is easier to keep a record of how you spend your money.

B. It is easier to control the amount you spend. If you use cash rather than a credit card, your spending is limited to the amount of cash you carry. When you run out, it is time to go home. If you use a credit card, you can continue to spend the bank's money up to your credit limit and that borrowed money must be repaid, often with finance charges.

Those who have insurance coverage for prescription drugs often find that they have copays of $10 or more per prescription. In some cases, those who specify a brand-name drug will be charged a higher copay than if they choose a similar generic (unbranded) drug that might be available. The higher copay is charged to discourage use of the more expensive product, saving money for the insurance company. Some group plans cover regular visits to the eye doctor and may even pay for a new pair of glasses (or contact lenses) once a year or perhaps every two years. Leticia's employer-based medical insurance plan covers prescription drugs but with a $10 copay for generic drugs and a $20 co-pay for equivalent brand-name drugs. Her doctor wants her to take a statin to lower her cholesterol, and suggests a generic drug, but Leticia replies that she wants to take Lipitor, which is a statin that is heavily advertised on television. Why will she have to pay a higher copay for the brand-name drug? A. Generic drugs are more expensive to make. B. It is much more expensive than the equivalent generic drug that does the same thing. C. The pharmacy gets to keep the copay. D. The pharmacy makes a higher profit selling the generic drug.

B. It is much more expensive than the equivalent generic drug that does the same thing. A generic drug is generally a lot less expensive than a name-brand drug that is heavily advertised, in part because the cost of the advertising must be built into the price of the drug.

A defined contribution pension plan is one where your employer sets up a separate retirement account for you and defines the amount of the annual contribution that the employer will make to your account. Most defined contributions made by your employer are a percentage of your salary. In addition to the employer's contribution, you may also be required (or allowed) to make a contribution on your own. The size of your retirement income depends on the amount of the contributions made to the plan by both your employer and yourself, and it depends on the return earned on these contributions. The return earned depends on the overall returns on assets as well as the success of those who manage your funds. Some employers have a single manager handle the entire pension money. Others allow employees to decide how they want their money invested (government bonds, stocks, etc.) and each type of investment has a separate manager, like a mutual fund. If you don't work long enough, you may not be able to keep any of the contributions made by your employer or any of the earnings on those contributions. This is called vesting and the company creates its vesting rules within government guidelines. It is important to understand these rules before you accept a job. Vesting applies to defined benefit plans as well as defined contribution plans. If you have worked for a company for a few years and are unhappy with your job, before you tell your boss off, think about whether or not you are vested. This will become very important to you when you are older. Andy works at a company with a defined contribution pension plan which contributes an amount equal to 7 percent of his salary to his account while he contributes nothing. The vesting period is 5 years. He has worked there full time for 2 years at an average pay of $30,000 and the account manager has earned 7 percent per year on the pension amount. If he leaves now to take a better job, how much will remain in his pension account? A. 40% of the amount in his account. B. Nothing. C. $4,200 which is equal to $30,000 times 7 percent times 2 years. D. More than $4,200 because it has earned interest as well.

B. Nothing. Since he has not worked long enough to be vested (5 years), he gets nothing in pension from this employer.

Both your ability to borrow money and the rate of interest that you pay for it are based upon the lenders' evaluation of how likely you are to pay it back. All lenders use the same types of measures to try to determine this. They even work together to collect information about you to give them a better idea about how much of a risk you are to their money. These measures are often called the "C's" of credit. Character. The first C of credit is character. In theory, this reflects the moral strength of the borrower - is he or she a person who feels a strong moral obligation to repay debt. In reality, it is based on your credit history. Some people are methodical about getting payments in ahead of time and never miss a payment, even if they have to miss a meal. Others may be a bit sloppier about repayment and still others may lead a hectic financial life, missing payments for a variety of reasons. If you have a history of paying your debts and other bills late, it means that you are likely to do so in the future, which makes you a pretty bad credit risk. Given the cooperation of creditors and the existence of computerized credit bureaus, literally every missed payment, from your first telephone, cell phone or credit card, is on file. When you apply for a loan, the potential lender will look at all your payments to determine your "character." Sometimes, when you are applying for a credit product with a very high interest rate, such as a credit card at 24 percent, a number of late payments may be ignored. Other times, however, even a single missed payment can kill a loan, particularly one offered at favorable rates of 10 percent or less. Melissa is a high school student who has a cell phone in her own name. She is not very careful with her bills and often pays them late, sometimes missing a payment entirely. If she tries to get a low rate car loan when she is in college, what will the effect be of her high school credit record? A. She will be a favored borrower because she has a long credit history. B. She will be seen as someone with bad borrower "character" because she pays late and misses payments. C. There will be no effect because many young people are sloppy with bills. D. Information on the behavior of high school students cannot be used against them later in life.

B. She will be seen as someone with bad borrower "character" because she pays late and misses payments. Even her early credit history will be used by lenders to judge whether she will pay on time when she is older.

Suppose you borrowed $1,000 that had to be repaid in 12 monthly installments. The lender will charge you only $60 in interest, which he will add to the amount that you borrow. Which of the following is closest to the annual percentage rate of interest that you will pay on the loan, 6 percent, 11 percent or 15 percent? Although it appears that a $60 interest charge on a one-year loan of $1,000 should be 6 percent, it is actually almost twice that (10.9 percent) because you are paying back the loan through the year. Remember, you get the use of the full $1,000 only for the first month. By the last month, you will be using only $88.33 of the lender's money. On the average, you are using only a little more than half of the lender's money for the whole year. Interest rates are tricky and can only be calculated accurately on a computer or a sophisticated financial calculator. For that reason, lenders have to tell us the annual percentage rate of interest ("APR"), which lets us compare loans from different lenders that may have different down payments, interest charges and lengths. If you are looking for a loan to finance a car, look no further than the annual percentage rate of interest. If one lender charges an annual percentage rate of 14 percent on a 4-year loan for $10,000 and a second lender charges 12 percent, you would pay the first lender a total of $13,116.71 and the second lender a total of $12,640.24 over the life of the loan. This is a savings of $476.47 of your money for comparing annual percentage rates of interest. Andie needs to borrow $6,000 to buy a car. One dealer offers her a monthly payment of $193.60 on a 3-year loan with an APR of 10 percent while another dealer offers her a monthly payment of $158.00 on a 4-year loan with an APR of 12 percent. If she can afford to make either payment, which loan is better? A. She should take both loans, B. The 3-year loan. C. The 4-year loan. D. You can't tell.

B. The 3-year loan. The 3-year loan is better for Andie provided that she can afford to make the higher payment. The reason is that the loan is less expensive. It has an annual percentage rate of interest of only 10 percent compared to 12 percent for the longer loan. Even though the monthly payments on the 4-year loan are lower, she would have to pay an extra year on it. In fact, her total payments on the 4-year loan are $158.00 x 48 months = $7,584 while total payments on the 3-year loan are $6,969.60, a difference of $614.40. Keep your eye on the APR because that is the only way you can compare the true cost of different loans.

If payment for your credit card bill is received after the payment due date, it is considered to be late and an additional late fee of $25 (or the minimum payment due, if less) will be due the first time you are late. If you are late with another payment within 6 months, you will be charged up to $35. These late fee charges have been set by Federal law. Another protection given to credit card customers is a restriction on raising finance charges. Unless you have a card with a variable rate, you must be given 45 days notice if your finance charge rate on new purchases is going to be increased so that you have time to shop around for a new card. And, in general, your card company may not raise the rate that you are paying on an existing balance unless you have missed at least two payments. Since different people use credit cards for so many different purposes, it is hard to say what the best way is to find the right credit card for you. Let's begin with the person who never misses a payment but who has a large credit card balance outstanding. In this case, it is important to transfer his balance to a credit card that has a low APR. Credit cards are a very good business for credit card companies. By far, their most profitable customers are those who are revolvers and carry large balances on their cards, but who also pay their bills on time. If you are such a credit card user, there are many companies who want your business. They often advertise very low APR finance charges, rates as low as 4 or 5 percent. Not only that, if you move your account to them, they will handle the paperwork of closing out your old account and moving the balance to them. The only problem is that the period of very low rates may be good for as little as 6 months, which is the minimum period for such rates under Federal law. After that time, APRs tends to jump back to high levels ranging from 12 to 21 percent. These temporary rates are called "teaser rates" because they tease you to switch your account and then the rates rise after the introductory period. If you are well disciplined, you can often keep getting low rates by moving your account every time the teaser rate period is up. However, this is a hassle that demands a level of control that is not often found in people who run up and maintain high credit card balances, and it might even lower your credit rating. Rather than shopping continuously for the best teaser rates, you might try to find a credit card issuer who will give you the best stable rate.Note also that many credit card companies may increase the APR charged on new purchases if you miss payments with them or with any other lender, including other credit card companies. They know this information because it is reported to them by credit bureaus. If you use your credit card a lot, you may be interested in getting something back. Some general-purpose credit cards, such as Discover, give you a small percentage of your total charges back in cash, which is credited to your account. Other cards allow you to sign up for frequent flier miles and generally give you one frequent flier mile for every dollar you spend on your card. Some cards are tied to specific airlines, such as the Citibank American Airlines card or the Delta American Express Card. Other cards will let you add your miles to a number of different frequent flier accounts. Most credit cards charge an annual fee of $25 to $150 for the frequent flier feature. However, the value of frequent flier miles is estimated to be about 2 cents per mile, so if you spend at least $250 per month on your credit card, or $3,000 per year, you will break even with a $60 annual fee for the frequent flier feature on the card ($3,000x.02 = $60). Karla receives a credit card application in the mail that offers her an APR of just 3.9 percent if she transfers the balance from her existing card on which she currently pays an APR of 18 percent. Which of the following is most likely? A. Credit card companies are desperate to lend money and are offering these rates to everyone. B. The 3.9 percent rate is a teaser rate that will go much higher sometime in the future. C. The new credit card probably offers frequent flier miles without an additional charge. D. The bank makes a lot of money charging 3.8 percent to its credit card customers.

B. The 3.9 percent rate is a teaser rate that will go much higher sometime in the future. When you are offered a rate that is much below other rates that are available, it is probably a teaser rate that will go up in a relatively short period of time.

If you end up over your head in credit difficulties and can't pay your bills, you still have a few options. The first thing to do is to communicate with your creditors, letting them know that you want to pay them back, but can't do it on the original schedule. Since most are likely to share your interest in seeing the loan repaid, even if it is late, they generally will try to work it out with you. However, it is usually a good idea to let all your creditors know what you want to do at the same time. This is best done through a professional, such as a lawyer or a reputable credit counselor. If you let some creditors know that you are having credit troubles before others, the ones who know first can take actions that may make it tough for you to get out of trouble. The car dealer may take back your car right away, making it tough for you to get to work. If you have a loan from your bank, they can use their right of "setoff" to take money out of your checking or savings account to repay your loan with them. Some of your creditors may even garnish your wages by sending a court order to your boss, requiring him or her to pay part of your wages to them every month. If you have a $1,000 loan from your local bank and also have $1,000 in your savings account at that bank that you need to pay the rent in two days, what can happen if you get behind on your loan and notify the bank that you won't be able to make your payments? A. The bank can force you to declare personal bankruptcy. B. The bank can seize your savings account and use it to repay the loan. C. The bank can take your car as collateral even if you own it free and clear. D. The bank can take your children's college money even though it is held in a different bank.

B. The bank can seize your savings account and use it to repay the loan. The "right of setoff" allows a bank to seize money from an account that you have at that bank to repay an overdue loan with them.

Another grant is available for students who intend to become teachers. The Teacher Education Assistance for College and Higher Education (TEACH) Grant Program provides grants of up to $4,000 per year to students who are willing to teach in schools serving students from low-income families. Those who receive a TEACH grant must promise to teach in an eligible school for at least four of their first eight years after graduation. If you don't honor your commitment, all the TEACH grant money that you received will be converted to an unsubsidized loan that must be repaid to the U.S. Department of Education. Many colleges give students their own financial aid in the form of "institutional grants." While some are based on need, other institutional grants such as "merit scholarships" are given on the basis of academic achievement. Some merit awards are offered only to students whose families demonstrate financial need; others are awarded without regard to a family's finances. If you are thinking of attending a private college (one that is not supported by state or local governments), it is important to understand that most of them are tuition-driven which means that they depend on student tuition and fees to pay for themselves. On average, such schools give student grants and scholarships equal to over 40 percent of the tuition that they charge. This percentage decreased is called the school's "discount rate." If two tuition-driven private colleges accept you, you may have bargaining power by getting them into a bidding war for you, particularly if you are a good student. If there is room for you, the school's marginal cost or additional tuition cost for enrolling you is close to zero, and any tuition that you agree to pay is a needed net addition to their revenues. You might tell a school's admission representative that you would really like to go to their school, but that their competitor ("school B") has offered you a larger student scholarship. In many cases, they will match or even try to beat that amount, and as a grant, this doesn't have to be repaid. Another way to finance your college education without having to borrow the money and pay it back is by working part-time on campus in the Federal Work-Study (FWS) program. Available to students with financial need, the program pays by the hour for work related to your major as well as community service work off campus. What is meant by a private, non-profit college's "discount rate?" A. The discount that enrolled students get at the college bookstore. B. The difference between a college's published tuition and the average tuition paid by its students. C. The special interest rate available on the College's credit card. D. The savings by pre-paying the cost of room and board.

B. The difference between a college's published tuition and the average tuition paid by its students. A college's discount rate is the difference between its published tuition (the amount that it tells prospective students) and the average amount that it actually charges. The average discount rate is over 40 percent, which means that if tuition is advertised at $20,000 per year, the college actually receives less than $11,000 on average after it gives out grants and scholarships.

It's difficult to predict how long the effects of identity theft may linger. That's because it depends on many factors including the type of theft, whether the thief sold or passed your information on to other thieves, whether the thief is caught, and problems related to correcting your credit report. Victims of identity theft need to monitor their financial records for months after they discover the crime. Victims should review their credit reports once every three months in the first year of the theft, and once a year thereafter. Stay alert for other signs of identity theft. Don't delay in correcting your records and contacting all companies that opened fraudulent accounts. Make the initial contact by phone, even though you will normally need to follow up in writing. The longer the inaccurate information goes uncorrected, the longer it may take to resolve the problem. Which of the following is NOT a factor in how long the effects of identity theft will last? A. Problems relating to correcting your credit reports B. Time of year C. If the thief was caught D. Type of theft

B. Time of year Time of year is not a factor. The effect of identity theft may linger due to the type of theft, whether the thief sold or passed your information on to other thieves, whether the thief is caught, and problems related to correcting your credit report.

In spite of the attention paid by the press to credit cards and student debt, by far the greatest amount of debt held by American families is closed-end, secured debt used primarily to finance the purchase of real estate and vehicles. In early 2019, according to the Federal Reserve, debt secured by residential properties accounted for about 70 percent of total debt. Student loans were second most important, followed by auto loans, credit cards, and other debts. This means that all other consumer debt amounted to just 8 percent of the total. All told, household debt was more than 12 trillion dollars. While most installment loans are used to finance vehicles, an increasing proportion is used to finance education. Other uses of installment debt includes other "big-ticket" items such as boats, lawn tractors, and occasionally, even furniture and appliances. As noted elsewhere, education loans are a type of installment loan that is unusual in that most of it, which is loaned directly by the Federal government or guaranteed by the Federal government, doesn't require any collateral. You get a student loan to invest in your human capital. If you stop paying on it, you will not be thrown in jail. However, the government likes to get its money back and will hardly ever let you off the hook if you don't repay your government-issued or guaranteed student loans. The process for getting a secured loan is similar, regardless of the purpose of the loan. You begin the process by filling out a loan application. If the application is approved, you sign a loan agreement or mortgage note (for real estate) which specifies the terms and conditions of the loan including a security agreement in which you allow the lender to take back the goods or property that you are buying if you don't make your payments. When the loan agreement is signed, lenders file a security instrument or lien in the county courthouse which formally gives them the legal right to take back the property if you stop paying before the loan is paid off. Liens are public information so other people can learn the nature of your debts. They serve also to keep a person from selling property without paying outstanding debt associated with the property. What is the purpose of a lien when you get a secured loan? A. To guarantee that borrowers know the annual percentage rate of interest on a loan. B. To let lenders take back property they financed if you don't repay your loan. C. To make sure that borrowers are treated fairly. D. To make sure that bank credit card companies, such as Visa and MasterCard get paid.

B. To let lenders take back property they financed if you don't repay your loan. Lenders file liens on collateral in secured loans so that they can get their property back if the borrower doesn't pay.

This is an additional question to determine finance charge on a loan. If Anna buys a car for $18,000 with a down payment of $2,000 and is given a 3-year loan with an APR of 5 percent and monthly payments of $480, what is the dollar amount of the finance charge on this loan? A. $280 B. $1,200 C. $1,280 D. $1,400

C. $1,280 The dollar amount of the finance charge is easy to find. It is equal to the sum of the loan payments over the life of the loan minus the amount borrowed. The sum of the loan payments is equal to $480 x 36 months = $17,280. The dollar amount of the finance charge must be $17,280 minus the amount borrowed, which was $16,000 which equals $1,280.

Death Benefits of Pension Plans: Most people who have a pension these days have defined contribution pensions where they and their employer contribute to a fund for their retirement. Since that money belongs to them, it goes to their family if they die, further reducing the amount of life insurance they must carry. The popular 401(k) plan is a type of defined contribution pension plan, as is an IRA. Maxine is a hard-working young woman with two small daughters. She has a good job and contributes to her 401(k) pension plan at work. If she dies without life insurance, which of the following best describes the sources of income that would be available to her family? A. The amount she has in her 401(k) plan B. Social Security survivor's benefits C. Both Social Security survivor's benefits and the amount in her 401(k) plan D. No additional sources of income

C. Both Social Security survivor's benefits and the amount in her 401(k) plan Her family will be entitled to both Social Security survivor's benefits and the amount she has accumulated in her 401(k) plan.

Some credit problems sneak up on you. Others fall on you like a ton of bricks. The problems that sneak up on you happen when you keep increasing your debt without giving it much thought. Every day, credit card applications arrive in the mail, promising you instant credit and a huge credit line. If your other credit card lines are maxed out, it is tempting to call the new credit card company and tell them to activate your card - particularly if it's getting close to Christmas. One day you discover that you will have difficulty making even the minimum monthly payments on your cards. That's when you know you are in trouble. The other way to get in credit difficulty is to run into something unexpected. Maybe you get laid off from your job or someone in your family gets sick, or the roof on your house starts leaking or the car dies and you can't get to work. Or maybe something great happens like you discover you are going to have a baby. Regardless, if you are living on the edge, just managing to pay your bills, a sudden loss of income or increase in expenses can push you over that edge. It is easy to tell people not to borrow so much or to have a reserve bank fund with several months' income in it. However, if everyone listened, Americans wouldn't be spending so much of their after-tax income servicing debt. One recognized way of avoiding credit difficulties is to keep your total debt payments (including student loans and mortgage) to less than 40 percent of your total income. Then, when you look ahead in life, make sure that when you get married, your combined debt payments will not exceed 40 percent of your combined gross income. If you or your spouse plan to take time off from work when you have children, make sure that your fall in income doesn't push your debt ratio over this limit. Jon earns a gross income of $42,000 per year as a young engineer. His debt payments, including student loan and mortgage payments, are $1,200 per month. How much more can he take on in monthly debt payments and not go over the dangerous 40 percent ratio of debt payment to gross income? A. $300 B. $100 C. $200 D. No more, he is already over the limit.

C. $200 40 percent of Jon's gross income of $42,000 ($42,000 x .4) = $16,800 per year or ($16,800/12 =) $1,400 per month which is the most that he can pay per month and not exceed the 40 percent limit. Since his total debt payments are now $1,200 per month, he can add $200 to his monthly debt payments and not exceed the 40 percent debt payment to income ratio.

In addition to the annual percent rate of interest (APR) that you must pay on the loan, the Truth in Lending disclosure form also requires the lender to tell you the dollar amount of the finance charge, the total amount financed and the total of all the payments you will have to make over the life of the loan. The dollar amount of the finance charge is equal to the sum of the loan payments over the life of the loan minus the amount borrowed. If you borrow $10,000 on a 4-year loan with an APR of 12 percent, you will have monthly payments of $263.34. Over 4 years, you will have paid $263.34 x 48 months = $12,640.32. Subtracting the $10,000 that you borrowed gives you $2,640.32 which is the dollar amount of the finance charge. The amount financed is the amount of money that you are borrowing. In our example, this amount is equal to $10,000. The total of payments is the total amount of money you will pay over the life of the loan. This is equal to the monthly payment multiplied by the number of months that you must pay. In our example, this is equal to $12,640.32. If Stuart buys a $20,000 car with a down payment of $2,000 and is given a 3-year loan with an APR of 10.4 percent and monthly payments of $584.20, what is the dollar amount of the finance charge on this loan? A. $18,000.00 B. $21,031.20 C. $3,031.20 D. $2,048.72

C. $3,031.20 The dollar amount of the finance charge is easy to find. It is equal to the sum of the loan payments over the life of the loan minus the amount borrowed. The sum of the loan payments are equal to $584.20 x 36 months = $21,031.20. The dollar amount of the finance charge must be $21,031.20 minus the amount borrowed, which was $18,000, which equals $3,031.20.

There are limits, both to the amount that you can borrow in a Direct Loan and to the amount of subsidized loan that you can use. This means that many students with financial needs will find that they must borrow both subsidized and unsubsidized amounts and pay them back accordingly. Undergraduate students who are dependent on their parents (most young students) can use Direct Loans to the following limits as identified in the chart below. Students who are independent of their parents can generally borrow more money. As we have seen, the interest rate charged is the same for Direct Subsidized and Direct Unsubsidized loans. For undergraduates, the interest rate is based upon the rate that the Federal Government pays on 10-year Treasury notes. The maximum rate that can ever be charged on a Direct Loan is 8.25 percent regardless of future rates on 10-year Treasury notes. The standard payback period for Direct Loans is 10 years. At 3.76 percent annual interest, for example, if you pay your loan off monthly over 10 years, your monthly payment will be $10.01 for every $1,000 of your loan balance when you begin payments. If you borrowed the maximum amount of $31,000, and your rate remained steady at 3.76 percent, your monthly payment would be 31 x $10.01 = $310.34. This is equal to $3,724 per year. In addition to the cost of the interest, there is a loan fee on all Direct Loans, subsidized and unsubsidized. The loan fee is 1.062 percent of the loan amount in 2018-2019 and this fee is deducted from the amount that you will receive. For example, if you qualify for a loan of $5,000, you will receive only $4,946.90 since the fee of 1.062 percent is equal to $5,000 times .01062 = $53.10. Direct Loans offer several repayment plans designed to meet the different borrower needs. In addition to the standard 10-year loan with equal monthly payments, students who expect to have a low-paying job early in their careers can opt for a Graduate Repayment Plan, which starts with lower monthly payments but has payments increase over the period of the loan until the borrowed amount is repaid with interest. Students who take out more than one federally-guaranteed student loan can consolidate all of their loans and make only a single monthly payment, and these payments can extend as long as 30 years. You may be able to get some or all of your loan balance forgiven if you teach full-time for 5 years at a school or educational service agency serving low-income families (and meet other requirements), or if you work for 10 years after graduation while employed in certain public service jobs such as the military, law enforcement, public health, public education, library, public interest law, early childhood education or with the disabled or elderly. If students need more funding than that available through the grants and loans already covered in this module, his or her parents may apply for a Direct PLUS Loan. The annual limit on a PLUS Loan can be fairly high - enough to cover the student's costs less any other financial aid the student receives. This PLUS loan is made by the Federal Government to the parents who are responsible for its repayment. An important disadvantage of a parent PLUS loan is that repayment of this loan may fall on parents as they prepare for retirement and may weaken a parent's financial position when they are older. https://s3.amazonaws.com/moneyskillv2/storage/image/HS/Mod31Q9.PNG Jana has agreed to borrow $3,500 through a Subsidized Direct Loan to pay her freshman tuition. When she receives the loan, how much will she get? A. $3,267.17 B. $3,500 C. $3,462.83 D. $2,970.54

C. $3,462.83 All Direct Loans have a 1.062 percent fee which is deducted from the amount of the loan, up front. This means that Jana's fee is $37.17 ($3,500 x .01062). Therefore, she will only receive $3,462.83.

When you sign up for your credit card, you agree to pay a specified annual percentage rate of interest on your outstanding balance. The question is, what exactly is your outstanding balance. That is not an easy question to answer. To begin, the rate you are charged on the outstanding balance each month is equal to the annual percentage rate (called the nominal APR) on your statement divided by 12. If your nominal APR is 18 percent, you pay 18 percent /12 = 1.5 percent per month. The credit card statement that you receive each month shows the charges that you made for that month. The due date for the payment is also shown on the statement, generally on the first page. By law, you must be given 21 days after the end of the billing cycle to make your payment. If you are sending in your payment by mail, be sure to allow enough time for it to get to the credit card company before the due date. If you did not begin the billing cycle with an unpaid balance from the previous period and if you pay the entire new balance by the due date, you can avoid paying any finance charges. If you do not pay for all the charges in full by the due date, you will have to pay a finance charge determined by the APR and your outstanding balance. This finance charge will show up on your next bill. You can pay as little as the minimum payment which is specified on your statement and is generally 3 to 5 percent of the outstanding balance. If your outstanding balance is $850 and your minimum payment is 5 percent of the outstanding balance, your minimum payment would be $850 x .05 = $42.50. However, if you only made the minimum payment, it could take you a long time to pay off the balance. In this example, if the APR is 18 percent per year, paying off just 5 percent of the balance per month, with a $42.50 minimum payment, would take you more than four years to pay off the $850 balance, even if you did not charge anything else on the card. You must also be told on your credit card statement how long it will take you to pay off your balance if you make only the minimum payment. https://s3.amazonaws.com/moneyskillv2/storage/image/HS/Mod29Q8.PNG Jo Ann just received her credit card statement which contains information that is listed below. How much must she send to the credit card company, and by what date must it be received so that she can avoid any finance charges for that period? A. No minimum payment is due. B. $388.32 by December 31, 2017 C. $3,883.32 by February 1, 2018 D. $78.00 by February 1, 2018

C. $3,883.32 by February 1, 2018 She can avoid finance charges for this period by paying the new balance on this account, $3,883.32, by the Due Date of February 1, 2018.

If we get very sick, it can be very expensive. This is part of the reason why 91 percent of all Americans had some type of health insurance in 2017, according to the Henry J. Kaiser Family Foundation. In 2018, the average total health care costs, including the employer's contribution to health insurance, was $28,166 for a family of four, according to the well-regarded Milliman Medical Index. This amount had more than doubled over the previous 10 years. Part of the huge cost of getting sick in America is the enormous cost of staying in a hospital for just a single day. The US Government's Healthcare.gov estimated the average cost of a 3-day hospital stay to be about $30,000. In fact, they reported that the average cost of fixing a broken leg could cost up to $7,500. The very high cost of being sick in America is due in large part to the fact that we have chosen to keep health care largely private, rather than being run by the government, which it is in most other Western countries. This offers consumers more choice in the selection of doctors, hospitals and even types of surgery, but these options are expensive. The average cost for spending three days in a hospital in the US is closest to: A. $500 B. $5,000 C. $30,000 D. $1,000

C. $30,000 The average cost of a 3-day hospital stay is about $30,000 according to Healthcare.gov.

The bankruptcy law that went into effect in 2005 makes it difficult for those with higher incomes to discharge their debts through bankruptcy. If your income is above the median income for your state, and you can afford to pay at least $100 per month to repay your debts, you will probably not be allowed to file Chapter 7, which means that you will have to repay your debts over time through Chapter 13 payments. Bankruptcy rules vary by state. Some states, such as Florida, allow you to keep your home, regardless of its value while many others will take away your home. Declaring bankruptcy is a very serious decision that will show up on your credit record for 10 years and may keep you from buying a home or perhaps even getting some responsible jobs for a long time. In general, your credit rating suffers less if you file Chapter 13 bankruptcy and pay off your debts than if you file Chapter 7 and don't pay. The law now states that if you file for Chapter 7 to discharge of your debts, you can't file Chapter 7 again for at least 8 years. If you declare personal bankruptcy, how long will this stay on your credit report? A. It is an invasion of your privacy to put it on your credit report. B. 8 years. C. 10 years. D. As long as you live.

C. 10 years. Under Federal law, if you declare personal bankruptcy, it stays on your credit report for 10 years.

The largest source of student financial aid in America comes from Federal Student Aid, a division of the U.S. Department of Education. To qualify for federally-funded financial aid, college students must have either a high school diploma or a recognized equivalent such as a General Educational Development certificate (GED) or have been home schooled. Which of the following is needed to qualify for federally-funded student financial aid? A. Military service B. Family income below $20,000 per year C. A high school diploma or GED. D. Above-average college entrance exam scores

C. A high school diploma or GED. A high school diploma or recognized equivalent, such as a GED, is needed for students who wish to qualify for federally-funded student financial aid.

As your children get older and closer to supporting themselves, your need for life insurance goes down because you have already paid a lot of the cost of raising the children. When the children are gone from home and you are in the empty nest stage of the life cycle, your life insurance needs are far less than when the kids were young. When you are retired, life insurance needs tend to stay low, in part because your spouse is entitled to Social Security as well as part of a pension, if available. If each of the following persons had the same amount of take home pay, who would need the greatest amount of life insurance? A. An elderly retired man, with a wife who is also retired. B. A young single woman without children. C. A young single woman with two young children. D. A young married man without children.

C. A young single woman with two young children. A lot of money will be needed to raise and educate the two young children and if the parent is single, it is unlikely that much if any of this will come from another parent.

Your tip-off to identity theft may come in several different ways. Your perfectly good credit card may be rejected as being over-limit when you know that you are nowhere near the limit. You may notice a charge on your credit card statement that you never made. You may be called to pay for a purchase that you never made. Your credit card company may suddenly raise your interest rate even though you have been paying all your bills on time. Your free annual credit report may show some debts that you never undertook. If you lose your wallet or individual pieces of personal information or identification such as credit cards or your license, moving quickly can reduce the potential for identity theft. Close financial accounts, like credit cards and bank accounts, immediately. When you re-open these accounts, place new passwords on them. Avoid using the same password for more than one account and avoid passwords that are not difficult for the crooks to find such as your mom's maiden name, your birth date (easily found on Facebook), the last four digits of your Social Security number or your phone number. If you think that you may be victim to identity theft, call the toll-free fraud number of any of the three nationwide consumer-reporting companies (which will notify the others) and place an initial fraud alert on your credit reports. This can help stop someone from opening new credit accounts in your name. The numbers are the following: TransUnion: 1-800-680-7289, Equifax: 1-800-525-6285, Experian: 1-888-EXPERIAN (397-3742). If you lose your driver's license, contact the agency that issued it. Follow its procedures to cancel it and to get a replacement and ask the agency to flag your file so that no one else can get a license from them in your name. If you know that your information has been misused, file a report about the theft with the police, and also file a complaint with the Federal Trade Commission. If your purse or wallet was stolen or your house or car was broken into - you definitely want to report it to the police immediately. If your wallet is lost or stolen, which of the following SHOULDN'T you do: A. Report this to the police. B. Cancel your credit card accounts. C. Advertise in your local paper, offering a reward for its return, before notifying authorities. D. Notify the driver's license bureau and ask them to flag your file.

C. Advertise in your local paper, offering a reward for its return, before notifying authorities. Notify authorities, the license bureau and the credit card company immediately to protect yourself even though it may involve a small hassle. Identity theft is a much bigger hassle.

When you borrow money to buy something specific, such as a home, a car, or a boat, two things are generally true. First, the loan is likely to be in the form of closed-end credit and second, the loan is generally secured or guaranteed by having you pledge what you are buying with the loan (car, house, boat, etc.) as collateral. The lender can take the collateral back if you don't pay. A closed-end loan is a loan that has a fixed repayment schedule that demands that you pay a certain number of dollars per month for a specified number of months. When you finish paying, the property that you are paying for is all yours, free and clear, and you don't have to pay the lender any more money. The most common type of closed-end credit is the installment loan. Another type of closed-end credit is the single payment loan. With this loan, you agree to repay the whole amount, with interest, at a date in the future. The single payment loan is harder for many borrowers to repay because they do not have the advantage of repaying in small, regular monthly payments. It is also riskier for lenders who see none of their money returned until the end of the loan period. Therefore, it is not used very frequently. Closed-end credit differs significantly from open-end credit, such as credit cards. Open-end credit is not used for a single purchase so it typically is not secured by collateral and does not have a fixed repayment schedule. Which of the following is NOT likely to be financed with closed-end credit? A. A Corvette convertible car. B. An inexpensive home. C. An expensive meal in a great restaurant. D. A new fishing boat with an 85 horsepower engine.

C. An expensive meal in a great restaurant. A restaurant meal, no matter how unforgettable, is unlikely to be financed with closed-end credit because it isn't expensive enough to go to the trouble and it cannot be pledged as collateral to protect the lender.

Life is a risky business! Right at this very moment, someone could be robbing our locker, stealing our car, or burglarizing our home. We could get sick or injured and possibly become disabled so we couldn't work. When we get older and have a family, we could die, leaving our family without the means of supporting itself. Or we could cause damage to others by hitting them with our car or having our dog bite them. Finally, for most of us, we could live so long and be so healthy that we will run out of money in our retirement years, long before we die. We need to pay some attention to the following types of risk: Property Risk - the risk that our property will be lost, stolen or damaged. Liability Risk - the risk that we will injure others or cause damage to their property. Health Risk - the risk that we, or someone in our family, will have an expensive illness. Disability Risk - the risk that we will get so sick or hurt that we can't work. Life Risk - the risk that we will die while we are supporting others. Retirement Risk - the risk that we will outlive our retirement assets. For every type of risk, there is insurance. However, if you try to fully insure yourself against all of these risks, it'll be so expensive that you won't have enough money left to do anything else. Therefore, we need to learn exactly what insurance we need and how to get it at the lowest cost. Margaret is 25 years old, single and working. She has just had a serious operation, which was paid for by her health insurance at work, but her doctors tell her that she won't be able to return to work for about 2 years. What type of insurance would keep income coming in during this period? A. Liability insurance B. Life insurance C. Disability Insurance D. Health insurance

C. Disability Insurance Margaret's health insurance may pay for her medical care, but it won't keep her paycheck coming in. She would need disability insurance for that.

As work becomes increasingly automated, increasing the value of knowledge relative to physical strength, the return to an investment in higher education also grows. Bachelor's degree holders earn about $32,000 more per year than those whose highest degree is a high school diploma. This results in $1 million in additional earnings over their lifetime according to the Association of Public and Land-grant universities. While higher education has a great payoff, it is not inexpensive. The average cost of tuition, fees, room, and board for college during 2018-2019 was $35,830 for private 4-year colleges and $10,230 for in-state students at public 4-year colleges. These costs have gone up rapidly in recent years, exceeding the rate of inflation. Compared to those with just a high school education, 4-year college graduates: A. Earn about the same but have a lower rate of unemployment. B. Earn four times as much but have a higher rate of unemployment. C. Earn about two-thirds more and have a much lower rate of unemployment. D. Earn more than twice as much and have the same rate of unemployment.

C. Earn about two-thirds more and have a much lower rate of unemployment. 4-year college graduates, on average, earn about 67.7 percent (a little more over two-thirds) more than those with just a high school degree and also tend to have about half the rate of unemployment.

Liability insurance does not provide income or cash payments to us if we cause an accident. Instead, it is meant to pay the folks we injured or damaged. It is important to remember, however, that liability insurance does cover the expensive legal costs involved with investigating and settling claims against us. These costs include interviewing witnesses and defending us in court with lawyers who may charge several hundred dollars per hour, so liability insurance is extremely valuable to us for this reason alone. This means that most young people need some liability insurance, but unless you are rich, you probably don't need a lot. As you get older and your pockets get "deeper," you will want to protect your growing wealth. Joyce is an 18 year old high school senior with a car in her own name. Her folks, who are upper middle class, also have a car. Which car should have more liability insurance on it? A. They should be the same. B. Joyce's car C. Her folks' car D. There is no way of knowing.

C. Her folks' car Since her folks are older and have accumulated more assets (house, cars, furniture, stocks, bonds, bank accounts), they have more to lose ("deeper pockets") if they cause damage in an accident.

When you apply for credit, your credit history is just one of several things that will determine whether you are given credit or turned down. In addition, the potential creditor also wants to look at your capacity to pay back the loan and the quality of the collateral if it is secured credit. Capacity to pay back a loan depends on your income and expenses, information that may not be collected by the credit bureaus. If you are applying for a home mortgage, the lender will want information about the property including an appraisal of what it's worth. If you are applying for a car loan, the lender will want to know the type and year of car in order to determine its value as collateral for the loan. Once you have filled out your credit application, all of the information that you have provided is put into a computer along with the information from your credit report. First, your information is checked against the information from the credit report to see whether you are telling the truth. Then, important pieces of information that the creditor has are given weights, and the weighted scores are added together to form your total credit score. For example, if you have held your current job for more than two years, you may be given 5 points and if your debt payments are more than 40% of your income, you may lose 10 points. Once your credit score has been calculated, it is compared to the score needed to pass, and you are notified whether you will be given credit. The weights for each piece of information, as well as the passing score, are determined by looking at the success of borrowers in paying back their obligations in the past. Through a statistical analysis, lenders find those factors in the credit application and credit report that best predict which borrowers repay their obligations on time and emphasize them in making a credit score. Your credit score is often referred to as your "FICO" score. This score between 300 and 850 was developed by the Fair Isaac Corporation to give potential lenders a numerical summary of the likelihood that you will repay a loan. The three major credit bureaus also offer a similar score. Some lenders use only one score to decide whether to give a loan, some average all three scores. In general, a FICO score below about 620 is called "subprime." Subprime borrowers are not always turned down for a loan. Rather, they are sometimes offered "subprime loans" which typically have higher interest rates attached. For this reason, it is important to know your FICO score and to take steps to ensure that you are a "prime" borrower. You can purchase your FICO score from www.myfico.com. Prices vary depending on the number and frequency of credit scores that are provided. Many credit card companies and banks also make credit scores available for free to their customers as a way to attract and retain them. Be careful when ordering your FICO score online because FICO and the credit bureaus make it very difficult to buy the single credit report that you want, and will try to sell you a subscription for monthly reports that can run more than $200 per year.These days, thanks to computers, the process is so fast that many lenders can approve (or disapprove) a credit application in under a minute. This includes the time that it takes to get your credit report from the credit bureau, figuring your credit score and letting you know! Nathan was just turned down for a credit card with a low APR finance charge. Which of the following is definitely true? A. He has too many debts. B. He had a bad credit history. C. His credit score was below the number needed for approval. D. He hasn't held his job long enough.

C. His credit score was below the number needed for approval. All the factors that can help determine whether Nathan will pay his credit card bills on time are included in the credit score calculated for his application. If the score is below the number needed for approval, he will be turned down. However, he may be able to get a credit card with a higher APR finance charge from another company.

On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (ACA), which was designed to ensure that all Americans were covered by affordable health insurance. The Act, which is complex, had two basic provisions: • Insurers must offer health insurance policies with the same premium (cost) to all applicants of the same age and part of the country regardless of pre-existing conditions (such as current or previous illnesses) • Everyone who is not already covered by a health plan offered by an employer, government health care programs such as Medicare and Medicaid, or other public plans must purchase an approved private plan. However, the individual mandate was repealed for 2019 and Americans without health insurance are no longer subject to a penalty on their income tax return. Federal subsidies are available to help low-income families pay for coverage. Of particular interest to young people was an additional provision allowing them to remain covered by their parents' health insurance until they are 26 years old. Which of the following provisions of the Patient Protection and Affordable Care Act ("Obamacare") is NOT true? A. People who currently have no health insurance coverage are no longer penalized on their income tax return. B. Young people can remain on their parents' policy until they are 26. C. Insurers are able to charge people who have cancer a lot more than people of the same age and location who are healthy. D. The Federal Government will help pay the cost of health insurance for families with lower incomes.

C. Insurers are able to charge people who have cancer a lot more than people of the same age and location who are healthy. Under the terms of the Affordable Care Act, it is not true that insurers will be able to charge people who have cancer a lot more than people of the same age and location who are healthy since the law did not allow insurers to charge more to those with pre-existing conditions.

A consumer loan application contains information that lenders need in order to decide whether they should lend you money. You can fill out the application yourself, or it also can be filled out by a co-applicant who is generally your spouse, but could be someone else such as a roommate, a friend or a parent. Having a co-applicant may make the application stronger, because it includes the income and assets of 2 people instead of just you. However, if the loan is approved, both of you are legally responsible to repay it. If your roommate or boyfriend skips town with the car you co-signed for, you may be stuck making the payments without having the car. Joel and Matthew were college roommates who loved to fish. They decided to buy a bass fishing boat together and filled out a loan application as co-applicants. In the summer after their junior year, Joel dropped out of college, hitched the boat and trailer to his car and took off. They still owed $2,300 on the boat that was being paid off at the rate of $150 per month. If Joel stops paying his half of the loan and Matthew can't locate Joel, what happens to the loan? A. Matthew doesn't have to pay anymore because Joel has the boat. B. Matthew must continue paying his half of the monthly payment which comes to $75 per month. C. Matthew must pay the full $150 per month even though he no longer has the boat. D. Mathew must buy another, identical boat and give it to the lender.

C. Matthew must pay the full $150 per month even though he no longer has the boat. As co-signer of the loan, Matthew is responsible for the entire amount of the payments if Joel does not pay even though Matthew no longer has use of the boat.

Disability insurance helps pay our income in the event that we can no longer work. If you think about it, disability is more costly to our family than our death. At least when we die, no one has to pay our expenses after our funeral. If we are disabled, our expenses have to be paid with no income from work, and these expenses can be pretty high if we need medical attention or have trouble getting around. Disability is a problem that many American families have to face. In fact, according to the Social Security Administration, "a 20-year-old worker has a more than 1 in 4 chance of becoming disabled before reaching full retirement age." Relatively few Americans are covered by any type of long-term disability insurance, other than Social Security. The amount of disability coverage that we need is usually based on our family's expenses minus the income that will still come from other sources. In general, disability insurance is relatively expensive when compared to life insurance for the same amount of coverage. Some employers offer group disability insurance, which is generally less expensive than if we bought it ourselves. When you are looking for a job, it certainly pays to ask about disability insurance. The cost of disability insurance varies by the amount it will pay you per month if you become disabled. It also varies by the waiting period. If you want a policy that will pay you after only 3 months after you have become disabled, it will cost more than a policy with a 6 month waiting period. Also affecting the cost of the policy is the definition of "disabled." The most expensive policy pays if you can't continue to practice your current profession, such as ballet dancer or basketball player. Less expensive are policies that pay only when you can't do any type of work, including clerical work. Social Security may provide payments for disability, but only if you can't do any work at all. If you earn a good living and want to protect your income if you become disabled, you need some disability insurance. Which type of disability insurance policy is likely to have the lowest premiums for a given monthly payment? A. One with a short waiting period that will pay out if you can't continue in your current occupation. B. One with a long waiting period that will pay out if you can't continue in your current occupation. C. One with a long waiting period that will pay out only if you can't work at all. D. One with a short waiting period that will pay out only if you can't work at all.

C. One with a long waiting period that will pay out only if you can't work at all. The lowest premiums will be charged to policies that have long waiting periods and pay out only if you can't work at all.

Preferred Provider Organization (PPO) plans are like fee-for service plans except that they limit you to using only certain doctors who agree to charge members of the plan specific prices. In most cases, you can use doctors outside of the plan but the insurance company will not pay the entire fee if you do. Pre-paid plans, offer complete medical care, (managed health care) for a set monthly premium. The most common pre-paid plans are offered by Health Maintenance Organizations (HMOs). On the plus side, HMOs tend to not have deductibles and often don't have co-payments either. On the minus side, HMOs will often choose your doctor for you or limit your choice of doctors and will also require that you get approval before seeing a specialist. If a family on a very tight budget has the choice between signing up for fee-for-service medical insurance or joining an HMO, and the premiums are the same, which is likely to provide the family with less expensive medical care over a year's time? A. They will be the same. B. You can't tell. C. The HMO. D. The fee for service plan.

C. The HMO. Since HMOs typically have no deductibles and very limited co-payments, if any, the family would expect to pay very few additional dollars for their medical care. If they signed up for the fee-for-service plan, they would have both deductibles and co-payments to make.

Wills. A will is a written document that legally specifies what happens to a person's possessions and even the care of young children after he or she dies. If you die without a will you are said to die "intestate," which means that your property, and even your children, may be given to someone that you hate. In spite of these terrible consequences, more than half of all American adults do not have a will. If one parent dies without a will, any children will stay with the surviving parent, but that parent will generally not inherit all of the property owned by the parent who dies. In most states, the "estate" (property owned by the person who dies) will be split between the surviving parent and the children. If there are two children, the surviving parent may only get a third of the estate, leaving him or her in a weakened position to care for dependent children. If both parents die at the same time, in an auto or plane accident for example, the court will generally give custody of the children to the closest blood relative, often refusing to recognize a much closer relative who is related through adoption. Federal estate taxes (and often state inheritance taxes) are charged on the value of property owned at death. Recent changes in the law have greatly lowered this tax. Federal estate tax is no longer applied for estates of less than $11.4 million in 2019 and estates larger than that are taxed at a flat rate of 40%. If a man with a wife and two young children dies intestate (without a will), which of the following is generally true? A. The children will go to the man's brother B. The man's estate will be given to the wife C. The man's estate will be split between the wife and the children D. The man's estate will be split among the children

C. The man's estate will be split between the wife and the children In most states, if a person dies intestate, the estate will be split between the surviving spouse and the children, regardless of their age. For this reason, it is always a good idea to have a will.

If you develop severe credit difficulties, your best bet is to go and see a reputable credit counselor, preferably one from a non-profit agency such as the Consumer Credit Counseling Centers of America. They work with most of the creditors and can generally get them to agree to give you some "breathing room." Often, they will work out a debt repayment schedule that you can handle and that will satisfy the creditors. There is a price, however, and that often involves your giving up your credit cards and agreeing not to take on any new debt. There are private firms called loan consolidators who will pay off your debts to everyone else so you make only one payment - to them. However, many of these firms charge very high rates of interest, which will only keep you in debt longer. If you are behind on your debt payments and go to a responsible credit counseling service such as Consumer Credit Counseling Centers, what help can they give you? A. They can cancel and cut up all of your credit cards without your permission. B. They can get the federal government to apply your income taxes to pay off your debts. C. They can work with those who loaned you money to set up a new payment schedule that you can meet. D. They can force those who loaned you money to forgive all your debts.

C. They can work with those who loaned you money to set up a new payment schedule that you can meet. A responsible credit counseling service works with the local and national creditors on a regular basis to help folks with credit problems work their way out of difficulty. This often involves setting up a new payment schedule that you can meet.

Credit agreements are so complicated that it is difficult to compare loan offers or even see just how much we are paying for a loan. To help us make smarter decisions, the Federal Government requires all lenders to tell us about the terms of our loan, including the interest rate, in the same way. All of this information must be given to us to look over before we sign the loan. If we pledge our existing home as collateral for a loan, we are given a three day "cooling off" period for us to reconsider whether we really want to go ahead with it. If we find a better deal or just get "cold feet," we can back out of the loan. A few states may have cooling off periods for other types of loans as well, but most don't. Be sure to read the disclosure form carefully so that you understand all the terms of your loans including whether there is a cooling off period. Tori and Scott have applied for an $8,000 installment loan to pay for a new car. They are told that the loan is approved and the lender fills out all the paperwork, which states that they will pay an annual percentage interest rate of 12.3%. Tori and Scott signed the loan papers. The next day, they find another car dealer who will sell them the same car at the same price but with an interest rate of just 9%. They do not live in a state that has a cooling off period for auto loans. What are their options? A. A dealer cannot charge more than 12 percent on any loan. B. They can tell the original dealer "no deal" and go to the lower-priced lender. C. They signed the contract and must take the original deal. D. The Federal Government will force the first dealer to lower the interest rate.

C. They signed the contract and must take the original deal. Unless they live in a state which has a cooling off period for car loans (most don't), they are stuck with the contract that they signed. Federal law demands a 3-day cooling off period only for loans secured by your existing home.

There are two types of fraud alerts: an initial alert, and an extended alert. An initial fraud alert stays on your credit report for at least one year. You may ask that an initial fraud alert be placed on your credit report if you suspect you have been, or are about to be, a victim of identity theft. An initial alert is appropriate if your wallet has been stolen, if you've been taken in by a "phishing" scam, or if you've just learned that you're a victim of ID theft. With an initial fraud alert, potential creditors must use what the law refers to as "reasonable policies and procedures" to verify your identity before issuing credit in your name. However, the steps potential creditors take to verify your identity may not always alert them that the applicant is not you. When you place an initial fraud alert on your credit report, you're entitled to order one free credit report from each of the three nationwide consumer reporting companies, in addition to the one free annual credit report from www.annualcreditreport.com, and, if you ask, only the last four digits of your Social Security number will appear on your credit reports. An extended fraud alert stays on your credit report for seven years. You can have an extended alert placed on your credit report if you've been a victim of identity theft and you provide the consumer reporting company with an Identity Theft Report. With an extended fraud alert, potential creditors must actually contact you, or meet with you in person, before they issue additional credit in your name. When you place an extended alert on your credit report, you're entitled to two free credit reports within twelve months from each of the three nationwide consumer-reporting companies. In addition, the consumer reporting companies will remove your name from marketing lists for pre-screened credit offers for five years unless you ask them to put your name back on the list before then. To place either of these alerts on your credit report, or to have them removed, you will be required to provide appropriate proof of your identity: that may include your Social Security number, name, address and other personal information requested by the consumer reporting company. Which of the following statements is true about an initial fraud alert and an extended fraud alert? A. An extended alert is appropriate if your wallet has been stolen or if you've been taken in by a phishing scam. B. An extended fraud alert stays on your credit report for at least 90 days. C. With an extended fraud alert, potential creditors must actually contact you, or meet with you in person, before they issue you credit. D. When you place an initial fraud alert on your credit report, you're entitled to order two free credit reports from three of the nationwide consumer reporting companies within twelve months.

C. With an extended fraud alert, potential creditors must actually contact you, or meet with you in person, before they issue you credit. With an extended fraud alert, potential creditors must actually contact you, or meet with you in person, before they issue you credit. An extended fraud alert stays on your credit report for seven years where an initial fraud alert stays on your credit report for at least 90 days.

A copayment makes you pay for part of the cost of every treatment. Often, it makes you pay for the first five or ten dollars of an office visit with the rest being paid by the insurer. This cuts costs in two ways. It not only saves the insurance company money directly but, like a deductible, it makes it more expensive for you to make unneeded visits to the doctor. Generally speaking, you only make a copayment when your medical expenses for the year are greater than the deductible. For example, if you have a $100 deductible and a 20 percent copayment above the deductible, you will pay the full amount for the first 2 visits to a doctor who charges $50 for an office visit. After this, you will pay only $10 (20 percent of $50) for every additional visit. The Affordable Health Care Act ("Obamacare") eliminated co-payments for "preventative" health care, such as vaccinations, that will help people avoid getting a disease. Joyce has a medical insurance policy through work, which has a $200 deductible and a 20 percent employee co-payment above the deductible. If her doctor charges $50 for an office visit, how much will Joyce pay for her third visit to the doctor this year? A. $40 B. Nothing C. $60 D. $50

D. $50 On the third visit, Joyce will pay the full $50 charge because she has paid only $100 (2 visits x $50) before this visit. Only after she has paid $200 will her insurance begin to pay its share for her doctor's charges.

Sometimes we have an opportunity to make an investment that we expect to yield a high return. If we invest our own savings in this investment, our returns are limited by the rate of return multiplied by the amount of money we have invested. If, however, we borrow money to make a larger investment, we can earn a return on the money we have borrowed as well as on our own money. In finance, we call this leverage; we are using someone else's money to work for us. Although the use of leverage can be of great benefit because it can multiply our returns, it can also be a great problem because it would also multiply our losses. Let's see how leverage works. Most stockbrokers will allow you to buy stocks on margin. This means that you can buy more stocks than you have money to invest by borrowing additional money from the broker. For a long time, the law has allowed investors to buy stocks with a 50 percent margin which means that you can buy twice as much stock as you have money to invest. Whether or not you make money on a leveraged investment depends on whether the return that you get on the borrowed funds is greater or smaller than the interest rate you paid to borrow those funds. If you pay the broker 8 percent to borrow funds to buy stocks on margin, you make money on the leverage if your return is greater than 8 percent. If it is less than 8 percent, you lose money. One of the largest investments we make using leverage is the purchase of a home. Conventional mortgages demand a 20 percent down payment which means that we are leveraged 5 to 1 since we control 5 times the assets that we own. If housing prices increase at an annual rate that is greater than the mortgage rate, we can earn a high return on our investment (our down payment). If housing prices increase by less than the mortgage rate, we can lose a lot of money because of the leverage. For example, Julio buys a home for $200,000, putting down 20 percent with a 6 percent mortgage and sells it after 1 year when the house has declined in value by 3 percent. The value of his home has declined by 3 percent or $200,000 x .03 = $6,000. His interest expense for the year was the $160,000 loan x .06 = $9,600. Adding the loss in the value of his home brings his total outflow for the year to $15,600. Since he invested $40,000, his return was equal to -$15,600/$40,000 = -39 percent. Hilary buys a home for $100,000 and puts down 20 percent with a 5 percent mortgage. She sells it after 1 year when the house has declined in value by 4 percent. Ignoring any real estate commissions or mortgage amortization, what has been the rate of return on her investment for the year? A. -52 percent B. -48 percent C. -4 percent D. -40

D. -40 The value of her home has declined by 4 percent or $100,000 x .04 = $4,000. Her interest expense for the year was the $80,000 loan x .05 = $4,000. Adding the loss in the value of her home brings her total outflow for the year to $8,000. Since she invested $20,000, her return was equal to -$8,000/$20,000 = -40 percent.

Capacity. The second C of credit is capacity or the ability to repay. Here, the application is examined for evidence that the borrower will have the discretionary income available to repay the loan. Discretionary income is money available each month to pay this new debt, after all existing debts have been paid and after necessary expenses (for food, medical care, etc.) have been subtracted. While many measures of capacity are used, most lenders like the ratio of debt payments to gross family income (income before deductions and withholding) to be less than 40 percent. Robin earns $42,000 per year and has current debt payments of $1,200 per month. She wants to buy a new car with desirable financing which will give her additional monthly debt payments of $435 provided that her debt payments are no more than 40 percent of her gross income. What will Robin's debt payment to gross income ratio be if she buys the car? A. 42.7% B. 44.6% C. 39.8% D. 46.7%

D. 46.7% Adding the $435 per month for her new car to her existing loan payments of $1,200 per month will give her total loan repayments of $1,200 + $435 = $1,635 per month. This is $1,635 x 12 = $19,620 per year which is $19,620/$42,000 = 46.7% of her gross income. She will not qualify.

Most students who borrow money through the U.S. Department of Education to pay for their college education receive either a Direct Subsidized Loan or a Direct Unsubsidized Loan. These loans are the primary type of loan made to college students by the Federal Government. Some direct loans are subsidized for students with demonstrated financial need. Direct Subsidized Stafford Loans are for students with financial need. These loans charge no interest and require no repayment while the student is in school and for a 6-month grace period after the student finishes. Maximum loan amounts and interest rates change periodically and can be found on the Federal student Aid website. Direct Unsubsidized Loans are available for all students, regardless of financial need. However, unlike the subsidized loan, interest is charged from the time your first payment is received. You can pay the interest while you are in school or you can allow it to accumulate ("accrue") and be added to the amount that you borrowed. You don't have to begin making payment on your loan until the end of the grace period, but interest on the loan keeps accruing so the longer you wait to begin paying off your loan, the more you will owe and the higher your payments will become. When does the Federal Government begin to charge interest on amounts borrowed on a Direct Subsidized Student Loan? A. At graduation. B. When the last loan is made. C. Immediately, as soon as the first amount is borrowed. D. 6 months after graduation.

D. 6 months after graduation. Subsidized loans charge no interest and require no repayment while a student is in school and for a 6-month grace period after a student finishes.

Almost everybody who works in America is forced to pay into Social Security. This means that most of us, who work for at least 10 years, can count on getting something back from Social Security when we retire. In 2019, the average Social Security retirement payment was $17,532. That can go up to $34,332 per year for higher-earning people who waited until the 70th birthday to retire. What we get out of Social Security depends somewhat on what we put in, so those who earn more money over their lifetimes will get more in benefits than those who have earned less. Social Security retirement benefits are increased every year to keep up with inflation. Spouses can choose to receive additional Social Security based on their own record of earnings or half of their partner's earnings, whichever is greater. Today, a person must be 66 years old to collect full Social Security benefits. This age keeps increasing. If you will retire after 2027, you will have to be 67 years old to get full benefits. You can retire as early as 62 and still collect Social Security retirement benefits, but these benefits will be reduced by about a third. Also, if you are collecting Social Security and still work, your Social Security benefits will be reduced by about half of your earnings from work. On the flip side, if you work past the full benefit age, your Social Security income will go up by about 8 percent for each additional year that you work to age 70. Social Security was developed as a backup retirement plan to make sure that everyone has some income for retirement. It was never meant to be the sole source of retirement income. This means that if you want a decent retirement, you better find a source of retirement income in addition to Social Security. Nikki is an 18 year old high school senior. If she works from the time she finishes her education, how old must she be before she is entitled to her full Social Security payment? A. 62 B. 65 C. 70 D. 67

D. 67 People born in 1960 and later must be 67 years old before they can collect their full Social Security benefits.

Transfer Risk: We can transfer much of our financial risk to an insurance company by paying it a premium to take it. Insurance companies can afford to take on your risk because they have lots of customers who pay premiums every year, even though only a few will have a serious accident, or get very ill, or die in any given year. In this way, all the other customers of the insurance company share your risk. Paul has a car that is 8 years old and has 126,000 miles on it. Even though he couldn't get more than $2,000 if he sold it, he still pays $350 per year for collision insurance to pay him up to the value of his car if it were damaged. If Paul decides to drop his collision insurance coverage, how is he handling that risk? A. Reducing it B. Transferring it C. Avoiding it D. Assuming it

D. Assuming it If he drops his collision insurance, he has moved from transferring the risk (buying insurance) to assuming it (self-insuring for collision damage to his car).

If someone asked you for a loan, what would you want to know about that person before you parted with your money? The first and most important question is how likely is that person to pay you back? Your answer to that question is based on some information: Has that person paid back other loans on time? How many other loans does that person have right now and how much is owed in total? Is that person applying for additional loans as we speak? Has that person been sued and/or declared bankruptcy? You could ask those questions to the person, but you could not be sure the answers are truthful. You could try to check with every lender in the country to see how debts are repaid and also check every courthouse in the country to see if there are any lawsuits or bankruptcies on file, but this is unrealistic. The credit bureaus take all of the credit information and add to it information about lawsuits or bankruptcies gathered from courthouses across the country. All this information goes into reports describing the credit history of just about every person who may be capable of borrowing money in America. The credit bureaus then sell these reports to creditors who use them to decide whether they should give credit to an applicant. The credit bureaus also sell the information to employers who don't want to hire deadbeats (those who don't pay back their loans), since that may be a sign of bad character. They will even sell information about you to you, for a price. This is why there are credit bureaus that collect credit information on everybody and do it all the time. The three big nationwide credit bureaus are Equifax, Experian and TransUnion. They have a working agreement with just about every business that lends consumers money. The creditors (lenders) submit regular reports to them about everyone who borrows money from them (or applies to borrow money), giving the payment history in detail. In this way, creditors can share information with each other very efficiently. If you've skipped a loan payment or made it late within the past 7 years, you can be sure that there is a record of that on your credit report. Which of the following statements is true? A. People have so many loans it is very unlikely that one bank will know your history with another bank. B. Your bad loan payment record with one bank will not be considered if you apply to another bank for a loan. C. If you missed a payment more than 2 years ago, it cannot be considered in a loan decision. D. Banks and other lenders share the credit history of their borrowers with each other and are likely to know of any other loan payments that you have missed.

D. Banks and other lenders share the credit history of their borrowers with each other and are likely to know of any other loan payments that you have missed. Through the credit bureaus, lenders of all types share the credit histories of their borrowers. Your missed payments are sure to show up on your credit report.

If you get yourself in so much debt that there is no way you can ever repay it, you do have the legal right to declare personal bankruptcy. There are two types of personal bankruptcy, Chapter 7 and Chapter 13. Chapter 7 is "straight bankruptcy" where a special court will sell almost everything you own to pay off as much of your debt as it can. At the end, your debts are taken away and you are given a fresh start. In some cases, you can lose your pension if you file bankruptcy, and in most states you can lose your home as well. Chapter 13 is also called "payment plan" bankruptcy. Here, you offer a plan to pay off at least part of your debts in a 5-year period. In this case, you can keep your assets, including your home, your car and your pension (an employer retirement income benefit), but you must promise to repay your debts from future income. While you are making your payments, your creditors can't sue you. In 2018, 755,182 households filed for personal bankruptcy, according to the American Bankruptcy Institute. Which of the Federal Bankruptcy plans frees you from having to repay your debts? A. Chapter 12 B. Chapter 1 C. Chapter 13 D. Chapter 7

D. Chapter 7 Chapter 7 bankruptcy allows you to discharge virtually all of your debts (except Federally guaranteed student loans). Chapter 13 protects you from being sued as you slowly repay your debts.

These days few credit cards charge their users an annual fee. Exceptions include credit cards that offer special frequent flier rewards or free use of private airline lounges. Most credit cards can be used for free if you don't pay an annual fee and you always pay off the amount of your charges every month. In this way, you don't have to pay finance charges. However, many American households who use credit cards seldom, if ever, fully pay off their card balances. Almost half (47%) carry a balance forward from month to month. It is expensive to use credit cards to finance purchases over time. The average APR (annual percentage rate) charged on credit cards in June 2019 was 17.73 percent, according to Creditcards.com. Costs are even higher for people who are charged penalty APRs for late payments and other infractions and those who take cash advances. Remember, too, that credit card companies charge interest immediately on cash advances even if you pay off your balance at the end of each month in full. Billy buys a new baseball glove for $75 using his MasterCard. Ed, who is with him, gets a $75 cash advance on his MasterCard to buy the identical glove. If they both have a habit of paying off their credit card bill every month, which of the following will happen? A. Neither Ed nor Billy will have to pay a finance charge. B. Both Ed and Billy will have to pay the finance charges. C. Billy will have to pay a finance charge while Ed won't. D. Ed will have to pay a finance charge while Billy won't.

D. Ed will have to pay a finance charge while Billy won't. Since Ed uses a cash advance, he must pay a cash advance finance charge on the $75 and interest on the cash advance even if he pays off his balance each month.

The best way to find out if you are a victim of an identity theft is to monitor your credit card, phone, cable and other accounts and bank statements each month, and check your credit report on a regular basis. If you check your credit report regularly, you may be able to limit the damage caused by identity theft. Unfortunately, many consumers learn that their identity has been stolen only after some damage has been done. You may find out when bill collection agencies contact you for overdue debts you never incurred or when you apply for a mortgage or car loan and learn that problems with your credit history are holding up the loan. You also may find out when you get something in the mail about an apartment you never rented, a house you never bought, or a job you never held. What should you do if your identity is stolen? Filing a police report, checking your credit reports, notifying creditors, disputing any unauthorized transactions, and reporting the theft to the Federal Trade Commission are some of the steps you must take immediately to restore your good name.Should you file a police report if your identity is stolen? An Identity Theft Report is a police report that provides specific details of the identity theft. Filing an Identity Theft Report entitles you to certain legal rights. If provided to the 3 major credit-reporting agencies, it can be used to permanently block fraudulent information such as debts, accounts or addresses, from appearing on your credit report. Identity Theft Reports can prevent a company from continuing to collect debts that result from identity theft, or selling them to others for collection. An Identity Theft Report is also needed to place an extended fraud alert on your credit report. You may not need an Identity Theft Report if the thief made charges on an existing account, such as a single credit card, and you have been able to work with the company to resolve the dispute. Where an identity thief has opened new accounts in your name, or where fraudulent charges have been reported to the consumer reporting agencies, you should obtain an Identity Theft Report so that you can take advantage of the protections to which you are entitled. In order to obtain the legal rights mentioned above, a police report must contain specific details about the identity theft. To save time, you might want to file an ID Theft Complaint with the United States Federal Trade Commission [FTC] at their website and bring your printed ID Theft Complaint with you to the police station when you file your police report. This printed complaint can be used to support your local police report to ensure that it includes the detail required. A police report is also needed to get copies of the thief's application, as well as transaction information from companies that dealt with the thief. To get this information, you must submit a request in writing, accompanied by the police report, to the address specified by the company for this purpose. Where should you file an ID theft complaint if your identity is stolen? A. The Better Business Bureau B. Your county of birth C. Your Senator D. Federal Trade Commission

D. Federal Trade Commission The answer is the Federal Trade Commission at www.identitytheft.gov

Over the past quarter century, the cost of attending college has increased much faster than the rate of inflation. For well over a decade, the cost of a college education has increased faster than the rate of inflation. From 2008-09 to 2018-19, tuition and fees increased by an average of 2.3% per year beyond increases in the inflation rate. If inflation trends continue, the cost of a 4-year college education could be as high as $500,000 at private schools and over $200,000 at public colleges by 2035. Many explanations have been given for the rapid increase in the cost of college education. These range from increased government regulation, high salaries for faculty, coaches and administrators, student preferences for climbing walls and single dorm rooms to the increased costs for remedial education. Others feel that increased government funding for higher education, in the form of loans and grants, has made it possible for colleges and universities to increase the prices that they charge to their students. Regardless, college is now financially out of reach for many students unless they can get financial aid. What has happened to the cost of attending college since 2006, not adjusting for inflation? A. It has increased more than 500 percent. B. It has increased between 100 and 200 percent. C. It has been equal to the overall rate of inflation. D. It has been about 2.3 percent per year higher than the rate of inflation.

D. It has been about 2.3 percent per year higher than the rate of inflation. From 2006 to 2016, the cost of higher education has increased by about 2.3 percent per year above the rate of inflation.

Since the primary purpose of life insurance is to keep the promises we made to those who depend on our income, most of us really don't need life insurance at all until we have children. At that point, we need a lot!When we are still unmarried and without children, we don't generally have anyone dependent on our income and don't need life insurance. If we do have a parent, brother or sister who depends on us for support, this will change our need for insurance. It may also change if a parent is responsible for paying back our student loans and we want enough life insurance to relieve them of that responsibility if something should happen to us.When we are married without children, our need for life insurance depends on the ability of our spouse to support him or herself. If they can, we have little need for life insurance.The big need for life insurance comes when our children are young. If we die, they need to be raised and educated, a process that can take many years. The cost of raising a middle-class child and sending that child to college can easily cost more than $300,000. If you have two kids, this is $600,000. For this reason, a middle class person with two or three children may have life insurance needs approaching a million dollars. An added benefit of having life insurance is that the proceeds or payout from this insurance is generally not taxable.If your spouse is working or capable of working, your income is diversified which means that you don't need as much life insurance as you would with only your income to support the family. For this reason, single parents need more life insurance than those who are married. Jim and Jill are a married couple with two young children. Jill is a wing walker who gets out of an open airplane and balances on the wing, and Jim is the pilot who flies the plane for her act. Their famous, death-defying stunts play at air shows all over the world. Relative to their next-door neighbors who are teachers, which of the following best describes their need for life insurance? A. It is lower than their neighbors because they must stay in such good physical condition. B. It is higher than their neighbors because their jobs are dangerous. C. It is the same as their neighbors. D. It is much higher than their neighbors because their jobs are dangerous and not diversified.

D. It is much higher than their neighbors because their jobs are dangerous and not diversified. Jim and Jill's need for life insurance is much higher than their school teacher neighbors because their jobs are far more dangerous and also because their sources of income are diversified. If the plane crashes during their act, their young children will have no parent to support them.

Few young people spend any time thinking about retirement. In fact, most Americans put off thinking seriously about retirement until it is nearly upon them. When people are just beginning their careers, little attention is paid to their job's retirement benefits because retirement seems so distant. As we get older, other job-related matters seem to have priority. Promotions, job changes, even the daily struggles to keep the family going keeps us from thinking much about the problems of retirement. Unfortunately, when we get close to retirement, we may regret the fact that we didn't pay much attention to it. While retirement planning has always been important, it is becoming more important than ever. Our population is getting older as senior citizens live longer and longer lives, thanks, in part, to modern medicine. In 1970, the average 65-year-old male lived for 13.1 years, and the average 65-year-old female lived for 17.1 years. In 2016, those figures were 18.0 years for males and 20.6 years for females. By 2050, when many of today's young people will retire, 65-year-old men are expected to live more than 20 years and women more than 22 years. Also, Americans are not producing enough children to maintain the same number of working adults in the future. In the U.S., women of childbearing age averaged just 1.72 children each in 2018, even though replacement level (needed to keep the population constant) is 2.1. This further increases the burden on tomorrow's workers, and also cuts the income that will be available for your own retirement. Japan is now going through painful economic times caused by an aging population in which women of childbearing age have, on average just 1.4 children each. In 2015, about 15 percent of the U.S. population was over 65, but that proportion is expected to be about 20 percent in 2050 when today's high school seniors approach retirement age. This means that when today's young people retire; there will be more than one retired person for every three working people. This will make it harder than ever to retire comfortably. It also means that you have to take retirement seriously and do something about it as soon as possible. Based on population trends in the U.S., which of the following statements is likely to be true about retirement in 2050 when you are likely to be retired. A. It should be easier to retire then than it is now because there will be more people working to support those who are retired. B. No one will be able to retire at that time. C. It should be about as easy to retire then as now because there will be the same ratio of working to retired people. D. It should be more difficult to retire then than now because there will be fewer working people to support those who are retired.

D. It should be more difficult to retire then than now because there will be fewer working people to support those who are retired. The number of retired people is expected to grow much faster than the number of people who will be of working age.

Since a person's credit record is based largely on their demonstrated ability to handle a loan, many lenders will start new borrowers out with smaller loans or, in the case of a credit card, with a relatively small initial line of credit. As the borrower proves that she or he is reliable in making payments, lenders will often be more generous in the amount they are willing to lend. Maria has just applied for a credit card. She is an 18-year-old high school graduate with a job but with few valuable possessions and no credit history. If Maria is granted a credit card, which of the following is the most likely way that the credit card company will reduce its risk? A. It will require Maria to have both parents co-sign for the card. B. It will charge Maria twice the finance charge rate it charges older cardholders. C. It will make Maria's parents pledge their home to repay Maria's credit card debt. D. It will start Maria out with a small line of credit to see how she handles the account.

D. It will start Maria out with a small line of credit to see how she handles the account. Since credit card companies know little about young adults who have no credit history, it assumes that they will have good character and will repay their debts on time, as most people do. However, while they are willing to give Maria some credit, they don't want to take too much risk until she has established a good credit rating. They will give her a chance to build her credit rating by starting her with a small line of credit (perhaps $500 - $1,000) and will then increase the size of the credit line as she builds a good credit history.

A question we should always ask is what price we are paying for debt in terms of the annual percentage rate of interest charged on each loan. Typically, secured loans, such as auto and home loans, charge lower rates of interest than unsecured loans, such as credit card loans. The reason for this difference is that the lender can repossess and sell secured assets in the event that the borrower is unable to repay the loan. In addition, the greater the amount of the loan, the lower the typical rate. This is because the administrative costs of granting and handling the loan are spread out over a larger amount of money. Therefore, home mortgages typically have a lower interest charge than car loans which, in turn, cost less than credit card loans. There is a great deal of competition among lenders, so it generally pays to shop around. Independent mortgage companies compete with banks to issue home mortgages and this competition has helped to force down rates. In addition, some credit card issuers offer rates that are substantially below 18 percent. These lower rates tend to be offered to consumers with excellent credit records. Jack and Ron are young men. Each has a good credit history. They work at the same company and make approximately the same salary. Jack has borrowed $2,500 to buy a car. Ron has borrowed $2,500 to take a foreign vacation. Who is likely to pay the lowest finance charge? A. They will both pay the same because they have almost identical financial backgrounds. B. They will both pay the same because the rate is set by law. C. Ron will pay less because people who travel overseas are better risks. D. Jack will pay less because the car is collateral for the loan.

D. Jack will pay less because the car is collateral for the loan. If Jack fails to repay the loan, the lender can take back the car. If Ron doesn't pay, the lender can't take back the vacation. Jack is lower risk and pays less in finance charges.

Credit card issuers make money in two primary ways. Every time you use your card, they get a percentage of the charge from the merchant, ranging from about 1 to 4 percent. Since this fee is paid by the merchant who accepted your card, you don't pay it directly. However, it is now legal for merchants to charge customers a higher price to buy things using a credit card and a number of gas stations and other merchants have started to do so. The second way credit cards make money for the banks that issue them is by charging interest (called a finance charge) on outstanding balances. Since these finance charges can be fairly steep, many banks find that credit card users who pay finance charges every month are profitable customers for them. If you are a "transactor" who pays off your entire balance every month, you probably don't make as much money for the credit card companies as do "revolvers" who seldom if ever pay off their credit card balances. Therefore, it is to your financial benefit to pay off the full amount of your charges every month. Credit card customers who use their cards outside of the United States find that "foreign fees" averaging about 3 percent of the foreign transactions are added to their monthly statements. A few credit card companies do not add such fees so if you travel overseas a lot, it may be worthwhile to search for one that doesn't have a foreign fee. Which of the following credit card users is likely to pay the GREATEST dollar amount in finance charges per year if they all charge the same amount per year on their cards? A. Ellen, who generally pays off her credit card in full but occasionally will pay the minimum when she is short of cash. B. Nancy, who pays at least the minimum amount each month and more when she has the money. C. Barbara, who always pays off her credit card bill in full shortly after she receives it. D. Paul who only pays the minimum amount each month.

D. Paul who only pays the minimum amount each month. If Paul pays only the minimum amount each month, which is generally about 5 percent of the outstanding balance, he is a "revolver" who never stops paying a lot of money in finances charges on his cards.

If you find something suspicious with one or more of your accounts, call and speak with someone in the security or fraud department of each company involved. Follow up in writing, and include copies (NOT originals) of supporting documents. It's important to notify credit card companies and banks in writing. Send your letters by certified mail, return receipt requested, so you can document what the company received and when. Keep a file of your correspondence and enclosures. If the identity thief has made charges or debits on your accounts, or has fraudulently opened accounts, ask the company for the forms to dispute those transactions. For charges and debits on existing accounts, ask the representative to send you the company's fraud dispute forms. If the company doesn't have special forms, ask what information you must supply and how they want to receive it. In either case, write to the company at the address given for "billing inquiries," NOT the address for sending your payments. For new unauthorized accounts, you can either file a dispute directly with the company or send a copy of your Identity Theft Report to the company. If you want to file a dispute directly with the company, and do not want to file a report with the police, ask if the company accepts the FTC's ID Theft Affidavit. If it does not, ask the representative to send you the company's fraud dispute forms. Once you have resolved your identity theft dispute with the company, ask for a letter stating that the company has closed the disputed accounts and has discharged the fraudulent debts. This letter is your best proof if errors relating to this account reappear on your credit report or you are contacted again about the fraudulent debt. When establishing a personal identification number (PINs), passwords or usernames which is considered the strongest of the following? A. Last 4 digits of social security number B. Birth date C. Mother's maiden name D. Random set of numbers, letters and characters

D. Random set of numbers, letters and characters A random set of numbers and characters, such as d46&lk$ provides the strongest level of security for your accounts.

Since 80 percent of Americans use credit, and nearly all of us will do so at some point of our lives, we must begin our analysis of credit by looking at it, not as something that is good or evil, but as a tool that everyone must learn to use. While it is not our place to make value judgments about how people should use credit, we can begin by reviewing some uses for credit that have measurable benefits that outweigh costs. Financing Human Capital: One of the best uses of credit is to finance our investment in "human capital," the education or training that will help us get a higher-paying job. We know that those with a 4-year college degree make over 50 percent more than those with just a high school degree. Over a lifetime, this earning difference can be expected to more than pay for the cost of a student loan used to pay for your higher education. Which of the following types of loans is considered to be an "investment in your human capital?" A. Auto loan B. Credit card charges C. Mortgage loan D. Student loan

D. Student loan A student loan is used to pay for higher education or training and is considered to be an investment in your "human capital." Although mortgage loans can possibly save us money on housing and an auto loan can enable us to get to work at a better-paying jobs, these loans are used to acquire "physical," "household" or "non-human" capital.

It is generally less expensive to add a young driver to a family's policy and have them drive a family car than to buy a car and pay for separate insurance for that car. For this reason, many young people start out by driving a family car before buying one of their own. However, if the young driver causes a serious accident that injures others, including the drivers' friends riding in the car, the family that owns the car is totally liable and can lose everything. For that reason, middle and higher income families often choose to give their children cars in their own names (so they can't be held responsible for an accident) or insure the cars that their children drive for a lot of liability insurance. The Reich family is upper middle class with a nice house and nice cars. Both of the parents are professional people who earn far more than the average person in their state. When their daughter Christine turned 16 and got her driver's license, the Reichs put her on their auto policy and allowed her to drive a family car which had maximum liability insurance of $200,000. One night, Christine went to a party, got drunk, and hit a tree on her way back, killing two of her friends and badly injuring a third. Which of the following is most likely to happen? A. The Reich family is not liable since it was Christine who was driving illegally (drunk). B. The families of Christine's friends will not pursue damages because of their relationship with Christine's family. C. The families of Christine's friends will accept and split the $200,000 maximum amount of the liability insurance. D. The families of Christine's friends will sue the Reich family for an amount far larger than the $200,000 maximum insurance company limit.

D. The families of Christine's friends will sue the Reich family for an amount far larger than the $200,000 maximum insurance company limit. It is most likely that the families of Christine's friends will sue the Reich family, who are legal owners of the car that Christine drove, for far more than the $200,000 maximum insurance limit since the damages are substantial and the Reich's have deep pockets. Since both parents earn more than the average person in their state, they even may have to pay out some of their future income (if they don't have enough assets) since their high income keeps them from escaping liabilities by declaring Chapter 7 personal bankruptcy.

Consumer loan applications all collect the following types of information: Loan Information including the amount requested, the purpose of the loan and whether you are applying by yourself or with a co-applicant Collateral information describing the collateral that will be used to secure the loan, including the year, make, model, miles and Vehicle Information Number (VIN) if you are buying a car Applicant information including your name, social security number, date of birth, whether you are married, and the number of your dependents. This is used to check your credit history and rating with the credit bureau. Information about your dependents is used to determine how many mouths you have to feed which helps tell the lender if you will have enough money left at the end of the month to pay back your loan. Applicant resident information asks about where you live now and where you lived in the past. It also asks whether you rent or own your home and your monthly housing payment. People who move around a lot are considered worse risks than those who are fairly stable. Applicant employment information includes the name, address and telephone number of your employer and previous employer, how long you worked at each job, and how much money you make on your current job. It also asks about other types of income you might have. (But it is against the law for a lender to refuse to give a loan only because the applicant gets money from a public assistance program.) The purpose of collecting income information is to see whether you have the capacity to pay. The purpose of checking with your previous boss is to find out something about your character - why, exactly, did you leave that job? Applicant credit references include information about those you owe money to, how much you owe and how much you pay on your debts every month. This is used to help determine your capacity to pay off the new loan in addition to your existing loans. It also lets the lender check with your other lenders to see how well you make your payments. Included in this section as well is information about accounts you currently have at banks. Authorization and signatures includes a statement allowing the lender to check your references and credit report. You and the co-applicant (if any) must sign and date the application. Why does a consumer credit application ask for the name and telephone number of your previous employer? A. The lender wants to know the type of work you used to do. B. The lender wants to find out where you used to bank. C. The lender wants to find out whether you ever worked with computers. D. The lender wants to find out whether you were a steady and reliable worker.

D. The lender wants to find out whether you were a steady and reliable worker. The lender wants to find out if you were a steady and reliable worker. If your employment history is one with very short jobs, the lender may conclude that you will not hold on to your job very long and will be a poor borrower.

Collateral. The third C of credit is collateral, which refers to the property that can be taken by a lender to repay a loan. Collateral is generally required for all consumer loans except for revolving credit (credit card) types of loans. Education loans from the Federal Government do not require collateral but, unlike other types of loans, may not be discharged or forgiven if a borrower declares personal bankruptcy. When you get a loan to purchase a specific asset, such as a car or a house, the asset generally secures the loan, which means that the lender has the right to take the asset back if you do not make your payments. Few people know that the items they buy with a store credit card may also be used to secure the loan. Loans that are secured by collateral tend to charge lower rates of interest than those that are not secured. This is because lenders see collateralized loans as less risky for two reasons. First, the collateral is likely to be worth something if it is repossessed. Second, if a borrower stands to lose something, such as a car or a house, he or she is likely to be more highly motivated to make his payments than if there is nothing to lose. Often, a cosigner with good credit is needed before a loan can be made. Or, the lender may require someone else to guarantee the repayment of your loan. If you are buying a car on an installment loan and then halfway through the loan you lose your job and stop making payments, what is likely to happen? A. Nothing, the lender will give you another year or so to pay back the loan. B. The lender will help you find another job. C. The lender will lower the interest rate on your loan to make it easier for you to pay. D. The lender will send someone out to take back the car (repossess it).

D. The lender will send someone out to take back the car (repossess it). Since the car is collateral for the loan, if you stop making your payments, the lender can, and probably will, send someone out to pick up your car. In general, it is then sold at auction.

Private Student Loans: Since the Federal Government offers loans directly to students at relatively attractive interest rates, it would not appear likely that a private market for loans could develop, particularly at higher interest rates. Unfortunately, most students taking out private loans do so even though they are eligible for federal loans at rates that are much lower and are capped. Some colleges appear to "push" private student loans as part of their financial aid package, making it very difficult for unsophisticated students to know just what loans they are undertaking. Therefore, it is in the student's best interests to maximize grants first, and then subsidized and unsubsidized Federal loans before ever considering a private student loan. Why do some students take out private loans when they are eligible for Federal student loans at much lower interest rates? A. Private loans don't have to be repaid for 10 years. B. Private loans have much lower fees. C. Private loans favor students with very low incomes. D. They are probably not aware of the rate difference and of their eligibility for the Federal loans.

D. They are probably not aware of the rate difference and of their eligibility for the Federal loans. Students should first use grants and then Federal loans to finance their college education since both are far less expensive than private loans. Those students who use private loans, even though they are eligible for Federal loans, are probably unaware of the benefits of first applying for Federal loans.

We can also use credit to finance household capital such as automobiles, appliances and even houses. In some cases this capital may have monetary benefits that outweigh costs. Individuals with cars can often get better jobs due to greater mobility. Many appliances such as vacuum cleaners and microwaves free up time that can be spent working for money. And the ownership of a house may offset the payment of rent. Kevin lives in the city and doesn't have a car. He takes the bus to work, teaching math in a local high school that pays him $40,000 per year. A similar job has become available in a nearby suburb that pays $50,000 per year. However, he needs a car to get to this job. He figures that he could buy a reliable car with monthly payments of $300. Insurance, parking, tolls, gas and oil will cost an extra $100 per month. Is this a good deal for him financially? A. Every adult in America needs to own a car. B. You can't tell. C. No D. Yes

D. Yes Correct! 3 of 10 It is a good deal for Kevin, financially. The total cost of the car will be $400 per month or $4,800 per year, and he will make an extra $10,000 per year. Even though taxes and other deductions will take part of the additional income, they won't take half. Also, if Kevin buys the car with installment payments, he will own it at the end of his payment term, and his monthly costs will drop by $300.

Your credit report contains the following information about you, which the credit bureaus gathered from your loan applications, your payment record and public records from courthouses. Personal Profile - showing your name, year of birth, current and former addresses and current and former employers. It may also have your income if you listed it on other credit applications as well as an estimate of your net worth. Credit Summary - showing all of your loan accounts by category (real estate, revolving, installment and other), which are current, how much you owe, whether you are delinquent or behind on any loans, whether there are any negative public records (lawsuits, etc.) about you and the total number of inquiries the credit bureau received in the last 6 months about you (mostly relating to new account applications). Public Records - giving the details about lawsuits or bankruptcy filings. Credit Inquiries - showing who has asked for your credit report. Account Histories - showing details of each account, including your credit limit and your high balance, and whether you are current on your account. It also lists every payment you have made for the past 2 years and shows whether they have been made on time. Payments that have been missed or were paid late for the past 7 years are also shown. Credit Score - is a number that summarizes your credit record. The most widely used credit score is your FICO score, which is a number between 300 and 850. You will also be given a credit rating or a "credit category" ranging from "Very Poor" to "Excellent." You can get a free copy of your credit report once a year from each of the credit bureaus at annualcreditreport.com or by calling (toll free) 877-322-8228. In addition to your one free report per year you can buy a copy of your credit rating from any of the credit bureaus for a low price, generally less than $10. If you are turned down for credit, for any reason, you can legally get a copy of your credit report for free. However, it is more difficult to get a free copy of our critical credit score. Although, some credit card issuers do offer this to their customers, most don't. For the rest of us, we will have to contact the credit bureaus who each charge an amount, which can be as high as $20, for the credit score they have calculated for us. Which of the following statements best describes your right to check your credit history for accuracy? A. All credit records are the property of the U.S. Government and access is only available to the FBI and Lenders. B. You cannot see your credit record. C. You can only check your record for free if you are turned down for credit based on a credit report. D. Your credit record can be checked once a year for free.

D. Your credit record can be checked once a year for free. You can check your credit record for free once a year.