Deck 6: Using Credit

Question 1

A retail charge card can be accessed by writing checks against demand deposit.

Answer 1

False

Question 2

The purpose of a credit investigation is to evaluate the kind of risk that you pose to the lender.

Answer 2

True

Question 3

Credit reports on individual borrowers are provided by credit card issuers.

Answer 3

False

Question 4

For a fee, local credit bureaus can provide credit information to members about prospective borrowers in their community.

Question 5

A credit card application requests information that is routinely used to predict creditworthiness.

Question 6

The most common method used by lenders to apply finance charges on credit cards is the average daily balance (ADB) method, including new purchases.

Question 7

Debit cards work like writing a check.

Question 8

Retail charge cards are cheaper than credit cards provided by financial institutions.

Question 9

Always paying cash helps in establishing a high level of creditworthiness.

Question 10

Paying a loan on schedule is one way to build a strong credit history.

Question 11

Credit should not be consistently used for purchasing nondurable goods.

Question 12

You should review your credit bureau file every year.

Question 13

Lenders use the guideline that a borrower's monthly repayment burden should not be more than 20% of the borrower's take-home pay.

Question 14

Using credit is the ideal way to meet basic living expenses.

Question 15

An individual can be overusing credit even if he or she can afford to make the minimum monthly payments on time.

Question 16

A smaller bank is more likely than a larger bank to charge an annual fee for its credit cards.

Question 17

Credit cards with very low minimum payment requirements are in the consumers' best interest.

Question 18

Obtaining a small loan, even if you don't need one, and then repaying it promptly is a good way to establish credit.

Question 19

An unsecured personal credit line is a form of revolving credit.

Question 20

The key to creditworthiness is to maintain your debt safety ratio at 50% or above.

Question 21

A credit card user's credit rating will be hampered if he or she pays only the minimum monthly payment on a credit card.

Question 22

The intent of the Wage Earner Plan is to eliminate all of a debtor's obligations.

Question 23

Your credit bureau file often includes information about your political and religious affiliations.

Question 24

Which of the following is a major reason why people use credit?

A) Weekly purchase of food
B) Monthly payment of utility bills
C) Regular payment of small cash outlays
D) Frequent impulse purchases
E) Occasionally for convenience

Question 25

A proper use of open account credit would be to buy:

A) food.
B) a washing machine.
C) expensive wine.
D) a designer purse.
E) jigsaw puzzles.

Question 26

A cost-effective method of reducing debt is to use a private credit counselor.

Question 27

It is necessary to give your Social Security number for identification when using a credit card.

Question 28

If you are expecting difficulties in making your payments, it is recommended that you:

A) talk to the creditors.
B) declare bankruptcy.
C) file a legal complaint.
D) obtain more credit.
E) transfer your debt to another creditor.

Question 29

Most lenders immediately will _____ the first time that you have difficulty meeting your loan payments.

A) double your interest rate
B) file a legal case
C) grant an extension
D) erase your debt
E) repossess the property you purchased

Question 30

The average filer of personal bankruptcy has low income, is between 25 and 34 years old, and has no college-level education.

Question 31

An individual who has a steady source of income and a reasonable chance to repay debts would choose Chapter 13 rather than Chapter 7 of the U.S. Bankruptcy Code.

Question 32

An improper use of extended credit is buying:

A) a car.
B) a house.
C) an expensive dinner.
D) a piece of land.
E) furniture.

Question 33

Credit card issuers must disclose to credit applicants the annual percentage rate (APR) that they charge.

Question 34

Which of the following is the best way to build a strong credit history?

A) Use a debit card on a regular basis
B) Regularly use credit cards to buy on impulse
C) Consistently make payments on time
D) Use one form of credit to make payments on other debt
E) Obtain a loan and pay it off in as few payments as possible

Question 35

Which of the following is an improper use of credit?

A) Buying a home
B) Buying a short-lived good
C) Spreading payments within a budget
D) Purchasing a big-ticket item
E) Meeting a financial emergency

Question 36

It is good to use credit for:

A) buying groceries.
B) dining at a restaurant.
C) buying a car.
D) visiting a tourist destination.
E) paying rent for your home.

Question 37

The "5 Cs of Credit" are:

A) character, capacity, collateral, cash flow, and condition.
B) character, cash flow, collateral, capital, and condition.
C) character, capacity, collateral, capital, and convenience.
D) character, capacity, compensation, capital, and condition.
E) character, capacity, collateral, capital, and condition.

Question 38

You should not give your credit card account number over the phone to people or organizations who call you.

Question 39

The majority of persons filing for bankruptcy choose Chapter 7 of the U.S. Bankruptcy Code.

Question 40

If you initiated the telephone call, it is okay to give your credit card account number when ordering or purchasing from major catalog houses, airlines, hotels, and so on.

Question 41

Nancy's take-home income is $3,000 per month, and she currently has a $700 monthly consumer debt. Which of the following statements applies to Nancy's ability to handle additional debt?

A) Nancy cannot take on additional consumer debt because her debt safety ratio is higher than lenders' guidelines.
B) Nancy can take on additional consumer debt because her debt safety ratio is higher than lenders' guidelines.
C) Nancy cannot take on additional consumer debt because her debt safety ratio is lower than lenders' guidelines.
D) Nancy can take on additional consumer debt because her debt safety ratio is lower than experts' guidelines.
E) Nancy cannot take on additional consumer debt because her debt safety ratio is lower than experts' guidelines.

Question 42

Lenders' guidelines say that you are likely to have financial difficulties if your personal credit obligations exceed _____ of your take-home pay.

A) 15%
B) 20%
C) 10%
D) 3%
E) 25%

Question 43

Mike has a MasterCard with an annual fee of $25, an 18% interest rate, and a $1,000 credit limit. He always pays the total outstanding balance monthly. His most recent monthly statement lists the previous month's payment, new charges in the current month totaling $1,500, and a $30 fee. The fee is most likely the result of:

A) interest charges.
B) his annual fee.
C) an over-the-limit fee.
D) a late payment.
E) transaction fees on purchases.

Question 44

Any credit card purchase will effectively be an interest-free loan if you have a zero balance when the grace period begins and you:

A) pay for the purchase within 6 months.
B) make the minimum payment.
C) pay off the entire balance on or before the due date.
D) pay a $5 fee or 3% of the amount charged.
E) receive a cash advance.

Question 45

As a percent of take-home pay, monthly consumer credit payments should not exceed:

A) 25%.
B) 20%.
C) 15%.
D) 10%.
E) 5%.

Question 46

Which of the following cards provides direct access to your checking account?

A) Retail charge cards
B) Affinity cards
C) Student credit cards
D) Reward cards
E) Bank debit cards

Question 47

Which of the following cards are issued as a form of credit by department stores and oil companies?

A) Debit cards
B) Student credit cards
C) Retail charge cards
D) Affinity cards
E) Reward cards

Question 48

Retail charge cards are advantageous to merchants because:

A) they help the merchants get loans.
B) they help build consumer loyalty.
C) they help the merchants file for bankruptcy.
D) they help the merchants save taxes.
E) they help the merchants give loans to their suppliers.

Question 49

Which of the following is the correct formula for calculating the debt safety ratio?

A) Total Monthly Consumer Credit Payments ÷ Monthly Take-Home Pay
B) Monthly Take-Home Pay ÷ Total Monthly Consumer Credit Payments
C) Total Monthly Consumer Credit Payments ÷ Gross Monthly Pay
D) Gross Monthly Pay ÷ Total Monthly Consumer Credit Payments
E) Gross Monthly Pay ÷ Monthly Take-Home Pay

Question 50

_____ are targeted at people with bad credit histories.

A) Secured credit cards
B) Retail charge cards
C) Affinity cards
D) Prepaid cards
E) Unsecured personal credit lines

Question 51

A frequent flyer card can be aptly classified as a(n):

A) reward card.
B) affinity card.
C) retail charge card.
D) cash advance.
E) student credit card.

Question 52

Which of the following statements about the cash advances that the holder of a bank credit card can obtain from participating banks is true?

A) Cash advances are loans on which interest begins to accrue only when the borrower uses them to make purchases.
B) Cash advances without any limits can be withdrawn from an automated teller machine (ATM) using credit cards.
C) Cash advances obtained from the teller window at a bank are limited by the unused credit in the borrower's account.
D) Cash advances can be obtained only during the hours the bank is open.
E) Cash advances are loans obtained from an automated teller machine (ATM) using credit cards that do not allow merchandise purchases.

Question 53

James finds it difficult to manage credit but wants the convenience of using a credit card. He wants to get a card that will provide direct access to his checking account. James should get a:

A) retail charge card.
B) prepaid  card.
C) student credit card.
D) debit card.
E) reward card.

Question 54

Clare's annual gross salary is $36,000, and her after-tax income is $28,800. What is Clare's maximum recommended monthly consumer credit payment?

A) $600
B) $480
C) $450
D) $360
E) $200

Question 55

To establish credit, you should first:

A) open checking and savings accounts .
B) use credit extensively.
C) obtain a small loan.
D) pay cash for all purchases.
E) obtain a large loan from close relatives.

Question 56

With a bank credit card, you can often avoid interest charges if:

A) the account balance is paid in full every month.
B) at least half the account balance is paid every month.
C) the minimum payment is made every month.
D) the account is a revolving credit account.
E) the account balance is below the credit limit.

Question 57

A payment made using a(n) _____ is equivalent to paying by cash.

A) retail credit card
B) debit card
C) affinity card
D) reward card
E) student credit card

Question 58

Credit offered in the form of _____ is most common in department and clothing stores and other high-volume outlets, where customers are likely to make several purchases each month.

A) collateralized credit cards
B) reward credit cards
C) affinity cards
D) retail charge cards
E) student credit cards

Question 59

_____ are the credit cards issued in conjunction with a sponsoring group-most commonly some type of charitable, political, or professional organization.

A) Affinity cards
B) Retail charge cards
C) Collateralized credit cards
D) Reward credit cards
E) Secured credit cards

Question 60

If your monthly before-tax income is $2,000, and your monthly take-home pay is $1,500, your maximum monthly consumer credit payments should not exceed:

A) $600.
B) $450.
C) $400.
D) $300.
E) $200.

Question 61

Justin and Angela have a home valued at $96,000 with an outstanding mortgage of $60,000. If their lender is willing to provide a home equity loan of up to 75% of the market value of the home, how much can they borrow using a home equity loan?

A) $0
B) $12,000
C) $27,000
D) $28,000
E) $36,000

Question 62

When canceling a credit card, you should cut up the card and _____ that you are canceling your account.

A) inform the issuer in writing
B) call to inform the issuer
C) inform the credit bureau in writing
D) call to inform the credit bureau
E) inform the future lender in writing

Question 63

Which of the following forms of consumer credit is among the cheapest and offers limited tax deductions?

A) Overdraft protection lines
B) Home equity credit lines
C) Collateralized c redit cards
D) Unsecured personal credit lines
E) Affinity cards

Question 64

Chapter 7 of the U.S. Bankruptcy Code:

A) restores all the losses incurred by the borrower.
B) results in the loss of all the assets of the debtor.
C) requires the debtor to pay back the debt in the future.
D) is also referred to as "straight bankruptcy."
E) eliminates all of the financial obligations of the borrower.

Question 65

Tamara is not a big spender and rarely has a credit card balance over $500. What should Tamara look for in a credit card given the way she uses one?

A) A long grace period
B) A low interest rate
C) A high annual fee
D) No grace period
E) A high interest rate

Question 66

The FICO credit scoring system assigns points according to:

A) amounts owed.
B) marital status.
C) employment history.
D) salary.
E) where you live.

Question 67

Which of the following is not requested in a typical credit card application?

A) Existing charge accounts
B) Housing
C) Employment
D) Income
E) Political affiliations

Question 68

A person who pays off his credit balance every month should look for a credit card with a:

A) long grace period.
B) high annual fee.
C) high interest rate.
D) low interest rate on existing balance.
E) low introductory rate.

Question 69

The decision about whether or not to grant you credit will be made by:

A) individual creditors.
B) local credit bureaus.
C) the credit cardholder.
D) the Federal Trade Commission (FTC).
E) national credit bureaus.

Question 70

If a borrower has a high FICO score, then there is:

A) a minimal chance of his or her loan getting approved.
B) no chance of his or her loan getting approved.
C) a high chance of having higher monthly payments for his or her loan.
D) a high chance of more collateral requirements for his or her loan.
E) a high chance that a lower interest rate will be charged for his or her loan.

Question 71

A(n) _____ is a type of reporting agency that collects and sells credit information about individual borrowers.

A) credit bureau
B) consumer bureau
C) insurance company
D) bank
E) credit scoring house

Question 72

If the information in an individual borrower's credit report contains an error, he or she is entitled to:

A) request a correction.
B) sue the credit bureau.
C) erase the credit report.
D) refuse to provide credit information.
E) withdraw from the credit bureau.

Question 73

Which of the following does a lender look at before granting credit to an applicant?

A) The applicant's political interests
B) The applicant's circle of friends
C) The applicant's age
D) The applicant's religious affiliations
E) The applicant's career goals

Question 74

Janey makes frequent small purchases and pays off the total outstanding balance on her credit card every month. Which of the following features is most attractive to her when searching for a credit card provider?

A) A low required minimum payment percentage
B) A high interest rate
C) A high over-the-limit fee
D) No grace period
E) No annual fee

Question 75

William uses his bank credit card frequently; however, he always pays off the total outstanding balance on the card each month. What should William look for in a credit card given the way he uses one?

A) A low annual fee and a long grace period
B) A low annual fee and a low interest rate
C) No annual fee and a long grace period
D) No annual fee and a low interest rate
E) A high annual fee and a low interest rate

Question 76

Sheldon has a home valued at $108,000 with an outstanding mortgage of $70,000. If his lender is willing to provide a home equity loan of up to 80% of the market value of his home, how much can Sheldon borrow using a home equity loan?

A) $86,400
B) $80,000
C) $38,000
D) $30,400
E) $16,400

Question 77

_____  involves some type of debt restructuring by establishing a debt repayment schedule.

A) The Wage Earner Plan
B) Straight bankruptcy
C) Pretexting
D) Phishing
E) Skimming

Question 78

Which of the following is usually excluded from a monthly credit card statement?

A) The minimum payment
B) The payment due date
C) The type of goods purchased
D) The account activity during the current period
E) The interest rate

Question 79

The most expensive method for determining finance charges on revolving credit would be the:

A) average daily balance (ADB) method, including new purchases.
B) average daily balance (ADB) method, excluding new purchases.
C) annual percentage rate (APR) method, including new purchases.
D) annual percentage rate (APR) method, excluding new purchases.
E) annual percentage rate (APR) method, excluding new purchases for student credit cards.

Question 80

Which of the following components carries the most weight in deriving a FICO score?

A) Length of credit history
B) Payment history
C) Different types of credit uses
D) Amounts owed
E) New credit