Chapter 4 “Using Credit Cards Personal Finance

Taking a cash advance on your credit card for daily living expenses may not be a wise financial decision because interest begins on the cash advance balance amount immediately. TRUE
Using your credit cards for cash advances is a relatively cheap way to borrow money because you usually do not start paying interest until the next billing period. FALSE
The average daily balance method calculates interest payments based on the ending balance of the previous period. FALSE
Due to compounding frequency, the actual interest rate or APY you pay is higher than the advertised interest rate or APR. TRUE
For the average consumer there is usually a set limit on open or revolving credit accounts. TRUE
Credit purchases made for personal needs like home mortgages or car loans are referred to as revolving credit. FALSE
Financially savvy people take advantage of the grace period on major purchases and pay the balance off in full; thus avoiding finance charges. TRUE
There is no cash advance fee when you use your credit card at an ATM machine. FALSE
Over 70% of the 25 biggest credit card issuers do not charge annual fees. TRUE
The percentage of the credit card sale the retailer owes to the credit card company is the merchant’s discount fee.
Typically, the credit card issuer allows you a grace period, which means both B and C apply
Which of the following apply to getting a cash advance with a credit card? All of the above.
Which method sums the outstanding balances owed each day during the billing period and divides by the number of days in the period? average daily balance
Credit cards are a form of ________ credit. both A and B above
Kendra always thought the grace period feature of her credit card was such a wonderful idea. Why, in essence, she is getting her purchases interest free during this time. After taking Dr. Art Keown’s Personal Finance course she learned a startling truth about grace periods. Most banks eliminate their grace period on new purchases if you don’t pay your balance in full.
The Truth In Lending Act requires that all consumer credit agreements disclose the ________ in bold print? Annual Percentage Rate (APR)
When you use a credit card at a store, the store is generally charged a fee ranging from 1.5% to 5%. What is this fee called? merchant discount fee
Changes to your credit card policies and rates are usually announced via “________”; which are notices enclosed with your bill. bill stuffers
One of the ugliest secrets about using your credit card for a cash advance is that ________. all of the above apply to cash advances
Alan has a credit limit and a balance of $3,000 on his Visa card. His car broke down, he charged the $500 repairs to his Visa which he knows put him over his credit limit for the month. His payment is due on the 20th so he made sure that he had his $750 payment to the post office on the 20th. Most likely, what penalties or fees, if any, will he incur? He will likely incur the penalty APR, as well as an over-the-limit fee and a late fee–because VISA has to receive his payment in its office by the 20th, not have it postmarked by the 20th.
Sometimes retailers will give you up to a 5% discount if you pay cash for their products instead of using your credit card. Why? They are saving on the Merchants Discount Fee so they pass the savings on to you.
When you withdraw cash from an ATM using your credit card You begin paying interest immediately.
Which of the following is not a disadvantage of credit cards? They allow the consumer the ability to rent cars and make online reservations.
Which of the following is not an advantage of credit cards? the finance charge that accrues on the account if not paid off in full each month
Research has determined that undergraduate college students tend to behave in similar manners with regards to their credit card usage. As noted in Chapter 6, which of the following behaviors are indicative of undergraduate students’ credit card behaviors? All of the above are typical behaviors exhibited by undergraduates with regards to their credit cards.
A convenience user of credit cards is someone who pays off the credit card balance each month. TRUE
A single-purpose card is a credit card that can be used only at a specific company. TRUE
A secured credit card is a good tool to help establish credit. TRUE
Only Prestige or Premium credit cards offer a grace period. FALSE
For the convenience credit card user the interest rate is ________. irrelevant
Nancy tried to use her Macy’s credit card at K-Mart but was unsuccessful. Why? Her Macy’s credit card is a single purpose card and can only be used at Macy’s.
A convenience user doesn’t really care what the APY is on their credit cards. TRUE
To a credit user, the perks and benefits are the most important determinant when choosing a credit card. FALSE
Which of the following are important to convenience users of credit cards? all of the above
The choice of a credit card is a matter of personal credit card philosophy. If you are a credit user, the most important decision factor is the card’s APR on the unpaid balance.
A(n) ________ card is a credit card that does not offer revolving credit and requires full payment of the balance at the end of each month. T&E
Which of the following is not a single-purpose credit card? Bank of America Visa
What is the main distinguishing feature(s) for T&E cards? both A and B above
Credit cards issued in conjunction with particular charities or organizations, like the Sierra Club or the Humane Society, that send a portion of their annual fee or percentage of their purchases back to the sponsoring organization are known as affinity cards.
The major differences between a premium prestige card and a regular credit card include both B and C above
Which of the following statements is most correct regarding a secured credit card? It is useful to someone who has bad credit or no credit established yet.
One of the more important factors in determining your credit score is the length of your credit history. TRUE
It is against the law for your potential employer to use your credit score for employment considerations. FALSE
Your credit score may affect how much you pay for Auto Insurance. TRUE
Getting a credit card while a college student is an excellent idea becauseA) it helps you learn about credit.B) you can shop online and make reservations.C) it works well for emergencies.D) when used correctly it allows you to build up a solid credit history. E) all of the above
One of the following lists constitutes the five Cs of credit. Select the correct one. character, capacity, capital, collateral, conditions
A company that gathers and sells consumers’ financial history to creditors is a credit bureau.
A credit bureau is a private organization that maintains credit information on individuals, which it allows subscribers to access for a fee. TRUE
________ is not information generally found in your credit report. College attended, grades, etc.
By law you have certain rights in connection with the credit bureau. They are all of the above
Your credit score affects All of the above are correct answers.
Credit scoring is not a flawless method of determining creditworthiness.
A low FICO score can cost you quite a bit when you get a mortgage loan.
The process of mathematically evaluating your creditworthiness to obtain credit is called credit scoring.
Which of the five Cs of credit would your actual home be in relation to your mortage? collateral
Roxanne has always maintained an excellent credit rating over the years. She has an annual income of $23,000, has lived at her current residence three years, and has worked at the same job for eight years. Susan works in a clerical position, has two credit cards and maintains two bank accounts. Which one of the following items of evaluation would Roxanne score the highest on? employment history
What rights would a college friend of yours have whose credit card application was denied? All of the above are correct answers.
Which of the following is not a typical potential problem that can occur in a credit bureau file? The wrong credit bureau handles your case.
Your credit card was stolen, and you did not realize that it was stolen until you received your most recent billing statement. You contacted the credit card company immediately after you read your statement. Fraudulent charges were as follows: $500 for a VCR, $400 for a new set of tires, $100 cash withdrawal, and $25 in interest charges on the above items. You did not carry credit card insurance. How much is your potential maximum liability? $50.00
The highest FICO a consumer can achieve is ________. 850
Consider the “Five Cs of Credit.” The category that considers the size of your investment holding or portfolio is capital.
Consider the “Five Cs of Credit.” The category that considers your current income level and current borrowing level is capacity.
Which of the following regarding credit application analysis is incorrect? None of the above statements is incorrect; all of the above are true statements.
How long do you have to begin an investigation into a billing problem under the Fair Credit Billing Act? 60 days
Credit card insurance is usually unnecessary since your liability on credit card losses is limited by law to $50
Mary is 38 years old and many of her friends have gotten into trouble using their credit cards to buy things they can’t afford. She feels lucky that her grandmother told her that credit is dangerous and that she should always pay cash for everything. So far, Mary has never had credit in her name and even paid cash for her car. From a personal finance perspective, what advice would you give to Mary? Both C and D would be good advice for Mary.
One of the five C’s of credit is capacity. Most likely, what information would potential creditors consider in evaluating your capacity? Both C and D are correct answers.
Angela noticed a list of creditors at the bottom of her credit report. Some of the inquiries were voluntary and some were involuntary. What is the difference between the two? Voluntary inquiries are due to your own credit requests; while involuntary inquiries are typically by creditors who seek to offer you a preapproved credit offer.
Josh was sued by his former business partner. He lost the case and has to pay his former partner $10,000. He has not yet done so and is refusing to do so. Josh is applying for a mortgage for a new home. Should he be worried about the lawsuit impacting his mortgage application? Absolutely, this kind of information is contained on one’s credit report.
Leon is 28 years old and pays cash for everything he buys. He has never had credit in his name and never missed or been late on any bills he has ever had. He recently went online to check what his credit score was. Where do you think his credit score would be? None of the above.
Ngoc likes to go shopping. Every time he goes to a new store, he fills out a credit card application for a store card so he can get a 15% discount on his purchases that day. Yesterday, he was trying to buy a new car but he was turned down for credit by the dealer. Ngoc can’t understand why this happened since he thought he had pretty good credit. If you looked at his credit report, what most likely is the reason he was denied credit? He has to many recent inquiries on his credit report.
Tawnya currently has six bank credit cards, five retailer credit cards, and a T&E card left over from when she was in sales. She wants to make sure her credit score is as high as it can be. What advice would you give her to improve her credit score? Cancel eight of the newest cards she has, keep at least one bank card.
The Fair and Accurate Credit Transactions Act (FACT) allows everyone to a free copy of their credit report every year. Why is it a good idea to check your credit report every year? All of the above are good reasons.
Non-profit Credit Counselors should be avoided due to their high fees. FALSE
People with high credit card balances still need to invest money on a regular basis. FALSE
Only a Credit Repair company can remove inaccurate data from your credit report. FALSE
Wally currently has a balance of $14,500 on his credit cards and he is having a hard time making the minimum payments on them. He has missed several payments and is now paying the default APR of 29.99%. He and his wife own a nice home with $40,000 in equity. They have $7,500 in a certificate of deposit with a 4% APR. He has come to you in tears asking for advice. What would you tell him to do? All of the above.
Having completed a personal finance class, you are now ready to give some advice to your free-spending friends. Which one is unwise?A) Reduce the credit card balance.B) Resolve any billing errors.D) Look for trouble signs in credit card spending.E) Control your spending through discipline. Quit using credit cards altogether.
Which of the following is the best strategy for controlling and managing your credit cards and open debt? All are good strategies.
When you find you cannot pay your credit card bills you must take action! Which option is advisable? All of the above.

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