Deck 6: Using Credit Cards: The Role of Open Credit

Question 1

Financially savvy people take advantage of the grace period on major purchases and pay the balance off in full;thus avoiding finance charges.

Answer 1

True

Question 2

Most credit cards have a ________ grace period from the date of the bill to make payments.

A) 1- to 15-day
B) 5- to 20-day
C) 21 to 25-day
D) 31- to 35-day

Answer 2

21 to 25-day

Question 3

Credit purchases made for personal needs like home mortgages or car loans are referred to as revolving credit.

Answer 3

False

Question 4

Over 70% of the 25 biggest credit card issuers do not charge annual fees.

Question 5

According to the Bankcard Holders Association of America,about 95 percent of all bank card issuers use the adjusted balance method.

Question 6

Changes to credit card policies and rates are usually announced via "bill addendums," which are notices enclosed with your bill.

Question 7

Cash advances generally require an upfront fee of 4 to 6 percent of the amount advanced.

Question 8

For the average consumer there is usually a set limit on open or revolving credit accounts.

Question 9

There is no cash advance fee when you use your credit card at an ATM machine.

Question 10

Typically,an annual fee charge ranges from $10 to $100,but the American Express Centurion Card charges a ________ annual fee-and there's also a ________ initiation fee for the first year.

A) $0; $0
B) $25; $75
C) $250; $750
D) $2,500; $7,500

Question 11

Due to compounding frequency,the actual interest rate or APY you pay is higher than the advertised interest rate or APR.

Question 12

One of the unpleasant secrets of using your credit card for a cash advance is that the APR on the cash advance is typically lower than the APR for normal purchases.

Question 13

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.

Question 14

Most credit cards offer a 31- to 35-day grace period from the date of the bill to make payments.

Question 15

The use of credit involves receiving cash,goods,or services with an obligation to pay later.Which statement is not an opening line to the use of credit in a shopper's language?

A) "Charge it."
B) "Put it on my account."
C) "Put it on my debit."
D) "I'll pay for it with plastic."

Question 16

The average daily balance method calculates interest payments based on the ending balance of the previous period.

Question 17

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.

Question 18

The ________ is the percentage of the credit card sale that the retailer owes to the credit card company.

A) retailer credit acceptance fee
B) card usage allowance
C) merchant's discount fee
D) franchise fee

Question 19

Late library fines and unpaid parking tickets can hurt your credit score.

Question 20

The main factor that determines the cost of a line of credit is the ________,which is also considered the true simple interest rate paid over the life of the loan.

A) annual merchant rate (AMR)
B) teaser rate
C) annual percentage rate (APR)
D) penalty rate

Question 21

In an emergency,you used your credit card for a $500 cash advance.You just received your statement and your total balance due is $1,859,and the cash advance was the most recent charge.You want to be sure to pay for the cash advance so you send in a payment of $700.Your credit card has an APR of 12 percent.How much of your payment will apply to the cash-advance balance?

A) Because it was the most recent charge, $500 of the payment will apply to the cash-advance balance.
B) It doesn't make any difference because the $1,859 balance includes the cash advance, the $700 payment will lower your total balance regardless, so the amount applied to the cash-advance balance is irrelevant.
C) There isn't enough information to answer the question, because the answer depends on the cash advance's interest rate.
D) None of the above

Question 22

Which method sums the outstanding balances owed each day during the billing period and divides by the number of days in the period?

A) Average daily balance
B) Previous balance
C) Adjusted balance
D) Balance calculation method
E) Simple interest

Question 23

The ________ is the interest rate you pay on your balance if you don't make your minimum payments on time.

A) penalty rate
B) late rate
C) cash advance rate
D) over-the-limit rate

Question 24

Credit cards are a form of ________ credit.

A) close ended
B) revolving
C) installment
D) service

Question 25

Sometimes retailers will give you up to a 5% discount if you pay cash for their products instead of using your credit card.Why?

A) It is just good customer service, especially for repeat customers.
B) They are getting close to their monthly charge limit and don't want to go over it.
C) They are saving on the merchants discount fee so they pass the savings on to you.
D) Its much less paper work to process cash transactions.

Question 26

Jessica always thought the grace-period feature of her credit card was a wonderful idea because her charges were interest-free during the grace period.After taking Dr.Art Keown's personal finance course,she learned this startling truth about grace periods.

A) Grace periods are actually beneficial to the credit card company.
B) There are higher fees associated with grace periods.
C) Most banks eliminate their grace period on new purchases if you don't pay your balance in full.
D) All credit cards carry a grace period.

Question 27

The Truth In Lending Act requires that all consumer credit agreements disclose the ________ in bold print?

A) Effective Annual Rate (EAR)
B) Annual Percentage Rate (APR)
C) Monthly Stated Rate (MSR)
D) Nominal Interest Rate (NIR)

Question 28

More than ________ of the 25 biggest credit card issuers do not charge annual fees.

A) 30 percent
B) 50 percent
C) 70 percent
D) 90 percent

Question 29

Typically,the credit card issuer allows you a grace period,which means

A) you do not have to make a payment during the current month.
B) you are not charged any interest during this grace period.
C) you must pay your balance off in full to benefit from the grace period.
D) interest charges are reduced during this time.
E) both B and C apply.

Question 30

Michael 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?

A) Only the penalty APR, depending on his credit card company.
B) Only the over-the-limit fee.
C) Only the late fee, since his payment will lower his balance below his credit limit.
D) 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.
E) None of the above choices accurately describes the situation.

Question 31

Changes to your credit card policies and rates are usually announced via "________";which are notices enclosed with your bill.

A) bill addendums
B) policy wards
C) bill stuffers
D) regal notices

Question 32

Bradley currently has a Visa card from his bank with the following terms: 21 percent on purchases, 25 percent on cash advances with a 3 percent cash-advance fee on the amount, and a default or penalty rate of 33 percent. His current statement shows a balance of $9,000. Lately, he has been having a hard time paying more than the minimum payment of 3 percent of his balance.
What is Bradley's minimum payment?

A) $158
B) $189
C) $270
D) $1,890

Question 33

Assume a 31-day month to calculate your average daily balance for your credit card bill.Your daily balance for the first 10 days was $1,400,for the next 10 days was $1900,and for the last 10 days was $2700.What will your average daily balance be at the end of the month?

A) $1935.48
B) $19.35
C) $193.58
D) $1.94

Question 34

According to the Bankcard Holders Association of America,about 95 percent of all bank card issuers use the

A) adjusted balance method.
B) previous balance method.
C) average daily balance method.
D) daily double balance method.

Question 35

Assuming the APR on your credit card is 24 percent and your average daily balance this month was $8,000,what will your interest or finance charges for the month be?

A) $1.92
B) $240
C) $192
D) $160

Question 36

On October 1st Joe charged $900 to his credit card,on October 10th he charged another $1,300 to his credit card,and on October 15th he charged an additional $100.His credit card charges him an Annual Percentage Rate (APR)of 18% compounded monthly.Using the Average Daily Balance Method calculate Joe's finance charge for the month of October.

A) $7.12
B) $28.16
C) $212.36
D) $523.14
E) None of the above are correct answers.

Question 37

Which of the following apply to getting a cash advance with a credit card?

A) Cash advances are available at ATM machines.
B) You begin paying interest immediately.
C) There may be a cash advance fee.
D) The interest rate may be higher than on regular purchases.
E) All of the above

Question 38

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?

A) Merchant discount fee
B) Merchant back-end charge
C) Merchant rate
D) Discount rate

Question 39

One of the unpleasant secrets about using your credit card for a cash advance is that

A) there is usually a 6 to 8 percent upfront fee on the amount.
B) the APR on the cash advance is typically lower than the APR for normal purchases.
C) payments do not apply to cash advance balances unless the balance for regular credit purchases is zero.
D) All but B apply to cash advances.

Question 40

Assuming the APR on your credit card is 18% and your average daily balance this month was $10,000,what will your interest or finance charges for the month be?

A) $180
B) $60
C) $150
D) $1.50

Question 41

Using your credit card for a cash advance in an emergency is probably a good idea.Using cash advances for non-emergencies is a terrible idea.Explain the characteristics that make cash advances very dangerous.

Question 42

Your credit card company is required to send you a notice ________ before they can increase your interest rate,change certain fees (such as annual fees,cash advance fees,and late fees),or make other significant changes to the terms of your card.

A) 1 day
B) 15 days
C) 45 days
D) 60 days

Question 43

Bradley currently has a Visa card from his bank with the following terms: 21 percent on purchases, 25 percent on cash advances with a 3 percent cash-advance fee on the amount, and a default or penalty rate of 33 percent. His current statement shows a balance of $9,000. Lately, he has been having a hard time paying more than the minimum payment of 3 percent of his balance.
What is the current APY on this credit card?

A) 21 percent
B) 22.99 percent
C) 23.14 percent
D) 24 percent

Question 44

Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR.
What is the current APY on this credit card?

A) 18%
B) 18.66%
C) 18.99%
D) 19.56%
E) None of the above

Question 45

Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR.
It is now three months later and Monty has missed two payments in a row and he is now paying the default or penalty rate on his balance.How much interest per month will Monty be accruing on his unpaid balance?

A) 18%
B) 1.5%
C) 36%
D) 3%

Question 46

Teaser rates are very low.How long do they last? Is there any real benefit in them?

Question 47

List the three primary methods used to determine interest charges on an unpaid credit card balance.

Question 48

The Credit Card Accountability,Responsibility,and Disclosure (CARD)Act established fee caps for cards.Card fees cannot total more than ________ of the initial credit limit.

A) 25 percent
B) 40 percent
C) 45 percent
D) 60 percent

Question 49

Compare and contrast the average,previous,and adjusted balance methods.

Question 50

Your credit card company is required to send you a notice 45 days before they can increase your interest rate,change certain fees (such as annual fees,cash-advance fees,and late fees),or make other significant changes to the terms of your card.

Question 51

Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR.
What will be Monty's minimum payment due?

A) $90
B) $20
C) $240
D) $1,080
E) None of the above

Question 52

Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR.
If Monty buys a new television for $800 this month and sends in a credit card payment of $1,200 when he gets his statement,how much interest will he pay on the television for the month?

A) 18%
B) 1.5%
C) None, since he paid for the television in full during the grace period.
D) None of the above answers is correct.

Question 53

Describe the three primary methods used to determine interest charges on an unpaid credit card balance.

Question 54

Which of the following is an advantage of credit cards?

A) They make it easy to lose control of spending.
B) In general they are an expensive way to borrow money.
C) They allow the consumer the ability to rent cars and make online reservations.
D) Using them means you will have less spendable money in the future.

Question 55

Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR.
When you withdraw cash from an ATM using your credit card

A) you begin paying interest immediately.
B) you are not charged any interest until after the date the payment is due.
C) the interest fee is lower than that for purchases.
D) you're using a relatively inexpensive way to borrow money.

Question 56

Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR.
Using the Adjusted Balance Method: If Monty sends in a payment for $1,000,how much will the finance charge be on his remaining balance? (Use the $6,000 balance for your calculations.)

A) $75
B) $90
C) $110
D) There is not enough information to solve this question.

Question 57

Bradley currently has a Visa card from his bank with the following terms: 21 percent on purchases, 25 percent on cash advances with a 3 percent cash-advance fee on the amount, and a default or penalty rate of 33 percent. His current statement shows a balance of $9,000. Lately, he has been having a hard time paying more than the minimum payment of 3 percent of his balance.
If Bradley buys a new game console for $560 this month and sends in a credit card payment of $950 when he gets his statement,how much interest will he pay on the game console for the month?

A) 21 percent
B) 1.75 percent
C) 3 percent
D) None, since he paid for the game console in full during the grace period.

Question 58

Bradley currently has a Visa card from his bank with the following terms: 21 percent on purchases, 25 percent on cash advances with a 3 percent cash-advance fee on the amount, and a default or penalty rate of 33 percent. His current statement shows a balance of $9,000. Lately, he has been having a hard time paying more than the minimum payment of 3 percent of his balance.
What is the APY on Bradley's default,or penalty,rate?

A) 33 percent
B) 33.50 percent
C) 38.48 percent
D) 42.96 percent

Question 59

Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR.
What advice would you give to Monty concerning his use of credit cards?

A) Learn to live within your means.
B) Learn the difference between a want and a need-gambling in Vegas is not a need.
C) Seek out a non-profit credit counseling company.
D) All of the above

Question 60

Monty currently has a Visa card from his bank with the following terms: 18% on purchases, 24% on cash advances with a 4% cash advance fee on the amount, and a default or penalty rate of 36%. His current statement shows a balance of $6,000. So far he has only taken one cash advance, withdrawing $1,000 from a casino in Las Vegas a year ago, which he has already paid off. Lately he has been having a hard time paying more than the minimum payment of 4% of his balance. The only assets he owns are a seven-year-old car and a $2,500 certificate of deposit that has a 5% APR.
What is the APY on Monty's default or penalty rate?

A) 36%
B) 36.99%
C) 42.58%
D) 48.66%

Question 61

A secured credit card is a good tool to help establish credit.

Question 62

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?

A) Their parents do not frequently pay their credit card balances for them.
B) They make more than their minimum payment each month but still tend to carry a balance on their cards.
C) They pay off all of their cards in full each month.
D) They make more than the required minimum payment on 90% of all other cards each month.

Question 63

Angela tried to use her Macy's credit card at Target but was unsuccessful because Target only accepts Target credit cards.

Question 64

Which of the following are important to convenience users of credit cards?

A) Low annual fee
B) Interest-free grace period
C) Card benefits and perks
D) Only A and B
E) All of the above

Question 65

List five components of the Credit Card Accountability,Responsibility,and Disclosure (CARD)Act.

Question 66

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

A) length of grace period.
B) annual fee.
C) APR on the unpaid balance.
D) minimum payment.
E) late payment fee.

Question 67

A convenience user doesn't really care what the APY is on their credit cards.

Question 68

List the five benefits or advantages associated with credit cards.What are the two major disadvantages?

Question 69

Your credit card company cannot increase your rate for the first 12 months after you open an account unless

A) your card has a fixed interest rate tied to an index and the index goes down.
B) your card's introductory rate expires and your rate reverts to the "go-to" rate the company disclosed when you got the card.
C) you are more than 15 days late in paying your bill.
D) all of the above.

Question 70

To a credit user,the perks and benefits are the most important determinant when choosing a credit card.

Question 71

A convenience user of credit cards is someone who pays off the credit card balance each month.

Question 72

Which of the following is a disadvantage of credit cards?

A) Allows for consumption before the purchase is fully paid for
B) Emergency use
C) Allows for online shopping
D) The finance charge that accrues on the account if not paid off in full each month

Question 73

Only Prestige or Premium credit cards offer a grace period.

Question 74

Most credit users are more interested in free benefits than low APRs.

Question 75

For the convenience credit card user the interest rate is

A) irresistible.
B) irrelevant.
C) irregular.
D) intimidating.

Question 76

Crystal tried to use her Macy's credit card at Target but was unsuccessful because her Macy's credit card is a single-purpose card and can only be used at Macy's.

Question 77

Which of the following is not a single-purpose credit card?

A) Shell Oil
B) Wells Fargo Visa
C) Toys R Us
D) Target
E) Macy's

Question 78

What is the main distinguishing feature(s)for T&E cards?

A) They do not offer revolving credit.
B) The full balance must be paid each month.
C) There is no annual fee.
D) Both A and B above
E) Both A and C above

Question 79

A single-purpose card is a credit card that can be used only at a specific company.

Question 80

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.

A) T&E
B) premium
C) affinity
D) traditional charge account
E) single-purpose