Question 1

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?

Accepted Answer

First, calculate 75% of the home's value: 0.75 * $96,000 = $72,000. This is the maximum amount the lender is willing to have outstanding on the home, including the existing mortgage. Since they already have a $60,000 mortgage, they can borrow up to $72,000 - $60,000 = $12,000.

Question 2

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

Accepted Answer

It is important to inform the issuer in writing when canceling a credit card to ensure that the account is properly closed and to prevent any future charges or fees. Simply cutting up the card is not enough to cancel the account.

Question 3

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

Accepted Answer

Home equity credit lines typically have lower interest rates and offer limited tax deductions as the interest paid on home equity loans is tax deductible up to a certain amount.

Question 4

Chapter 7 of the U.S. Bankruptcy Code:

Accepted Answer

Chapter 7 of the U.S. Bankruptcy Code, also known as "straight bankruptcy," results in the loss of all the assets of the debtor. However, not all debts may be discharged through Chapter 7, such as taxes, child support, and student loans.

Question 5

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?

Accepted Answer

Since Tamara rarely carries a credit card balance over $500, a low interest rate will benefit her the most to minimize the interest charges she incurs. A long grace period may not be as important since she pays off her balance quickly, a high annual fee is unnecessary and a high interest rate will only cost her more money in interest charges.

Question 6

The FICO credit scoring system assigns points according to:

Accepted Answer

The FICO credit scoring system assigns points based on amounts owed, which includes things like credit card balances, loan balances, and other outstanding debts. This makes up 30% of your credit score, making it a significant factor in your overall score. The other options listed (marital status, employment history, salary, and where you live) are not considered by the FICO credit scoring system.

Question 7

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

Accepted Answer

Political affiliations are not requested in a typical credit card application.

Question 8

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

Accepted Answer

A person who pays off their credit balance every month doesn't have to worry about interest rates but should prioritize finding a credit card with a long grace period to avoid any fees or penalties for late payments.

Question 9

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

Accepted Answer

Individual creditors are responsible for making the decision to grant credit based on their criteria and the information they obtain from credit reports and other sources.

Question 10

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

Accepted Answer

A high FICO score indicates that the borrower has a good credit history and is less risky to lend to. Thus, lenders are more likely to offer lower interest rates to borrowers with high FICO scores.

Question 11

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

Accepted Answer

Credit bureaus are reporting agencies that collect and sell credit information about individual borrowers to lenders and other businesses. This information includes credit histories, payment behavior, outstanding debt, and public records such as bankruptcies and foreclosures. This information helps lenders and businesses to make informed decisions about extending credit to consumers. Choice B, consumer bureau, is not a correct term and there is no widely recognized entity with this name. Choice C, insurance company, is not correct as their main business is selling insurance policies and they may use credit data to price insurance policies, but not sell credit information. Choice D, banks, may use credit data to evaluate loan applications, but they are not reporting agencies that collect and sell credit information. Choice E, credit scoring house, is not a common term and is not the standard nomenclature for credit reporting agencies.

Question 12

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

Accepted Answer

If there is an error in an individual borrower's credit report, they have the right to request a correction from the credit bureau. This can be done by filing a dispute and providing evidence to support the correction. It is not necessary to sue the credit bureau, erase the credit report, refuse to provide credit information, or withdraw from the credit bureau.

Question 13

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

Accepted Answer

A lender looks at factors such as an applicant's employment history, income, credit score, and age to determine their creditworthiness. The applicant's political interests, circle of friends, religious affiliations, and career goals are not relevant factors for a lender to consider.

Question 14

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?

Accepted Answer

Since Janey pays off the total balance each month, the interest rate and required minimum payment percentage are not significant factors for her. A high over-the-limit fee and no grace period can lead to extra fees and charges, which Janey wants to avoid. Therefore, the most attractive feature for her would be a credit card with no annual fee.

Question 15

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?

Accepted Answer

Since William pays off his balance each month, he doesn't need to worry about interest rates. Therefore, a card with no annual fee and a long grace period would be most beneficial for him, allowing him more time to pay off his balance without incurring any fees.

Question 16

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?

Accepted Answer

The answer of Sheldon has a home valued at $108,000...

Question 17

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

Accepted Answer

The Wage Earner Plan, also known as Chapter 13 bankruptcy, involves the debtor developing a plan to repay their debts over a period of three to five years. This involves restructuring their debts and establishing a repayment schedule.

Question 18

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

Accepted Answer

The type of goods purchased is usually excluded from a monthly credit card statement for privacy reasons. The other options (A, B, D, and E) are typically included on the statement.

Question 19

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

Accepted Answer

The average daily balance (ADB) method including new purchases tends to be the most expensive for consumers because it calculates finance charges based on the balance each day of the billing cycle, including new purchases, which can increase the overall balance on which interest is calculated.

Question 20

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

Accepted Answer

Payment history carries the most weight in deriving a FICO score, accounting for 35% of the score. The other components carry the following weights: Amounts owed (30%), Length of credit history (15%), New credit (10%), Different types of credit uses (10%).

Quiz 6: Using Credit