Deck 5: Managing Consumer Credit: Credit Cards and Consumer Loans

Question 1

Which is not a type of consumer credit?

A) Debit cards
B) Credit cards
C) Car loans
D) Student loans

Answer 1

Debit cards

Question 2

Consumer finance companies offer ______ than depository institutions.

A) lower rates
B) higher rates
C) stricter credit standards
D) higher credit standards

Answer 2

higher rates

Question 3

Which is not a source for student loans?

A) Sales finance company
B) The federal government
C) Depository institution
D) Credit card

Answer 3

Sales finance company

Question 4

Borrowers who might not qualify for loans at ______ are often able to obtain loans at ______.

A) depository institutions; consumer finance companies
B) payday lenders; depository institutions
C) consumer finance companies; depository institutions
D) payday lenders; consumer finance companies

Question 5

The interest rate for a credit purchase from a ______ is likely to be lower than a similar loan charged by a_______.

A) sales finance company; consumer finance company
B) consumer finance company; sales finance company
C) pawnshop; sales finance company
D) pawnshop; consumer finance company

Question 6

Which would not be considered an open-end credit?

A) Credit card
B) Department store credit account
C) Home equity line of credit
D) Home mortgage

Question 7

A credit card issued by Home Depot is both a ______ card and ________ type of credit.

A) retail; an open-end
B) retail; a closed-end
C) bank; an open-end
D) bank; a closed-end

Question 8

Which represents the largest share of household debt in the United States?

A) Home mortgages
B) Student loans
C) Auto loans
D) Credit cards

Question 9

A _______ credit card can be used, up to your credit limit,_______.

A) retail; at any retailer
B) retail; only at the respective retailer
C) bank; only at the respective retailer
D) travel and entertainment; only at the member airlines and restaurants

Question 10

Which of the following is a benefit of consumer credit to the U.S. economy as a whole?

A) Greater household debt
B) Increased homeownership
C) Lower unemployment
D) Lower interest rates

Question 11

Ford Motor Credit, which finances Ford autos for customers, is an example of a

A) consumer finance company.
B) sales finance company.
C) retail finance company.
D) wholesale finance company.

Question 12

Which of the following is true about the relationship between your use of credit and your insurance premiums?

A) Poor credit management may result in increased insurance premiums.
B) Paying insurance premiums by credit cards reduces the amount due.
C) Insurance premiums will not be affected by your credit history.
D) Buying insurance through credit card companies may result in lower premiums.

Question 13

Which of the following statements is true regarding trends in U.S. household debt?

A) Household debt has increased at a faster rate than household income.
B) Home mortgage debt is less than half of total debt.
C) As a proportion of total household debt, student loans have declined and home equity loans have increased.
D) Credit card debt is the largest component of outstanding consumer debt.

Question 14

Payday lenders are controversial because they

A) allow people to cash their paychecks even when they do not have a bank account.
B) charge very high rates of interest.
C) are in competition with traditional lenders.
D) make it easier for undocumented workers to stay in the job market.

Question 15

What information is typically not asked for on a consumer credit application?

A) Income
B) Assets
C) Debt
D) Dependents

Question 16

What is a function of the Consumer Financial Protection Bureau?

A) Sets the maximum interest rates that can be charged on credit cards
B) Establishes standard contracts for home equity loans
C) Insures the money consumers have on deposit in large banks
D) Protects consumers from unfair or illegal lending practices

Question 17

Which of the following is not a form of revolving credit?

A) American Express card
B) Overdraft protection on a Bank America checking account
C) Wells Fargo home equity line of credit
D) Chase Visa debit card

Question 18

All of the following are risks associated with the use of credit cards except

A) increased risk of identity theft.
B) increased risk of overspending.
C) potential adverse impact on credit score.
D) ability to spread the cost of large purchases over time.

Question 19

In order to assess a prospective borrower's credit capacity, the lender will evaluate

A) the economic conditions in the area.
B) your total debt and assets.
C) your income tax rate.
D) the sources of your income and expenses

Question 20

Lenders will consider borrowers who have _______ to be less likely to default on a loan.

A) higher levels of assets
B) lower levels of assets
C) higher levels of debt
D) lower levels of income

Question 21

If you don't make payments on a secured loan as promised, a lender can

A) take any pledged collateral and resell it to pay off the loan.
B) take any of your assets and resell it to pay off the loan.
C) take any pledged collateral until you make all the missed payments.
D) attach a lien on the pledged assets.

Question 22

It is recommended that borrowers take the ____ loan they can afford, when obtaining ____ loans.

A) shortest; debt consolidation
B) longest; debt consolidation
C) highest; debt consolidation
D) highest; any

Question 23

Bankruptcy appears on your credit report ____ and may affect your ability to obtain _____.

A) for 10 years; any credit
B) for 7 years; a mortgage
C) forever; any credit
D) forever; a mortgage

Question 24

In assessing a person's creditworthiness using the Five Cs of Credit, which of the following is applicable in the category of "capacity"?

A) The income of the person applying for credit
B) The value of the asset that will secure the loan
C) The amount of other debt the applicant already owes
D) The credit score of the person applying for credit

Question 25

All of the following are reasons that credit counselors recommend using a debt consolidation loan to pay off existing consumer credit accounts, except

A) you will pay lower annual fees.
B) lenders will increase your credit card limits.
C) your monthly payment will be lower.
D) you will pay lower annual finance charges.

Question 26

Which of the following is not one of the Five C's of Credit?

A) Conditions
B) Capacity
C) Credibility
D) Capital

Question 27

When lenders evaluate your sources of income and your expenses, which of the Five Cs of Credit are they considering?

A) Capacity
B) Capital
C) Collateral
D) Character

Question 28

When you know that you cannot meet your debt obligations, you should

A) contact your creditors directly to explain the situation.
B) not contact your creditors because it will adversely affect your credit report.
C) declare bankruptcy as soon as possible.
D) use alternative lenders such as payday lenders.

Question 29

A person who agrees to take responsibility for the repayment of a loan if the primary borrower defaults are known as a

A) mentor.
B) guarantor.
C) cosigner.
D) benefactor.

Question 30

Lenders cannot deny credit based on

A) credit history.
B) debt obligations.
C) income.
D) marital status.

Question 31

Which of the following is not one of the factors considered in the FICO credit scoring system?

A) Level of debt
B) Employment history
C) Variety of debt sources
D) Length of credit history

Question 32

Which of the following FICO credit scoring factors carries the greatest weight?

A) Payment history
B) Amounts owed
C) Types of credit used
D) Length of credit history

Question 33

Negative credit information, with the exception of bankruptcies, must be removed from a credit report after ___ years.

A) 3
B) 5
C) 7
D) 10

Question 34

Which of the following is not one of the recommended solutions if you are having trouble making payments on your consumer credit?

A) Take a second job.
B) Live with your parents or other family members.
C) Transfer balances to another credit card.
D) Sell some assets.

Question 35

A strategy that starts with budgeting the absolute necessities and debt payments and then adds expenditures until there is no more cash flow is known as a

A) net sum budget.
B) pro forma budget.
C) line item budget.
D) zero-based budget.

Question 36

Which type of bankruptcy requires the liquidation of most of your assets?

A) Chapter 5
B) Chapter 7
C) Chapter 11
D) Chapter 13

Question 37

Which type of bankruptcy requires that you develop and implement a plan to repay your debts under court supervision and allows you to keep all of your assets?

A) Chapter 5
B) Chapter 7
C) Chapter 11
D) Chapter 13

Question 38

Maria has accumulated $6,000 in credit card debt and the annual rate on the card is 12%. If she wants to be able to pay it off in four years (48 months), what monthly payment will she need to make (rounded to the nearest dollar)?

A) $125
B) $158
C) $164
D) $185

Question 39

Which of the following is not correct about your consumer credit rights?

A) Lenders must provide you with full and truthful information about loans they are offering.
B) Lenders billing statements must provide you with full information about all charges made to your account.
C) Credit card interest rates cannot be increased in the first 12 months after you open an account.
D) Promotional rates, such as 0 percent interest, on new credit cards must last for at least six months.

Question 40

Lenders are required to report the ____ on all types of loans they advertise so that borrowers can easily compare borrowing costs.

A) annual percentage yield (APY)
B) annual percentage rate (APR)
C) nominal percentage rate (NPR)
D) real percentage rate (RPR)

Question 41

A smart card is similar to a _____ card but _______.

A) prepaid; can be used anywhere
B) debit; offers a credit line
C) credit; is automatically paid from your checking account
D) debit; payment is delayed until the monthly due date

Question 42

The federally regulated minimum payment on your credit card is

A) just the monthly interest due on the account for the period.
B) the monthly interest due on the account for the period and one percent of the outstanding balance.
C) the amortized value of the outstanding balance.
D) the amount of interest and fees due on the account for the period plus one percent of the outstanding balance.

Question 43

You should always pay more than the minimum monthly payment owed on your credit card because

A) it is only enough to pay the interest and fees and does not include any repayment of the outstanding balance.
B) otherwise it can take several years to fully repay the balance.
C) otherwise you will never fully repay the balance.
D) it is only enough to pay the interest and does not include any repayment of the outstanding balance.

Question 44

Which is not a mobile payment method?

A) Venmo
B) Square Cash
C) Apple Pay
D) Smart card

Question 45

If your credit card agreement gives you a grace period, no interest will accrue

A) on new charges (other than cash advances) until the due date, even if you carried a balance from the previous month.
B) during the grace period on the balance from the previous month (other than cash advances).
C) if you carried a balance from the previous month (other than cash advances).
D) on new charges (other than cash advances) until the due date, if you paid in full the prior statement balance.

Question 46

In calculating the annual percentage rate (APR) on a credit card account, the total annual finance charges include interest and

A) all annual fees.
B) late payment charges.
C) over-the-limit charges.
D) all fees and charges assessed on the account.

Question 47

The formula to calculate the APR is the

A) average loan balance divided by the total annual finance charges.
B) total annual finance charges plus annual fee divided by average loan balance.
C) total annual finance charges plus annual fee divided by outstanding loan balance.
D) outstanding loan balance divided by the total annual finance charges.

Question 48

If you borrow $10,000 and pay $1,200 in annual interest, the APR on your loan is

A) 1.0%
B) 1.2%
C) 6.0%
D) 12.0%

Question 49

Which of the following statements regarding retailers and bank credit cards is true?

A) Retailers incur a cost for accepting credit cards.
B) All retailers now accept some type of bank credit card.
C) Very few financial institutions offer credit cards
D) Retailers receive half of the credit card finance charges.

Question 50

An interest rate on credit cards that is below the market rate and is offered to new customers is known as a __________ rate.

A) teaser
B) cash advance
C) temporary
D) balance transfer

Question 51

Making the minimum payment on a credit card bill each month

A) will not significantly reduce the overall debt.
B) ensures that the balance will be repaid in the minimum time period.
C) ensures that late payment penalties will not be imposed.
D) will improve your credit score.

Question 52

For borrowers who carry a balance on their credit cards, which of the following methods essentially gives the consumer free credit from the date of purchase until the beginning of the next billing cycle?

A) Average daily balance method with a grace period
B) Average daily balance method without a grace period
C) Previous balance method
D) None of these

Question 53

Which of the following is used to calculate the finance charge in a particular billing cycle?

A) Periodic rate × Account balance owed
B) APR × Average loan balance
C) APR × Account balance owed
D) Periodic rate × Average loan balance

Question 54

The quoted annual rate on your credit card is 18%, and there is a $50 annual fee. If your account balance for the monthly billing period is $1,000, what is your finance charge?

A) $15.00
B) $15.75
C) $65.00
D) $180.00

Question 55

At the end of your credit card billing cycle (March 31), you have a balance of $2,000. On April 10, you made a $1,000 payment on the account, and on April 15, you used your card to make a purchase of $500. What is the average daily balance that will be used to calculate your finance changes for the month (rounded to the nearest dollar)?

A) $1,500
B) $1,567
C) $1,581
D) $1,633

Question 56

The grace period is the period of time before

A) interest begins to accrue on new transactions.
B) a penalty will be assessed for late payment.
C) the balance is due in full.
D) the lender will increase the interest rate on the credit card.

Question 57

You have $15,000 in credit card debt, and your APR is 14%. How much will you need to pay each month if you want to pay off the debt in three years (rounded to the nearest dollar)?

A) $513
B) $507
C) $338
D) $538

Question 58

Payments on car loans are typically ____ and _____.

A) fixed; amortizing
B) variable; amortizing
C) fixed; revolving
D) variable; revolving

Question 59

If all other factors are equal, _____will have a lower APR than _______.

A) an auto loan; a credit card
B) a credit card; an auto loan
C) a credit card; a mortgage
D) a credit card; a home equity loan

Question 60

Which consumer loan typically does not offer a variable interest rate?

A) Auto loan
B) Home equity loan
C) Mortgage
D) Credit cards

Question 61

If all other factors are equal, a(n) ____ will have a lower APR than a(n) ______.

A) simple interest loan; add-on loan
B) add-on loan; simple interest loan
C) discount interest; simple interest loan
D) discount interest; add-on loan

Question 62

Variable-rate loans usually carry lower initial interest rates than fixed-rate loans because the

A) lender has the option of raising the rate later.
B) lender does not have the option of raising the rate.
C) borrower may not receive a lower rate in the future.
D) borrower does not have the option of early payment of the loan.

Question 63

With a single-payment loan,

A) both interest and principal are repaid at maturity.
B) principal is entirely paid at the maturity.
C) amortization payments end at a predetermined period, at which time the outstanding principal is due.
D) the interest is added to the amount borrowed before the payments are calculated.

Question 64

An installment loan is considered to be in default

A) whenever a required payment is overdue.
B) when two required payments have been missed.
C) when a required payment has been missed.
D) when a principal payment has been missed.

Question 65

A secured loan gives the lender the right to

A) take certain assets or property if the loan is not repaid according to its terms in the promissory note.
B) take certain assets or property if the loan is not repaid according to state laws.
C) any assets or property if the loan is not repaid according to state laws.
D) take any assets or property if the loan is not repaid according to its terms in the promissory note.

Question 66

Home equity loans are often referred to as a

A) first mortgage.
B) second mortgage.
C) mortgage-backed security.
D) reverse mortgage.

Question 67

The maximum amount that can be borrowed with a home equity loan is

A) 75 to 90 percent of the current market value of the home less the outstanding primary mortgage.
B) 75 to 90 percent of the current market value of the home.
C) 75 to 90 percent of the outstanding primary mortgage.
D) the original mortgage amount less 75-90 percent of the current market value of the home.

Question 68

What is the income tax advantage of home equity loans?

A) Interest on home equity loans (loan amount up to $100,000) is tax-deductible.
B) Payments on home equity loans (loan amount up to $100,000) are tax-deductible.
C) Interest on home equity loans is tax-deductible only if it is used to improve the home, and the total debt on the home cannot exceed $750,000.
D) Payments on home equity loans is tax-deductible only if it is used to improve the home, and the total debt on the home cannot exceed $750,000.

Question 69

Below-market interest rates on car loans are often

A) offset by higher prices and additional fees.
B) due to trade-ins.
C) offset by longer loan maturities.
D) due to manufacturer rebates.

Question 70

In most cases, the ____the term on a consumer loan, the _____ charged.

A) longer; higher the interest rate
B) shorter; higher the interest rate
C) longer; higher the annual fee
D) shorter; lower the annual fee

Question 71

Most depository institutions use the ______ method to determine finance charges on consumer loans.

A) discount interest
B) simple interest
C) add-on interest
D) interest-only

Question 72

How do you approximate the APR on an add-on interest loan?

A) Total annual finance charges as a percentage of half the original loan amount
B) Nominal rate multiplied by the face value of the loan
C) Nominal rate multiplied by the average outstanding loan balance
D) Total annual finance charges as a percentage of the loan amount

Question 73

A balloon loan is a type of _______ that requires full repayment at a date much earlier than the amortization payment maturity.

A) installment loan
B) revolving credit
C) line of credit
D) interest-only loan

Question 74

Car loans typically have short maturities from two to seven years because

A) the economic value of the collateral for the loan declines quickly.
B) the comparative value to leases is the most competitive within that period.
C) it matches the allowable IRS limits on deductible amortization.
D) the insurable value diminishes at that point.

Question 75

When the interest owed on a loan is calculated every period on the outstanding balance, this is known as the method.

A) discount interest
B) add-on interest
C) simple interest
D) interest-only

Question 76

When the interest on a loan is calculated at the beginning of a loan based on the original amount borrowed and the number of years, this is known as the method.

A) discount interest
B) add-on interest
C) simple interest
D) amortized interest

Question 77

When real property is used as collateral to secure a loan, what legal right does the lender have on the property?

A) Deed
B) Judgment
C) Lien
D) Mortgage

Question 78

The equity in a home is defined as the

A) market value of the home.
B) market value of the home less the current home loan balances.
C) appraised value of the home less the current home loan balances.
D) appraised value of the home.

Question 79

An installment loan is a loan that requires a borrower to pay

A) periodic payments over the repayment period including both principal and interest.
B) interest at the beginning of the loan and the principal at the end of the loan period.
C) periodic payments over the repayment period equal to the loan amount divided by the number of periods.
D) interest-only payments during the repayment period and the principal at the end of the loan period.

Question 80

An acceleration clause is a loan term that requires immediate repayment of the _______ on a loan that is in default.

A) amount overdue
B) outstanding balance
C) minimum monthly payment
D) original borrowed amount