FINN 1003 (CHAPTER 5)

1. Consumer credit refers to the use of debit cards for personal needs. FALSEConsumer credit refers to the use of credit.
2. Consumer credit dates back to colonial times when it was extensively used by farmers. TRUE
3. Consumer credit allows businesses to be more efficient or more productive. FALSEConsumer credit allows consumers to be more efficient.
4. Economists recognize consumer credit as a major force in the American economy. TRUE
5. When used effectively, credit can help a consumer have more and enjoy more. TRUE
6. A trade off of credit is that it increases the amount of money that will be available to spend in the future. FALSECredit decreases the amount of money that will be available in the future.
7. A disadvantage of using credit is its use when making a hotel reservation. FALSECredit offers the convenience to make a hotel reservation.
8. During the grace period, finance charges are assessed at only half the normal rate. FALSEFinance charges are not assessed during the grace period.
9. Credit can indicate stability since lenders consider you a good risk. TRUE
10. Although credit allows immediate satisfaction of needs and desires, a greater advantage is that it increases total purchasing power. FALSECredit does not increase total purchasing power.
11. Closed-end credit consists of loans made on a continuous basis with periodic bills for at least partial payment. FALSEDefinition is for open-end credit.
12. Open-end credit consists of loans made on a continuous basis with periodic bills for at least partial payment. TRUE
13. Closed-end credit is used for a specific purpose and involves a specific amount. TRUE
14. Installment sales credit is a loan that allows a consumer to purchase high-priced items. TRUE
15. A consumer applies for open-end credit to make a single purchase, such as a large appliance. FALSEOpen-end credit does not require an application for each purchase.
16. The least expensive loans are often provided by parents or other family members. TRUE
17. The most expensive loans are often provided by parents or other family members. FALSEThese are the least expensive loans.
18. The easiest loans to obtain are also the least expensive. FALSEThe easiest loans are also the most expensive.
19. Interest paid on a credit card is tax-deductible. FALSEInterest on home equity loans is tax deductible.
20. A credit card holder who pays the full balance during the grace period each month is actually getting a free loan from the credit card company. TRUE
21. A secured credit card is most appropriate for someone with a strong credit background. FALSEThis type of card would be most appropriate for someone with a bad credit history.
22. Experts suggest that you spend more than 20 percent of your after-tax (net) income on consumer credit payments. FALSE
23. The debt-to-equity ratio is calculated by dividing your total liabilities, including mortgage, by net worth. FALSEThe ratio excludes mortgage.
24. In the five Cs of credit, character refers to the borrower’s trustworthiness and stability. TRUE
25. In the five Cs of credit, capacity refers to the borrower’s trustworthiness and stability. FALSEThis refers to character.
26. In the five Cs of credit, capital refers to the borrower’s ability to pay additional debts. FALSEThis refers to capacity.
27. In the five Cs of credit, conditions refer to what will happen if the borrower does not repay the loan. FALSEConditions refer to general economic conditions that can affect a borrower’s ability to repay a loan.
28. The Equal Credit Opportunity Act requires that a lender not turn you down for credit based on your age as long as you are old enough to sign a legal contract, which is usually allowed at age 16. FALSEThe age to sign a legal contract is usually 18 – 21 years.
29. FICO and VantageScore are two methods used to judge creditworthiness. TRUE
30. FICO is a better score to use than VantageScore for consumers with limited credit histories. FALSEVantageScore allows for a more predictive score for consumers, even for those with limited credit histories.
31. The higher your FICO score, the more risk you pose to creditors. FALSE
32. A credit file can include your spouse’s name and Social Security number. TRUE
33. The Fair Credit Reporting Act, enacted in 1971, places limits on who can obtain your credit report. TRUE
34. A bankruptcy remains on a credit file for no more than 5 years. FALSEBankruptcies remain on a credit file for 10 years.
35. Most information in your credit file may be reported for only 7 years. TRUEMost information is removed after 7 years; however, bankruptcies remain on a credit file for 10 years.
36. You have a legal right to sue a credit bureau if you observe an error in your file. FALSEYou have a legal right to sue if the credit bureau has not followed the rules established by the Fair Credit Reporting Act.
37. The Annual Percentage Rate is lower than the stated rate for loans that are repaid in monthly payments. FALSEThe APR for these loans is higher than the stated rate.
38. The longer the term for a loan at a given interest rate, the higher the overall interest charges. TRUE
39. The add-on interest calculation uses the formula: Interest = Principal × Rate of interest ×Time FALSEThe formula is correct for Simple Interest.
40. The amount of interest paid is independent of the length of the loan. FALSELonger loans require more interest to be paid.
41. The Truth in Lending Act requires that creditors explain how they calculate the finance charge. TRUE
42. The expected rate of inflation should not be considered when determining the amount of interest a creditor should charge. FALSELenders incorporate the expected rate of inflation when deciding how much interest to charge.
43. The longer it takes for you to pay off a bill, the less interest you pay. FALSEThe longer it takes to pay, the more interest to be paid.
44. If you purchase something with a credit card, the finance charges you pay on an item could end up being more than the item is worth. TRUE
45. According to law, a creditor may threaten your credit rating while you are negotiating a billing dispute. FALSEA creditor may not threaten your credit rating during this time.
46. According to the Fair Credit Billing Act from 1975, a creditor must adjust the disputed amount in your account or tell you why the bill is correct within 30 days. FALSEThe creditor must take this action within two billing periods, but not longer than 90 days.
47. According to the Fair Credit Billing Act from 1975, a consumer may tell his credit card company to stop payment for a defective good if he made a sincere attempt to resolve the problem with the store. TRUE
48. The first sign of stolen identity might be that you get bills for a credit card account that you never opened. True
49. If you are a cosigner for a loan and the debt is not repaid, then that fact will appear on your credit report. TRUE
50. You should keep a record of your credit card number separate from your card. TRUE
51. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it easier for consumers to file Chapter 7 bankruptcy. FALSEThe new law made it more difficult for consumers to file a Chapter 7 bankruptcy and forces them into a Chapter 13 repayment plan.
52. Installment credit exploded on the American scene with the advent of the B. AutomobileInstallment credit exploded on the American scene in the early 1900s.
53. Which of the following expressions is correct? C. As the consumer goes, so goes the U.S. economy.
54. Which of the following is a valid reason for borrowing? A. Purchasing a new dishwasherB. Borrowing for a college educationC. Purchasing a homeD. Paying for a medical emergencyE. All of the above are valid reasons for borrowing
55. Which of the following is NOT a valid reason for borrowing? B. Paying for everyday living expensesA. Purchasing a new dishwasherC. Buying a car to start a new jobD. Paying for a medical emergencyE. All of the above are valid reasons for borrowing
56. Many people expect B. Their incomes to increase to make it easier to make payments
57. Which of the following questions is NOT needed before deciding how and when to make a major purchase? A. Do I have the cash I need for the down payment?B. Does the purchase fit my budget?C. Could I postpone the purchase?D. Could I use the credit I need for this purchase in some better way? E. All of the above are valid questions to ask.
58. When used effectively, credit can result in E. Improved lifestyle
59. Which of the following is NOT correct? A. Credit can result in a greater chance of bankruptcy.B. Credit can decrease the amount of money that will be available to spend in the future. C. Credit offers convenience when shopping on the Internet.E. Credit allows a consumer to shop without carrying a large amount of cash.D. Credit cards typically offer a “float” of up to 10 days.Credit cards can provide a float up to 50 days.
60. Which of the following is NOT correct? A. Credit is appropriate to pay for medical emergencies.C. Credit sometimes occurs automatically, such as for telephone usage.D. Credit usually makes returning merchandise easier than returning cash purchases.E. Credit allows consumers to enjoy goods and services now and pay later.B. Credit can increase the amount of money that will be available to spend in the future.
61. A typical grace period for many credit card issuers is C. 20 – 25 days
62. Many think that perhaps the greatest disadvantage of using credit is A. The temptation to overspend.
63. Failure to repay a loan may lead to all except: A. Bankruptcy.B. Loss of income.C. Loss of a good reputation.D. Damage to family relationships.E. All of the answers may be a result of the failure to repay a loan.
64. Consumer credit B. Dates back to colonial times.
65. Before buying goods and services on credit, a consumer should consider all except: A. Whether they will have lasting valueB. Whether they will increase personal satisfaction during present income periodsC. Whether they will increase personal satisfaction during future income periodsD. Whether current income will continue or increaseE.Whether the good or service will be worth more because they were purchased with credit instead of cash
66. Which of the following is an example of closed-end credit? A. MortgageB. Department store credit cardC. Overdraft protectionD. Line of creditE. All of the above are examples of closed-end credit
67. Which of the following is an example of open-end credit? B. Department store credit cardA. Automobile loanC. Installment loan for purchasing furniture D. MortgageE. Single lump-sum credit
68. A direct loan for personal purposes, home improvements or vacation expenses is called B. Installment cash credit
69. A loan that must be repaid in total on a specified day, usually within 30 to 90 days is E. Single lump-sum credit
70. Molly purchased a $1,500 HDTV from Best Appliances. She will make 12 equal payments over the next year to pay for it. She is using A. Closed-end credit
71. A line of credit is D. The maximum dollar amount of credit the lender has made available
72. A prearranged loan up to a specified amount that a consumer can access by writing a special check is known as B. Revolving check credit
73. The periodic charge for the use of credit is C. Interest
74. Which is often considered to offer the least expensive loans? D. Parents or family members
75. A cash advance D. Accrues interest charges beginning the day the cash advance is made
76. Home equity loans should be used for C. Major expenses such as home improvements or education
77. Home equity loans B. Have interest that is tax-deductible
78. If you miss payments on a home equity loan, you can lose your C. House
79. A credit cardholder who pays off his balances in full each month is known as B. Convenience user
80. Which of the following is NOT associated with credit cards? A. Grace periodB. Finance chargeC. Annual feeD. Convenience users and borrowers E. Down payment on a home
81. Which of the following electronically subtracts money from your savings or checking account to pay for goods and services? A. Credit cardB. Closed-end credit D. Gift cardE. Home equity loanC. Debit card
82. Bankruptcy courts treat gift cards C. The same way they handle unsecured debt
83. Before taking out a loan, you should ask yourself whether you can meet all of your essential expenses and still afford the monthly loan payments. This can be determined by: A. Adding up basic monthly expenses then subtracting this total from take-home pay.B. Asking what you plan to give up to make the monthly loan payment.C. Multiplying your take-home pay by 50 percent and subtracting your current loan payments.D. A and B are correct.
84. Experts suggest that the debt payments-to-income ratio should be a maximum of B. 20 percent
85. If you have reached the upper limit of debt obligations, your debt-to-equity is about E. 1
86. When calculating the debt-to-equity ratio, the following is NOT included: A. Credit card balancesB. Open-end creditC. Auto loan balancesE. All of the above are included in the calculationD. Mortgage balance
87. The question “will you repay the loan?” relates to A. Character
88. The question “what are your assets and net worth?” relates to C. Capital
89. The use of property or savings to secure a loan relates to D. Collateral
90. A loan officer is examining whether or not he/she will offer you a loan today. Specifically, he/she is examining your income and debts. Which of the five Cs is the loan officer reviewing? B. Capacity
91. The Equal Credit Opportunity Act (ECOA) prohibits a lender from discriminating based on A. RaceB. NationalityC. AgeD. SexE. All of these are prohibited.
92. Which of the following is the best scoring technique used in credit applications for consumers with limited credit histories? A. CreditHistory B. CreditReport C. FICOD. LimitedCredit E. VantageScore
93. FICO scores generally range from C. 350 to 850
94. Which of the following is NOT a valid credit application question? A. How much of a loan are you requesting?B. What is the account number for your checking account?C. What is the name of the nearest relative not living with you? D. How many dependents do you have?E. All of the above are valid credit application questions.
95. When evaluating your credit application, a lender may NOT A. Ask your date of birthC. Request a list of the ages of your dependentsD. Inquire if you ever received credit before from that lenderE. Ask the income of your spouse, if you have a joint applicationB. Deny you if you receive public assistance
96. What step can you take if your credit application is denied? A. Sue the credit rating agencyB. File a complaint against the merchantD. Reapply for credit once 30 days have passedE. Borrowers do not have any rights provided by lawC. Ask why you were denied credit
97. If you are denied credit, you can contact the credit bureau and ask for a copy of your credit report. The bureau cannot charge a fee for this service as long as you ask to see your files within D. 60 days
98. A credit report includes A. Credit historyB. Assumptions made by credit rating agencies C. Credit scoreD. Credit expectationsE. All of the above
99. Which of the following is NOT a credit bureau? A. ExperianB. EquifaxC. Trans UnionE. All of the above are credit bureausD. FICO
100. Credit bureaus get their information from all of the following except: A. BanksB. Credit card companies C. Finance companiesE. StoresD. References
101. Which of the following is the only online source authorized to provide a free credit report each year at your request? A. www.annualcreditscore.com B. www.freecreditreport.com C. www.onlinecreditreport.com D. www.freecreditscore.comE. www.annualcreditreport.com
102. Credit files can include all except: A. Employer, position and incomeB. Previous addressC. Spouse’s name, Social Security number, employer, and incomeE. Checks returned for insufficient fundsD. Race or nationality
103. Which is NOT true about the Fair Credit Reporting Act? E. Allows borrowers to receive free annual credit reportsA. Regulates the use of credit reportsB. Requires deletion of out-of-date informationC. Gives consumers access to their files and the right to correct any misinformation D. Places limits on who can obtain a report
104. Credit reports can be obtained for all except: A. In response to a court orderB. In connection with a credit transaction C. For underwriting of insuranceE. For some legitimate business needD. Inquiry by a neighbor
105. Information about a personal bankruptcy may be reported in your credit file for D. 10 years
106. If you are denied credit, E. You are entitled to a free copy of your credit report
107. The finance charge for credit includes all except: A. Interest costsB. Services chargesC. Credit-related insurance premiumsD. Appraisal feesE. Amount borrowed
108. The APR is the percentage cost of credit on a(n) ______________ basis. D. Annual
109. If a loan is being paid in installments instead of all at the end of the loan period, the actual rate of interest will be C. Higher than the stated rate
110. Sam is comparing the costs of two loans. One is due in one year and the other is due in four years. Both have the same stated rate of interest. Which of the following is true? A. The principal paid for the one year loan will be lower than the principal paid for the four year loan. B. The principal paid for the one year loan will be higher than the principal paid for the four year loan. D. The interest paid for the one year loan will be higher than the interest paid for the four year loan.E. The interest and principal payments cannot be compared for the two loans.C. The interest paid for the one year loan will be lower than the interest paid for the four year loan.
111. The minimum monthly payment on a credit card is D. The smallest amount you can pay and remain a borrower in good standing
112. If you double the monthly payment for a credit card, the loan will be paid off in B. Less than half the time
113. Which of the following acts sets procedures for promptly correcting billing mistakes, refusing to make credit card or revolving credit payments on defective goods, and promptly crediting accounts? A. Experian Act of 1982B. Fair Credit Reporting Act of 1971 C. Bills and Disputes Act of 1963D. Equifax Act of 1979E. Fair Credit Billing Act of 1975
114. If you think a bill is wrong or you want more information about the bill, then you and your creditor should follow all of the steps below except A. You should notify your creditor in writing.B. You should pay the portion of the bill that is not in question.C. Your creditor must acknowledge your letter within 30 days.D. Your creditor must adjust your account or tell you why the bill is correct within two billing cycles. E. Your creditor must reimburse you for your time spent researching the error.
115. Which of the following is often the first sign of a stolen identity? A. You receive bills for a credit card account you never openedB. You see charges to your account for things you purchasedC. You receive a phone call from the thiefD. You receive a duplicate credit card from your credit card company E. All of these are typical signs of a stolen identity
116. If you think your identity has been stolen, which of the following actions does the Federal Trade Commission recommend you take immediately? A. Report it to your neighbor B. Call 911C. Contact your local bank E. All of these steps should be taken immediatelyD. File a police report
117. Which of the following items should be shredded to protect yourself from identity theft? A. MagazinesC. EnvelopesD. Privacy notices that are received with credit card statements E. Newspaper adsB. Papers with personal information
118. Carrie thought she misplaced her checkbook for a few days. When she found it, she noticed that two checks, her cash and her debit card were missing. She immediately thought about the increase in identity theft in her area and decided to take some action. She should take all of the following steps except A. Stop payment on the missing checks.B. Cancel her debit card.C. Get a new debit card with a new personal identification number (PIN).D. Close her bank account and open a new one.E. All of the steps above are appropriate to take if she suspects identity theft.
119. Who is responsible for a loan repayment? A. The store granting credit B. The credit card company C. The governmentE. The bankD. The cosigner
120. All of the following are consumer credit protection laws except A. Truth in Lending and Consumer Leasing ActB. Equal Credit Opportunity ActC. Fair Credit Billing ActE. Consumer Credit Reporting Reform ActD. Credit Lawsuit Act
121. If you want to file a complaint against a bank, you: D. Do not need to have an account at the bank
122. According to the Fair Credit Billing Act, if a creditor fails to follow the rules that apply to correcting any billing errors, you have the right to sue for B. Actual damages plus twice the amount of any finance charges
123. All of the following are signs of financial trouble except: A. You use savings to pay for necessities such as food and utilities. B. You receive second and third payment due notices from creditors.C. You exceed the credit limits on your credit cards.E. The total balance on your credit cards increases every month.D. You pay your credit card bills in full each period.
124. The Consumer Credit Counseling Service A. Aids families with serious debt problems by helping them to manage their money better and set up a realistic budget
125. Personal bankruptcy can be filed under which section(s) of the U.S. bankruptcy code? A. Chapter 7B. Chapter 11C. Chapter 13D. A and C are correct
126. Under Chapter 7 o f the U. S. Bankruptcy code, C. Certain assets receive some protection
127. Following the signing of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, debtors seeking to erase all debts will have to wait ___ years from their last bankruptcy before they can file again. D. Eight
128. Rachel Efron went to the ATM to draw $200 cash with her debit card. She inadvertently pulled out her credit card instead, not realizing the expenses for cash advances. If her credit card company charges a cash advance fee of 3 percent and interest at 24 percent APR, what are the total fees she will pay for her mistake? D. $10Similar to Figure it Out! On page 145Cash advance fee = 3% ×$200 = $6Interest for one month = 24% APR × $200/12 months = 48/12 = $4 Total cost for one month = $6 + $4 = $10

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