Question 1

The Fair Credit Reporting Act, enacted in 1971, places limits on who can obtain your credit report.

Accepted Answer

The Fair Credit Reporting Act does place limits on who can obtain your credit report.

Question 2

The debt-to-equity ratio is calculated by dividing your total liabilities, including your mortgage, by your net worth.

Accepted Answer

The debt-to-equity ratio is calculated by dividing a company's total liabilities by its shareholder equity, not by an individual's net worth and it typically does not specifically include a mortgage unless it's in the context of a company's liabilities.

Question 3

FICO and VantageScore are two scores used by creditors to predict how likely it is that you will repay a loan.

Accepted Answer

FICO and VantageScore are both credit scoring models used by creditors to assess a borrower's creditworthiness and the likelihood that they will repay a loan.

Question 4

In the five Cs of credit, conditions refer to what will happen if the borrower does not repay the loan.

Accepted Answer

Conditions in the five Cs of credit refer to the overall economic conditions and external factors that may affect the borrower's ability to repay the loan, such as interest rates, industry trends, and government regulations. The consequences of not repaying the loan fall under the fifth C, which is collateral.

Question 5

Most information in your credit file (except bankruptcies) may be reported for only 7 years.

Accepted Answer

According to the Fair Credit Reporting Act, most negative information in your credit file, such as late payments, collections, and charge-offs, can only be reported for 7 years. However, bankruptcies can remain on your credit report for up to 10 years.

Question 6

The most expensive loans are often provided by parents or other family members.

Accepted Answer

The most expensive loans are usually provided by payday lenders or other high-interest lenders, not family members who may offer lower or no interest rates.

Question 7

The higher your FICO score, the more risk you pose to creditors.

Accepted Answer

This statement is false. The higher your FICO score, the less risk you typically pose to creditors as it indicates a history of responsible credit behavior and a higher likelihood of timely repayment.

Question 8

The Equal Credit Opportunity Act requires that a creditor not turn you down for credit based on your age as long as you are old enough to sign a legal contract, which is usually allowed at age 16.

Accepted Answer

The Equal Credit Opportunity Act prohibits discrimination based on age, but the legal age to enter into contracts is generally 18, not 16, in most jurisdictions.

Question 9

A credit file can include your spouse's name and Social Security number.

Accepted Answer

A credit file can include information about joint accounts or accounts where both spouses are authorized users. In such cases, both spouses' names and Social Security numbers may appear on the credit file.

Question 10

In the five Cs of credit, capacity refers to the borrower's trustworthiness and stability.

Accepted Answer

Capacity actually refers to the borrower's ability to repay the loan, considering their income and other debts, not their trustworthiness and stability.

Question 11

A credit card holder who pays the full balance during the grace period each month is actually getting a free loan from the credit card company.

Accepted Answer

The grace period is the time provided by the credit card company during which no interest is charged on the outstanding balance. If the credit card holder pays the full balance within the grace period, they are essentially borrowing money for free during that time.

Question 12

The least expensive loans (loans with low interest) are often provided by parents or other family members.

Accepted Answer

Loans provided by parents or other family members often have little to no interest, making them the least expensive option for borrowers.

Question 13

A secured credit card is most appropriate for someone with a strong credit history .

Accepted Answer

A secured credit card is intended for individuals with limited or bad credit history. It requires a cash deposit as collateral and typically has a lower credit limit than an unsecured card. The deposit amount usually determines the credit limit. However, it can be a useful tool for improving credit scores by demonstrating responsible credit usage.

Question 14

FICO is a better score to use than VantageScore for consumers with limited credit histories.

Accepted Answer

VantageScore can be more favorable for consumers with limited credit histories because it can score individuals with shorter credit histories more accurately than FICO, which typically requires a longer credit history to generate a score.

Question 15

Interest paid on a credit card is tax-deductible.

Accepted Answer

Interest paid on a credit card is not tax-deductible for personal expenses. It may be tax-deductible for business expenses in some cases, but for personal expenses, it is not deductible.

Question 16

Experts suggest that you spend more than 20% of your net (after-tax) income on consumer credit payments.

Accepted Answer

Experts typically recommend that you spend no more than 10-15% of your net income on consumer credit payments, so spending more than 20% would be considered excessive and could lead to financial difficulties.

Question 17

In the five Cs of credit, capital refers to the borrower's ability to pay additional debts.

Accepted Answer

Capital refers to the borrower's financial resources and assets that can be used to repay debts, not their ability to accumulate additional debts.

Question 18

In the five Cs of credit, character refers to the borrower's trustworthiness and stability.

Accepted Answer

Character is defined as the borrower's trustworthiness and stability in the five Cs of credit.

Question 19

A personal bankruptcy remains on a credit file for no more than 5 years.

Accepted Answer

A personal bankruptcy remains on a credit file for up to 7 years in most cases in the United States. It can stay on a credit report for up to 10 years in some cases, such as for certain types of bankruptcy filings.

Question 20

The easiest loans to obtain are also the least expensive.

Accepted Answer

Generally, the easiest loans to obtain are those that come with higher interest rates and fees, such as payday loans or high-interest personal loans. These loans may be easy to obtain, but they can end up costing borrowers a lot more in the long run. Loans that require more documentation and have strict eligibility criteria, such as traditional bank loans, may be more difficult to obtain but often come with lower interest rates and fees.

Quiz 5: Consumer Credit: Advantages, Disadvantages, Sources, and Costs