Foundations in Personal Finance Chapter 4 Test Study Questions

What factors determine a FICO score? Getting a personal loan from the bank, using credit cards and taking out a mortgage on a house.
The best ways to get out of debt are . . . Quit borrowing money, get a part-time job or work overtime, sell something.
True or False: It is impossible to rent a car, buy a plane ticket or purchase something online with a debit card. False
These three factors affect your credit score: Type of debt, new debt, and duration of debt.
True or False? Under FRCA, consumers are allowed to receive one free credit report every five years. False
What are the steps for the Drive Free method of purchasing a car? 1) Plan your purchase in advance using the sinking fund method of saving; 2) Place your savings in a mutual fund so that your money can make more money; 3) Start with an inexpensive car and gradually move up in car value as your savings increase.
What is the most cost-effective option for purchasing a home? The most ideal way to buy a house is with 100% down; if that is not an option, you should get no more than a 15-year, fixed rate mortgage with a down payment of at least 10%.
True or False: Every extra dollar you get should be thrown at the largest debt first when using the snowball method of getting out of debt. False
What is paycheck garnishment? A court-ordered attachment that allows a lender to take monies owed directly from a borrower’s paycheck.
How can the use of a credit card for purchases instead of cash change one’s spending behavior? Studies show that consumers typically spend more when using credit as opposed to cash purchases.
The following statements are MYTHS: 1) The lottery and other forms of gambling will make you rich; 2) You have “arrived” financially once you get approved for a credit card; 3) Debt is a tool and should be used to create prosperity.
If you do not have a FICO score, what factors will determine whether or not you qualify for a mortgage? History of rental and utility payments and the amount of your down payment and employment history.
A credit score is intended to measure . . . the risk of your not repaying debt.
Your identity may have been stolen if . . . you receive a call from a collection agency about a debt you didn’t incur, and/or your bank and billing statements don’t arrive on time, and/or your credit report shows accounts you didn’t open.
Individual account information is removed from your credit report seven years after the last activity on the account, except for chapter 7 bankruptcy, which stays on your account for . . . 10 years
True or False: You must establish credit in order to buy a house. False
True or False: If your a victim of identity theft, you are only responsible for paying back half the debt. False
True or False: There are three credit bureaus: Experian, TransUnion and Equifax. True
True or False: You can and should obtain a free copy of your credit report annually in order to check for any suspicious activity. True
True or False: You need to have a credit card to rent a car or check into a hotel. False
True or False: It is okay to use a credit card if you pay it off every month. False
True or False: The Federal Trade Commission (FTC) is one of many U.S. federal agencies that regulate the consumer credit system and enforce the laws related to it. True
True or False: Under the Fair Credit Reporting Act ( FCRA), any person or organization may check a person’s credit information without having a legitimate need. False
True or False: Teens are a huge target of credit card companies today. True
True or False: Co-signing a loan is a good way to help a friend or relative. False
debt snowball Preferred method of debt repayment; includes a list off all debts organized from smallest to largest balance; minimum payments are made to all debts except for the smallest, which attacked with the largest possible payments
credit report A detailed report of an individuals credit history
loan term time frame that a loan agreement is in force, and before or at the end of which the loan should either be repaid or renegotiated
annual percentage rate (APR) cost of borrowing money on an annual basis; takes into account the interest rate and other related fees on a loan
depreciation a decrease or loss in value
annual fee a yearly fee that’s charged by the credit card company for the convenience of the credit card
introductory rate an interest rate charged to a customer during the early stages of a loan; the rate often goes up after a specified period of time
lease a long term rental agreement on a car; a form of secured long-term debt
upside down when a person owes more on an item (like a car or house) than it is worth, the person is said to be __________________ on the loan
credit card a card issued by a bank that allows users to finance a purchase
What is the difference between a secured and unsecured loan? An unsecured loan is given to borrowers based on their financial resources or ability to repay the loan; a secured loan is usually needed when borrowing large amounts of money. The loan is “secured” with collateral (an asset that can be taken if not paid).
Why is an adjustable rate mortgage (ARM) is a bad idea? An ARM is a mortgage with an interest rate that changes based on market conditions. They are not recommended because there is an increased risk of losing your home if your rate adjusts higher or you lose your job and your payment becomes too much for you to afford.
Why is financing a car a bad idea? Spreading the purchase of a car over four or five years hinders your ability to pay off debt or save money during that time; you will be paying interest in addition to the purchase price; and the car depreciates quickly, which means you may end up owing more on the car than it’s worth.
What are the negative consequences of debt? What effect can it have on your future? Constantly owing money to others prevents you from paying yourself through saving and investing, making it difficult or even impossible to build wealth over time.
What are some things you can do to protect your personal information? Use a paper shredder and destroy credit card offers and other documents with personal information, check your credit report annually, create strong passwords and keep them confidential, purchase identity theft protection, and never give out your social security number unless absolutely necessary.
How does the debt snowball work? Put all your debts in order from smallest to largest; pay minimum payments on all your debts except for the smallest one; attack the smallest debt with intensity until it is paid off; apply the paid-off debt payment to the next debt on the list, continuing to “snowball” payments toward each larger debt.
What should you do if you think you are a victim of identity theft? Obtain a copy of your credit report and look for any suspicious activity; place a fraud victim-alert on your credit bureau report; if your wallet is stolen, cancel all cards immediately, get replacements, and place a “stop payment” on all stolen or lost cards; file a police report and keep a copy of the report for your personal records; report any suspicious charges and accounts to the appropriate credit issuers and credit bureaus immediately and cancel the accounts.

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