Deck 7: Choosing a Source of Credit: the Costs of Credit Alternatives

Question 1

Buying on credit is almost always cheaper than paying cash.

Answer 1

False

Question 2

With the add-on interest method,interest is calculated on the full amount of the original principal.

Answer 2

True

Question 3

After you have selected a product,you should buy it immediately before the store runs out of it.

Answer 3

False

Question 4

You can often obtain medium-priced loans from commercial banks,federal savings banks,and credit unions.

Question 5

When more than one payment is made on a simple interest loan,the method of computing interest is known as the declining balance method.

Question 6

The fairest method of calculating interest on a credit card is the average daily balance method.

Question 7

The finance charge is the total dollar amount you pay to use credit.

Question 8

The annual percentage rate is the percentage cost (or relative cost)of credit on a yearly basis.

Question 9

The most basic method of calculating interest is the compound interest calculation.

Question 10

If you want to minimize your borrowing costs,you may need to accept conditions that reduce the risk for your lender.

Question 11

If you want to take advantage of the interest-free period on your credit card,you must pay your bill in full every month.

Question 12

The two most common methods of calculating interest are compound and simple interest formulas.

Question 13

Two key concepts that you should remember when borrowing are the finance charge and the annual percentage rate.

Question 14

Inflation increases the purchasing power of money.

Question 15

If creditors give you no credit for payments made during the billing period,it is called the adjusted balance method.

Question 16

The Truth in Lending law does not set the interest rates or tell the creditor how to make interest calculations.

Question 17

If you pledge property or other assets as collateral,you will probably pay a higher interest rate on your loan than you would without collateral.

Question 18

You can deduct the interest paid on consumer loans on your income tax return.

Question 19

You may be able to borrow at a lower interest rate if you accept a shorter-term loan.

Question 20

Parents or family members are often the source of the least expensive loans.

Question 21

Under the rule of 78s,loans for a year or less usually do not allow for a finance charge rebate.

Question 22

Chapter 7 bankruptcy is also known as a straight bankruptcy.

Question 23

The consumer credit laws require that an advance notice be given before repossessing a car.

Question 24

"Keeping up with the Joneses" is one of the frequent reasons for indebtedness.

Question 25

Banks often encourage you to make the maximum payment,referred to as the "cardholder amount due."

Question 26

The Consumer Credit Counseling Service (CCCS)is a lending institution that will refinance all of your existing debts for you.

Question 27

In addition to the Consumer Credit Counseling Service (CCCS),alternative counseling services (universities,credit unions,military bases,and state and federal housing authorities)sometimes provide nonprofit counseling services.

Question 28

Anyone who is overburdened by credit obligations can phone,write,or visit a Consumer Credit Counseling Service (CCCS)office.

Question 29

Overindulgence of children is a frequent reason for indebtedness.

Question 30

Both Chapter 7 and Chapter 13 bankruptcy are considered an easy way out of debt.

Question 31

There is never a charge for a debt repayment plan administered by a Consumer Credit Counseling Service (CCCS)office.

Question 32

For some debtors,bankruptcy had become an acceptable tool of credit management based on the number of declared bankruptcies in 2005.

Question 33

The Consumer Credit Counseling Service (CCCS)counseling is usually free.

Question 34

The Fair Debt Collection Practices Act regulates the ways debt collection agencies do business.

Question 35

An increasing number of bankruptcy filers are well-educated,middle-class people.

Question 36

You have two choices in declaring personal bankruptcy: Chapter 7 and Chapter 13 bankruptcy.

Question 37

The most commonly purchased type of credit insurance is credit life insurance.

Question 38

Credit life insurance provides for the repayment of the loan if the borrower dies.

Question 39

A person filing for relief under the bankruptcy code is called bankrupt,not a debtor.

Question 40

The rule of 78s formula dictates that you pay less interest at the beginning of a loan.

Question 41

Your bank card has an APR of 21% and there is a 3% fee for cash advances.The bank starts charging interest on cash advances immediately.You get a cash advance of $500 on the first day of the month.You get your credit card bill at the end of the month.What is the approximate total finance charge you will pay on this cash advance for the month? Assume each month has 30 days.

A)$15
B)$21
C)$24
D)$0
E)$3

Question 42

You can often obtain medium-priced loans from:

A)parents or family members.
B)American Express.
C)Diners Club.
D)finance companies.
E)credit unions and federal savings banks.

Question 43

In a straight bankruptcy,many,but not all,debts are forgiven.

Question 44

A "float" period can be defined as:

A)the interest charged during one billing period.
B)the principal balance due on a loan.
C)a home equity loan.
D)a certain number of days during which no interest is charged.
E)a lump-sum loan from a credit union.

Question 45

The most expensive loans are available from:

A)parents.
B)friends.
C)federal savings banks.
D)finance companies.
E)credit unions.

Question 46

The number of credit union members has been:

A)growing steadily.
B)declining gradually.
C)static.
D)restricted by the Tax Reform Act of 1986.
E)restricted by state laws.

Question 47

By evaluating your credit options,you may:

A)reduce your finance charges.
B)reconsider your decision to borrow money.
C)discover a less expensive type of loan.
D)find a lender that charges a lower interest rate.
E)All of these

Question 48

Which one of the following financing methods usually provides a "float" period?

A)Installment loan
B)Credit card
C)Lump-sum loan
D)Home equity line of credit
E)Auto loan

Question 49

Which one of the following is often the source of the least expensive loan?

A)Parents or family members
B)Banks
C)Savings and loan associations
D)Finance companies
E)Loan sharks

Question 50

You have the right to file your own bankruptcy case and to represent yourself at all court hearings.

Question 51

In a Chapter 13 bankruptcy,the debtor normally keeps all or most of his or her property.

Question 52

If your credit company invites you to skip a monthly payment without a penalty,they are doing you a favor.

Question 53

If you declare a Chapter 7 bankruptcy,you do not have to pay alimony,child support,or educational loans.

Question 54

There are no costs involved in filing for a bankruptcy.

Question 55

If creditors add finance charges after subtracting payments made during the billing period,then this is called the:

A)APR method.
B)discount method.
C)previous balance method.
D)adjusted balance method.
E)average daily balance method.

Question 56

One of the drawbacks of borrowing from parents or family members is that such loans:

A)tend to be more expensive than other types of loans.
B)must be interest-free.
C)can complicate family relationships.
D)are limited to oral agreements.
E)are legally prohibited from establishing repayment dates and terms.

Question 57

If you borrow $150 at 10 percent interest,how much will you repay in one lump-sum at the end of one year using simple interest?

A)$100.
B)$150.
C)$165.
D)$115.
E)$155.

Question 58

The total dollar amount you pay to use credit is called the:

A)finance charge.
B)annual percentage rate.
C)price of the good/service purchased.
D)amortized rebate.
E)interest rate.

Question 59

Credit unions offer loans with a single repayment schedule to non-members.

Question 60

Which federal law,passed in 1969,requires creditors to state the cost of borrowing as a dollar amount?

A)Fair Credit Reporting Act
B)Fair Credit Billing Act
C)Equal Credit Opportunity Act
D)Fair Debt Collection Practices Act
E)Truth in Lending Law

Question 61

Which type of credit insurance repays your loan in the event of a loss of income due to illness or injury?

A)Credit life insurance
B)Credit accident and health insurance
C)Credit property insurance
D)Credit casualty insurance
E)Credit inability insurance

Question 62

Which formula is used by creditors and involves tables based on a mathematical formula to determine how much interest you have paid at any point in a loan?

A)Simple interest formula
B)Compound interest formula
C)Multiple compound interest formula
D)The rule of 78s
E)The rule of 72s

Question 63

This morning,you received a phone call alleging you owe a debt.If you dispute this debt,you must write to the debt collector and request verification of the obligation.How many days do you have to send this letter?

A)5
B)10
C)15
D)20
E)30

Question 64

Which one of the following is not a danger signal of potential debt problems?

A)Paying only the minimum balance due each month
B)Receiving second or third payment notices from creditors
C)Using savings to pay routine bills
D)Repaying loans faster than required
E)Depending on overtime and moonlighting to meet everyday expenses

Question 65

Which one of the following is a local,nonprofit organization that provides debt counseling services for families and individuals with serious financial problems?

A)Credit bureau
B)Chamber of Commerce
C)Consumer Credit Counseling Service
D)Internal Revenue Service
E)Better Business Bureau

Question 66

If you find that you cannot make your payments,the first thing you should do is:

A)skip town.
B)declare personal bankruptcy.
C)borrow from a loan shark to make the payment.
D)let the balance owed go to a collection agency.
E)contact your creditors and try to work out a modified payment plan with them.

Question 67

Which of the following financially supports the Consumer Credit Counseling Service with contributions?

A)National Foundation for Consumer Credit
B)Community-minded organizations and individuals
C)Federal Reserve Banks
D)The Federal Home Loan Bank
E)Taxpayers

Question 68

If you receive a phone call from a debt collector,s/he must send you a written notice within ________ days.

A)5
B)10
C)15
D)20
E)30

Question 69

According to a consumer affairs columnist,the nation's number one family financial problem is:

A)poor money management.
B)overindebtedness.
C)medical costs.
D)insurance costs.
E)unemployment.

Question 70

If you receive a phone call from a debt collector:

A)hang up on him or her.
B)expect follow-up written communication within five days.
C)call the police.
D)threaten the collector with a law suit.
E)contact your attorney immediately.

Question 71

If you default on your automobile loan,most automobile financing agreements:

A)require an advance notice be sent to you before your car is repossessed.
B)permit your creditor to repossess your car at any time without notice.
C)permit the federal consumer credit laws to protect your car from being repossessed.
D)allow you to not pay the full balance due on your automobile loan.
E)allow you to pay fifty percent of the balance due on your automobile loan.

Question 72

What is the most common reason why consumers are unable to pay their bills on time?

A)Medical expenses
B)Defective goods and services
C)Excessive use of credit
D)Fraudulent use of credit
E)Consumer fraud

Question 73

If creditors give you no credit for payments made during the billing period,then this is called the:

A)APR method.
B)discount method.
C)previous balance method.
D)adjusted balance method.
E)average daily balance method.

Question 74

A few months ago,you sent a certified letter to a debt collector and requested verification of a debt the collector says you owe.You know the letter was received by the collector but you have not received a response to your request.Today,you received a letter threatening court action.What should you do?

A)Pay the debt and protect your credit rating
B)Insist that communications about the debt cease
C)Renegotiate payment terms with the creditor
D)Sue the collection agency
E)Pay half the outstanding balance

Question 75

The Federal Trade Commission enforces the:

A)Truth in Credit Act.
B)Equal Credit Act.
C)Fair Credit Receiving Act.
D)Fair Debt Collection Practices Act.
E)Fair Credit Payment Act.

Question 76

Excessive indebtedness can result in:

A)heavy drinking.
B)neglect of children.
C)marital difficulties.
D)drug abuse.
E)All of these

Question 77

The Consumer Credit Counseling Service is affiliated with the:

A)National Foundation for Consumer Credit.
B)Federal Trade Commission.
C)Better Business Bureau.
D)U)S.Consumer Protection Agency.
E)Federal Reserve Banks.

Question 78

Which of the following is/are a signal of potential debt problems?

A)Paying only the minimum balance on credit card bills each month
B)Missing payments or paying late
C)Using savings to pay routine bills
D)Depending on overtime to meet everyday expenses
E)All of these are danger signals

Question 79

Which formula dictates that you pay more interest at the beginning of a loan and pay less and less interest as the debt is reduced?

A)Adjusted balance method
B)Previous balance method
C)The rule of 78s
D)Average daily balance
E)Accelerated balance

Question 80

The most commonly purchased type of credit insurance is:

A)credit life insurance.
B)credit accident insurance.
C)credit health insurance.
D)credit property insurance.
E)credit disability insurance.