Deck 8: Managing Your Credit

Question 1

Which of the following personal information should not be asked on a credit card application?

A) Stocks and bonds owned
B) Race or ethnic group
C) Employment history
D) Expenses and commitments

Answer 1

Race or ethnic group

Question 2

One advantage of credit cards is that you can receive free financing if you pay off your balance each month.

Answer 2

True

Question 3

Describe the advantages and disadvantages of credit cards.

Answer 3

Advantages: take advantage of discounts and sales when short on cash; allows for an extended payment period; establish credit history; security (safer than cash); convenience.
Disadvantages: high interest rate if the bill is not paid in full; may also be more difficult to fit the payments into a tight budget; spending may increase due to a false sense of security; too much credit may mean too much debt with the possibility of bankruptcy.

Question 4

Because of the short-term nature of credit card lending, the condition of the economy is not considered.

Question 5

One advantage of using a credit card is that you receive a list of your purchases, which enables you to keep track of your spending.

Question 6

One of the disadvantages of credit cards is that they allow you to spend beyond your means.

Question 7

There is no cost to the merchant when you use a MasterCard or Visa credit card.

Question 8

Credit cards can eliminate the need for carrying large amounts of cash.

Question 9

Credit cards are generally used for such purchases as

A) cars.
B) homes.
C) meals, clothing, and groceries.
D) stocks.

Question 10

When applying for a credit card, the amount of savings that you have will not be a factor in the credit card company's decision.

Question 11

It is not difficult to find a credit card company that is eager to extend credit to you.

Question 12

Advantages of using credit include the ability to make purchases without cash and the convenience of not carrying checks.

Question 13

Financial institutions issuing MasterCard and Visa credit cards typically charge a high rate of interest on the credit extended.

Question 14

Credit cards have all of the following advantages, except

A) they allow you to borrow cash interest free for 60 days.
B) you can make purchases without carrying cash.
C) you obtain free financing until the bill is due.
D) you receive an itemized monthly statement.

Question 15

The easiest way to establish credit is to

A) purchase a new car with a car loan.
B) purchase a house with a mortgage.
C) obtain a credit card.
D) pay cash for all your purchases.

Question 16

In applying for a credit card, the potential creditor will look at your ________ to determine if you have funds to cover future debt payments if necessary.

Question 17

When using credit cards, there is no way to keep track of individual expenditures.

Question 18

Credit cards are commonly used to pay for items such as investments, home down payments, or a new car.

Question 19

When you apply for a credit card, the potential creditor will look at which of the following as a source of future debt payments if necessary?

A) Cash outflows
B) Credit history
C) Potential inheritances
D) Balances in savings accounts

Question 20

Which of the following personal information would not be asked on a credit card application?

A) Cash inflows
B) Country of birth
C) Capital and collateral
D) Cash outflows

Question 21

A credit card issued by a financial institution and secured by funds deposited by the cardholder is a

A) prepaid card.
B) protected card.
C) secured card.
D) proprietary card.

Question 22

Credit limits may be as high as $10,000 for those credit card holders who have an exceptional credit history.

Question 23

The interest charged on purchases and cash advances on credit cards is computed in the same way.

Question 24

MasterCard and Visa credit cards are not accepted by gas stations such as Shell, which issue their own credit cards.

Question 25

Some credit cards offer card users cash rewards if they exceed a certain spending level each month.

Question 26

Cash advances on credit cards normally cost you interest from the date of the advance and also a transaction fee of 1 to 2%.

Question 27

Credit cards with tiered interest rates charge cardholders who

A) carry large balances a lower rate.
B) pay off their balance monthly a higher rate.
C) make early payments a higher rate.
D) carry large balances a higher rate.

Question 28

Some credit card companies will waive the annual fee on a credit card if

A) you use the card infrequently.
B) you carry a large balance from month to month.
C) you pay your bills in a timely manner.
D) Credit card companies never waive annual fees.

Question 29

Credit has its advantages and disadvantages. Which of the following is false?

A) Credit cards should be used with discipline.
B) You should spend up to the limit on all your credit cards.
C) Cash advances are available through a credit card.
D) Bankruptcy is the worst-case scenario from poor credit management.

Question 30

Prestige cards may charge higher annual fees, but offer extra benefits such as access to private jet programs and concierge service at hotels.

Question 31

MasterCard, Visa, and American Express credit cards all allow you to pay only a portion of your amount due and finance the remainder from month to month.

Question 32

Creditors are willing to extend credit when the economy is weak to stimulate purchases.

Question 33

A credit card whose interest rate changes as a specific market interest rate changes is said to have a

A) variable rate.
B) fixed rate.
C) constant rate.
D) tiered rate.

Question 34

If a credit card has a provision allowing you to make purchases beyond the stated credit limit for a fee, it is referred to as

A) a purchase protection plan.
B) overlimit protection.
C) a grace period.
D) a first forgiveness provision.

Question 35

Credit card companies offer many incentives, such as airline miles and bonuses to get you to use their cards.

Question 36

An alternative to MasterCard, Visa, and American Express credit cards is a retail or proprietary card that is issued for use at a specific retail establishment.

Question 37

In comparing credit cards to other forms of credit, which of the following is true?

A) Credit cards are generally the most expensive form of credit.
B) You should invest funds before paying off your credit cards.
C) It is prudent to borrow from some cards to pay off other credit cards.
D) All of the above.

Question 38

One disadvantage of a proprietary credit card is that it limits your purchases to a single merchant.

Question 39

In comparing credit cards to other forms of credit, which of the following is false?

A) Credit cards are generally the most expensive form of credit.
B) You should pay the most expensive debt off first.
C) Credit cards can be viewed as a source of income.
D) A home equity loan can be used to consolidate credit card and other debt.

Question 40

If you pay your total credit card balance before the grace period, you normally are not charged any interest.

Question 41

The ________ is usually about 20 days after the credit card statement is closed.

Question 42

Which of the following statements is true about bank credit cards like VISA and MasterCard?

A) They are an excellent source of emergency funds for unexpected expenses.
B) Their interest rate is generally lower than a loan at a credit union.
C) Like home equity loans, the interest paid on credit cards is tax deductible.
D) Their interest rate is lower than home equity lines of credit.

Question 43

To properly manage your money, you should use a credit card only if you will have the cash to cover the payment when you receive your credit card statement.

Question 44

All of the following are disadvantages of proprietary credit cards, except

A) your purchases are limited to a single merchant per card.
B) you may need several credit cards.
C) you receive several billing statements.
D) it takes considerable time to process your application to allow you to begin obtaining credit.

Question 45

All of the following are true of the grace period on credit cards, except it

A) is usually about 20 days.
B) applies only to cash advances.
C) is the time in between the time the statement is "closed" and the time the payment is due.
D) amounts to free credit time.

Question 46

Which of the following is not correct about cash advances?

A) There is no grace period for cash advances.
B) The interest rate for cash advances is higher than for purchases.
C) A cash advance is like a loan.
D) A minimum transaction fee of 5% is usually charged.

Question 47

Which of the following is not true about annual fees on credit cards?

A) The fees are the same on all credit cards.
B) The fees may be high, amounting to several hundred dollars per year for some prestige cards.
C) Many cards do not have annual fees.
D) Some cards may waive the fees for individuals who pay their credit card bills in a timely manner.

Question 48

Which of the following is not true regarding cash advances on credit cards?

A) They are treated just like other charges on your credit card.
B) There is a charge for interest from the time you take the advance to the time you pay it off.
C) There is also a transaction fee on most cash advances.
D) The grace period does not apply to cash advances.

Question 49

Because credit card interest rates are usually quite high, you should pay off your credit card balances before you invest funds anywhere else.

Question 50

All of the following are true of prestige credit cards, except they

A) have a longer grace period than other cards.
B) may have substantially higher fees.
C) provide extra benefits to cardholders.
D) are given to individuals who have an exceptional credit standing.

Question 51

Even if you cannot pay your credit card bill in full, you should still attempt to pay as much as possible so that you can minimize finance charges.

Question 52

In comparing credit cards, which of the following is false?

A) Some cards are more widely accepted than others.
B) Some cards offer a teaser interest rate.
C) Some cards charge an annual fee and others do not.
D) Some cards allow you to always carry a balance from month-to-month with no interest.

Question 53

Which of the following is not true regarding payroll cards?

A) The employer can require employees to accept their wages on these cards.
B) Employers use payroll cards because they are cheaper than issuing payroll checks.
C) Fees are frequently associated with the cards.
D) The cards are convenient for employees who lack bank accounts.

Question 54

Cards that are purchased at retail establishments and loaded with funds that you provide are called ________.

Question 55

Which of the following statements is not true of prepaid cards?

A) Many fees may be associated with them.
B) Some prepaid cards can be used to withdraw cash from ATMs.
C) They can be useful in rebuilding an individual's credit record.
D) They offer less protection against theft than standard credit cards.

Question 56

Cash advances are

A) a good way to finance your purchases.
B) cheaper than a line of credit.
C) not shown on the credit card statement.
D) easy to obtain at an ATM.

Question 57

It is good financial planning to pay only the minimum credit card payment and thus maintain a balance since interest rates are low on credit cards.

Question 58

A credit card that can only be used in establishments of the issuer is called a(n) ________ credit card.

Question 59

Which of the following may not be a feature of some credit cards?

A) Credit limits
B) Annual fees
C) Grace periods
D) Cash advances

Question 60

When obtaining a credit card, you should try to obtain

A) the highest maximum limit possible.
B) a maximum limit high enough to cover necessary monthly purchases.
C) a maximum limit high enough to cover anything you might wish to purchase.
D) the lowest maximum limit possible to restrict your usage.

Question 61

Which of the following methods of calculating finance charges on credit cards is least favorable to the cardholder?

A) Previous balance method
B) Ending balance method
C) Average daily balance method
D) Adjusted balance method

Question 62

Which of the following is not a method for computing interest on credit cards?

A) Previous balance method
B) Average daily balance method
C) Present value of future payment method
D) Adjusted balance method

Question 63

Jill just borrowed $6,000 and will be charged a simple interest rate of 12 percent. Jill will pay ________ interest for borrowing the money on September 1 and repaying the money on December 31.

A) $240
B) $420
C) $720
D) $1,200

Question 64

As of November 14, Ben has an outstanding credit card balance of $1,100 from purchases made over the past month. The new billing period begins on November 15. Assume Ben's outstanding balance for the first 15 days of this new billing period (Nov. 15-29) is $1,100. Then on November 29, the financial institution receives a payment of $600 from Ben, reducing his balance to $500. This is the balance for the remaining 15 days. Using the previous balance method and a monthly interest rate of 2.5%, Ben's finance charge would be

A) $15.00.
B) $12.50.
C) $27.50.
D) $20.00.

Question 65

The previous balance method takes into account the time that you pay off any part of the outstanding balance.

Question 66

The ________ method charges interest based on the balance at the beginning of the new billing period.

A) new cycle
B) adjusted balance
C) average daily balance
D) previous balance

Question 67

As of November 14, Ben has an outstanding credit card balance of $1,100 from purchases made over the past month. The new billing period begins on November 15. Assume Ben's outstanding balance for the first 15 days of this new billing period (Nov. 15-29) is $1,100. Then on November 29, the financial institution receives a payment of $600 from Ben, reducing his balance to $500. This is the balance for the remaining 15 days. Using the adjusted balance method and a monthly interest rate of 2.5%, Ben's finance charge would be

A) $15.00.
B) $12.50.
C) $27.50.
D) $20.00.

Question 68

The annual percentage rate (APR) is useful because it allows you to easily compare financing costs among various possible creditors.

Question 69

APR means

A) actual percentage rate.
B) applied percentage rate.
C) annual percentage rate.
D) all-banks percentage rate.

Question 70

Which of the following is not a method by which financial institutions calculate finance charges on credit cards?

A) Previous balance method
B) Ending balance method
C) Average daily balance method
D) Adjusted balance method

Question 71

The interest you pay when using credit cards can have a major impact on the total amount you owe.

Question 72

If it takes you four years to pay off a loan, you have to pay the total annual interest four times.

Question 73

Of the three methods by which finance charges may be calculated on outstanding credit card balances, the least favorable to the cardholder is the ________ balance method.

Question 74

Ben owes $3500 on his credit card which bears an interest rate of 1.5% per month or 19.6% per year. Since Ben is maxed out on his credit limit, he is no longer charging anything to the card, but is only making the required monthly minimum payment which is 1.25% of the outstanding balance. How much of Ben's next payment will go towards paying off the outstanding balance?

A) $10 per month
B) $0; Ben is not even paying enough to pay the monthly interest charge.
C) $8.75
D) $443.75

Question 75

Finance charges apply only to balances that were not paid in full before their due date in the current billing period.

Question 76

If you find yourself with an excessive credit card balance, the first thing you should do is

A) borrow funds from family members.
B) quit school and get a job.
C) spend as little as possible.
D) file for personal bankruptcy.

Question 77

As of November 14, Ben has an outstanding credit card balance of $1,100 from purchases made over the past month. The new billing period begins on November 15. Assume Ben's outstanding balance for the first 15 days of this new billing period (Nov. 15-29) is $1,100. Then on November 29, the financial institution receives a payment of $600 from Ben, reducing his balance to $500. This is the balance for the remaining 15 days. Using the average daily balance method and a monthly interest rate of 2.5%, Ben's finance charge would be

A) $15.00.
B) $12.50.
C) $27.50.
D) $20.00.

Question 78

On a credit card, a finance charge is applied to

A) any purchase.
B) any balance not previously paid.
C) current purchases.
D) future purchases.

Question 79

The annual percentage rate (APR) is all of the following, except

A) a simple interest rate for borrowing money for a year.
B) it requires a complex formula to compute.
C) it includes fees such as application processing fees.
D) it allows easy comparison of financing costs among various creditors.

Question 80

When making payments on a credit card, the amount paid is first applied to ________ and the remainder is applied to ________.

A) late fees; interest
B) balance due; late fees
C) interest for the month; balance due
D) The entire payment is applied to the balance due.