Question 1

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?

Accepted Answer

Ben's monthly interest charge is 1.5% of $3500, which is $52.50. The minimum payment is 1.25% of $3500, which is $43.75. Since the minimum payment is less than the interest charge, none of it goes towards paying off the balance.

Question 2

Bill borrowed $3,600 and will be charged a simple interest rate of 18%.Bill will pay ________ interest for borrowing the money on April 1 and repaying the money on December 31.

Accepted Answer

Simple interest is calculated using the formula I = PRT, where I is the interest, P is the principal amount ($3,600), R is the annual interest rate (18% or 0.18), and T is the time in years. From April 1 to December 31 is 9 months, or 9/12 of a year. Thus, I = $3,600 * 0.18 * (9/12) = $486.

Question 3

What is the interest cost and the total amount due on a six-month loan of $1,500 at 13.2% simple annual interest?

Accepted Answer

To find the interest cost, we use the formula I = PRT, where P is the principal ($1,500), R is the interest rate (13.2%), and T is the time in years (6 months = 0.5 years).
I = 1500 x 0.132 x 0.5 = $99
To find the total amount due, we add the interest cost to the principal.
Total amount due = $1,500 + $99 = $1,599
Therefore, the best choice is B.

Question 4

Assuming you were charged simple interest of 5% on a loan of $1,000 that requires you to repay in two payments,one at the end of the first six months and one at the end of the second six months,total payments on the loan would be

Accepted Answer

Simple interest is calculated as $I = P \times r \times t$, where $P$ is the principal amount ($1,000), $r$ is the annual interest rate (5% or 0.05), and $t$ is the time in years. For a 6-month period, $t$ is 0.5 years. The interest for each 6-month period is $1000 \times 0.05 \times 0.5 = $25$. Over two 6-month periods, the total interest is $2 \times $25 = $50$. Therefore, the total repayment is the principal plus the total interest, which is $1000 + 50 = $1050$. However, none of the options exactly match this calculation, suggesting a possible mistake in my explanation or a misunderstanding of the question's conditions. Given the options, A) $1,037.50 is the closest to a reasonable calculation, assuming some misinterpretation in the interest calculation or payment structure.

Question 5

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

Accepted Answer

The previous balance method is least favorable to the cardholder because it calculates finance charges based on the previous month's balance, regardless of payments or charges made during the current billing cycle. This results in higher finance charges for the cardholder.

Question 6

If you borrowed $8,700 at 6% for one year,what would your total interest be if you are charged simple interest?

Accepted Answer

Simple interest is calculated using the formula I = PRT, where P is the principal amount ($8,700), R is the rate (6% or 0.06), and T is the time (1 year). So, I = 8700 * 0.06 * 1 = $522.

Question 7

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

Accepted Answer

This statement is false. The total annual interest is typically divided into smaller monthly or quarterly payments over the course of the loan, and the number of times the interest is paid depends on the specific terms of the loan agreement.

Question 8

The simple interest rate includes any fees charged by the creditor.

Accepted Answer

The simple interest rate only considers the percentage rate charged on the principal amount borrowed or invested, and does not include any additional fees or charges.

Question 9

APR means

Accepted Answer

APR stands for annual percentage rate. It is the annual rate charged for borrowing or the annual percentage earned through an investment and includes fees and any other extra costs associated with the transaction.

Question 10

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.

Accepted Answer

Simple interest is calculated as principal * rate * time. Here, principal = $6,000, rate = 12% (or 0.12), and time = 4 months (or 4/12 of a year). So, the interest = $6,000 * 0.12 * (4/12) = $240.

Question 11

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.

Accepted Answer

The answer of Of the three methods by which finance...

Question 12

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

Accepted Answer

Using the previous balance method, interest is charged on the average daily balance for the entire billing period, which is 30 days in this case.

For the first 15 days, the balance is $1,100. 
For the remaining 15 days, the balance is $500.

Average daily balance = ((15 x 1100) + (15 x 500)) / 30 = $800

Finance charge = Average daily balance x Monthly interest rate x Number of billing days 
= $800 x 0.025 x 30 
= $20

Therefore, the finance charge is $20. Option C is the correct answer.

Question 13

Sandy had a beginning balance on her MasterCard statement of $300.This month she had purchases of $400,payments of $300,and a $100 cash advance.To avoid interest charges,Sandy must make a payment of

Accepted Answer

The answer of Sandy had a beginning balance on her...

Question 14

Assuming you were charged simple interest on a loan of $4,900 which requires you to repay in one year $5,292,what rate of interest would you be charged? (Round interest rate to the nearest hundredth percent if necessary.)

Accepted Answer

The answer of Assuming you were charged simple interest on...

Question 15

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

Accepted Answer

The APR is not a complex formula, but rather a standardized calculation used to express the total cost of borrowing, including fees and any additional finance charges. While the calculation may involve multiple components, it is a straightforward calculation and does not require a complex formula.

Question 16

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

Accepted Answer

The amount paid on a credit card is first applied to the interest for the month, and the remainder is then applied to the balance due. This is a common practice among credit card issuers to ensure that interest charges are covered before reducing the principal balance.

Question 17

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

Accepted Answer

The previous balance method charges interest based on the balance at the beginning of the new billing period, not taking into account any new charges or payments made during the billing cycle.

Question 18

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

Accepted Answer

The answer of As of November 14,Ben has an outstanding...

Question 19

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

Accepted Answer

When you carry a balance on a credit card, interest accrues on the amount owed. This interest can quickly add up and make it more difficult to pay off the debt. It is important to stay mindful of the interest rate on your credit card and make timely payments to avoid accruing more debt.

Question 20

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

Accepted Answer

The adjusted balance method calculates interest on the balance remaining after payments are made. Ben's payment reduced his balance to $500 for half the month. The monthly interest rate of 2.5% applied to $500 results in a finance charge of $12.50.

Quiz 8: Managing Your Credit