Chapter 7 Choosing a Source of Credit: The Costs of Credit Alternatives True/False Questions  1)

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Chapter 7 Choosing a Source of Credit: The Costs of Credit Alternatives

True/False Questions

 1). By evaluating your credit options, you can reduce your finance charge

2. After you have selected a product, you should buy it immediately before the store runs out of it.

3. Buying on credit is almost always cheaper than paying cash.

4. Parents or family members are often the source of least expensive loans.

5. You can often obtain medium-priced loans from commercial banks and credit unions.

6. The least expensive loans are available from finance companies and retailers.

7. Credit unions rarely offer the same range of consumer loans that banks and other financial institutions do.

8. The most expensive loans are available from finance companies, retailers, and credit c 

 

9. Borrowing from car dealers, appliance stores, department stores, and other retailers is relatively inexpensive.

10. Credit card cobranding has become popular with banks and industries.

11. Today borrowing and credit are more complex than ever.

12. Shopping for credit is not as important as shopping for an automobile, furniture, or major appliances.

13. Two key concepts that you should keep in mind when borrowing are the finance charge and the annual percentage rate.

14. Credit costs usually do not vary.

15. The finance charge is the total dollar amount you pay to use credit.

16. Borrowing $100 costs you $8 in interest. If there is a service charge of $1, the finance charge will be $10.

 

 17.The Annual Percentage Rate is the percentage cost of credit on a yearly basis.

18. If you want to reduce your borrowing costs, you may need to accept conditions that lower the risk for your lender.

19. A variable interest rate is based on fluctuating rates in the banking system, such as the prime rate.

20. With a collateral, you'll probably pay a higher interest rate on your loan.

21. You may be able to borrow at a lower interest rate if you accept a shorter-term loan.

22. The two most common methods of calculating interest are compound and simple interest formulas.

23. The most basic method of calculating interest is the compound interest calculation

 24. Simple interest is the dollar cost of borrowing money.

25. Simple interest formula is: Interest = Principal ´ Rate of interest ´ Time

26. When more than one payment is made on a simple interest loan, the method of computing interest is known as the declining balance method.

27. With the add-on interest method, interest is calculated on the full amount of the original principal.

28. The Federal Trade Commission Act requires that open-end creditors let you know how 

 29. Creditors use the same system to calculate the balance on which they assess finance charges.

30. The fairest method of calculating the interest is the adjusted balance method.

31. The fairest method of calculating interest is the previous balance method.

32. The fairest method of calculating interest is the average daily balance method.

 

 33. If creditors add finance charges after subtracting payments made during the billing period, this is called the previous balance method.

34. If creditors give you no credit for payments made during the billing period, it is called the adjusted balance method.

35. Some creditors use a two-cycle average daily balance method, which may include or exclude new purchases.

36. The Truth in Lending law does not set the interest rates or tell the creditor how to make interest calculations.

37. If you want to take advantage of the interest-free period on your credit card, you must pay your bill in full every month.

38. Inflation increases the purchasing power of money.

39. Inflation decreases the purchasing power of money.

40. You can deduct interest paid on consumer loans for state and federal income tax returns.

41. Banks often encourage you to make the maximum payment.

42. The rule of 78s formula dictates that you pay less interest at the beginning of a loan.

43. Loans for a year or less usually do not allow for a finance charge rebate.

44. The most commonly purchased type of credit insurance is credit life insurance.

45. Credit life insurance provides for the repayment of the loan if the borrower dies.

 46. Most borrowers should buy credit life insurance.

47. The consumer credit laws require that an advance notice be given before repossessing a car.

48. The Fair Debt Collection Practices Act regulates the ways debt collection agencies do business.

 

  

 49. If you are having trouble paying your bills, turn to a company that claims to offer assistance in solving debt problems.

50. Excessive indebtedness may result in heavy drinking, neglect of children, marital difficulties, and drug abuse.

51. Over-indebtedness is the nation's number two family financial problem.

52. Keeping up with the Joneses is one of the reasons for indebtedness.

53. Paying only the minimum balance each month on credit card bills is a signal of potential debt problems.

54. A Consumer Credit Counseling Service (CCCS) is a charitable, lending institution of last resort.

55. Anyone overburdened by credit obligations can phone, write, or visit a CCCS office. 

56. There is never a charge for any service provided by a CCCS.

 

 

 57. The CCCS counseling is usually free.

58. The CCCS will refinance all of your existing debts for you. You will make on monthly low payment to the CCCS.

59. In addition to CCCS, universities, credit unions, military bases, and state and federal housing authorities sometimes provide credit counseling services

60. An increasing number of bankruptcy filers are well-educated middle-class baby boomers.

61. For some debtors, bankruptcy has become an acceptable tool of credit management.

62. During the last decade, the personal bankruptcy rate has increased 20 percent annually.

63. Your only choice in declaring personal bankruptcy is a Chapter 7 bankruptcy.

64. You have two choices in declaring personal bankruptcy: Chapter 7 and Chapter 13 bankruptcy.

65. A person filing of relief under the bankruptcy code is called a bankrupt, not a debtor.

66. Chapter 7 bankruptcy is also known as straight bankruptcy.

67. Both Chapter 7 and Chapter 13 bankruptcy are considered an easy way out of debt.

68. In a straight bankruptcy many, but not all, debts are forgiven.

69. In a Chapter 13 bankruptcy, the debtor normally keeps all or most of his or her property.

70. Obtaining credit may be easier for people who file a Chapter 7 bankruptcy than a Chapter 13 bankruptcy.

71. Obtaining credit may be easier for people who file a Chapter 13 bankruptcy than a Chapter 7 bankruptcy.

72. You have the right to file your own bankruptcy case and represent yourself at all court hearings.

 

73. There are no costs involved in filing for a bankruptcy.

74. If you declare a Chapter 7 bankruptcy, you do not have to pay alimony, child support, or educational loans.

75. The majority of personal bankruptcies are filed under Chapter 13 of the U. S. bankruptcy code.

76. Personal bankruptcies have been declining in recent years.

 

Multiple Choice Questions

77. Financial institutions, the sources of credit,

A) come in all shapes and sizes.

B) play an important role in our economy.

C) offer a broad range of financial services.

D) All of the above choices are correct.

78. By evaluating your credit options, you can

A) reduce your finance charges.

B) reconsider your decision to borrow money.

C) discover a less expensive type of loan.

D) find a lender that charges a lower rate.

E) All of the above choices are correct.

 

79. Which of the following financing methods provides a float period?

A) installment loan

B) credit card

C) lump-sum loan

D) home equity line of credit

E) a loan from a relative

80. A float, as used in Chapter 7, refers to

A) an interest charged for only a few days.

B) something one enjoys in a parade.

C) a home equity loan.

D) a period when no interest is charged.

E) a lump-sum loan from a credit union.

81. Which is often the source of the least expensive loan?

A) parents or family members

B) banks

C) savings and loan associations

D) finance companies

E) loan sharks

82. One of the drawbacks of borrowing from parents or family members is that such loans are

A) more expensive.

B) never obtainable.

C) family troublemakers.

D) the least expensive.

E) illegal under the IRS code.

 

 

83. Your bankcard has an APR of 18% and there is a 2% fee for cash advances. The bank starts charging your interest on cash advances immediately. You get a cash advance of

$600 on the first day of the month. You get your credit card bill at the end of the month. What is the total finance charge you will pay on this cash advance for the month?

A) $12

B) $  9

C) $21

D) $ 0

E) None of the above.

84. The interest rate on a collateralized loan is relatively low, but one of the disadvantages of such loans is that

A) the loan must be repaid in a short period of time.

B) the assets used as collateral are tied up until the loan has been repaid.

C) the loan is difficult to obtain.

D) commercial banks do not make such loans.

E) you ruin your credit rating.

85. You can often obtain medium-priced loans from

A) parents or family members.

B) American Express.

C) Diners Club.

D) finance companies.

E) commercial banks and credit unions.

86. Membership in credit unions has been

A) growing steadily.

B) declining gradually.

C) static.

D) restricted by the Tax Reform Act of 1986.

E) restricted by state laws.

 

87. The most expensive loans are available from

A) parents.

B) friends.

C) banks.

D) finance companies.

E) credit unions.

88. If you are denied credit by a bank or a credit union, you should

A) reapply for a loan after thirty days.

B) question your ability to afford the loan.

C) run to the nearest loan shark for a loan.

D) beg your friends for a loan.

E) file a complaint with the Better Business Bureau.

89. Which federal law, passed in 1969, requires creditors to state the cost of borrowing in common language?

A) Fair Credit Reporting Act

B) Fair Credit Billing Act

C) Equal Credit Opportunity Act

D) Fair Debt Collection Practices Act

E) Truth in Lending Act

90. The total dollar amount you pay to use credit is called the

A) finance charge.

B) annual percentage rate.

C) price of the good/service purchased.

D) amortized rebate.

 

91. If you borrow $100 at 10 percent simple annual interest and repay it in one lump sum at the end of one year, you will have to pay

A) $100.

B) $105.

C) $110.

D) $115.

E) $120.

92. What is the APR for a $100 loan when the loan is paid off in 12 equal monthly payments at the stated annual interest rate of 10 percent?

A) 10 percent

B) 15 percent

C) 18.5 percent

D) 20.5 percent

E) 25 percent

93. If creditors add finance charges after subtracting payments made during the billing period, this is called the

A) APR method.

B) discount method.

C) previous balance method.

D) adjusted balance method.

E) average daily balance method. 

94. If creditors give you no credit for payments made during the billing period, this is called the

A) APR method.

B) discount method.

C) previous balance method.

D) adjusted balance method.

E) average daily balance method.

 

95. Which interest formula may be used by creditors to determine how much interest you have paid at any point in a loan?

A) simple interest formula

B) compound interest formula

C) multiple compound interest formula

D) the rule of 78s

E) the rule of 72s

96. The most commonly purchased type of credit insurance is

A) credit life insurance.

B) credit accident insurance.

C) credit health insurance.

D) credit property insurance.

E) credit disability insurance.

97. Which type of credit insurance repays your debt in the event of a loss of income due to illness or injury?

A) credit life insurance

B) credit accident and health insurance

C) credit property insurance

D) credit casualty insurance

98. Which formula dictates that you pay more interest at the beginning of the loan and pay less and less interest as the debt is reduced?

A) adjusted balance method

B) previous balance method

C) the rule of 78s

D) average daily balance

 

99. If you find that you cannot make your payments,

A) skip the town.

B) declare personal bankruptcy.

C) borrow from a loan shark to make the payment.

D) let the borrower go to a collection agency.

E) contact your creditors at once and try to work out a modified payment plan with them.

100. According to consumer affairs experts, the nation's number two family financial problem is

A) that families don't prepare their budgets.

B) over-indebtedness.

C) under-indebtedness.

D) buying too much insurance.

E) unemployment.

101. If you default on your automobile loan,

A) an advance notice to you is required before your car is repossessed.

B) no advance notice is required before repossession.

C) the federal consumer credit laws give you protection.

D) you don't have to pay the full balance due on the loan.

E) the creditor pays the towing and storage costs.

102. If you have trouble paying your bills,

A) skip the town and hope for the best.

B) turn to a company that claims to offer assistance in solving debt problems.

C) check with your local Better Business Bureau for help.

D) seek assistance from a collection agency.

E) try to solve the problem with your creditor.

103. The Federal Trade Commission enforces the

A) Truth in Lending Act.

B) Equal Credit Opportunity Act.

C) Fair Credit Billing Act.

D) Fair Debt Collection Practices Act.

E) Fair Credit Reporting Act.

104. If you receive a phone call from a debt collector,

A) hang up on him/her and pray.

B) the debt collector must follow the call with a written notice.

C) dispute the fact that you owe the money.

D) threaten the collector with a law suit.

E) contact your attorney immediately.

105. If you receive a phone call from a debt collector, he/she must send you a written notice within days.

A) 5

B) 10

C) 15

D) 20

E) 30

z

106. If you dispute the debt, within how many days must you write to the debt collector and request verification of the debt?

A) 5

B) 10

C) 15

D) 20

E) 30

107. If the debt collector does not verify the debt, you can

A) pay the debt and protect your credit rating.

B) insist that communications about the debt cease.

C) renegotiate payment terms with the creditor.

D) sue the collection agency.

108. What is the number one reason for consumer default on loans?

A) overextension of credit

B) defective goods and services

C) loss of income

D) fraudulent use of credit

E) consumer fraud

109. What is(are). the signal(s) of potential debt problems?

A) paying only the minimum balance each month

B) missing payments or paying late

C) using savings to pay normal bills

D) depending on overtime to meet normal expenses

E) All of the above are the danger signals.

110. Which one of the following is one of 16 danger signals of potential debt problems?

A) paying maximum balance due each month

B) receiving the first notice of delinquency from creditors

C) using savings to pay for major purchases

D) borrowing money to pay old debts

E) occasionally working overtime and moonlighting  

111. Excessive indebtedness can result in

A) heavy drinking.

B) a neglect of children.

C) marital problems.

D) drug abuse.

E) All of the above are possible results.

112. A Consumer Credit Counseling Service (CCCS) is affiliated with the

A) National Foundation for Consumer Credit.

B) Federal Trade Commission.

C) Better Business Bureau.

D) U.S. Consumer Protection Agency.

E) Federal Reserve Banks. 

113. Who financially supports a CCCS?

A) National Foundation for Consumer Credit

B) community-minded firms and individuals

C) Federal Reserve Banks

D) the Federal Home Loan Bank

E) taxpayers

114. Which of the following is a local organization affiliated with the National Foundation for Consumer Credit that provides debt counseling services for families and individuals?

A) Credit Bureau

B) Chamber of Commerce

C) Consumer Credit Counseling Service

D) Internal Revenue Service

E) None of the above.

 

115. Most people who are in debt over their heads are

A) criminals who take advantage of creditors.

B) living in the poverty-stricken areas.

C) expected to declare Chapter 11 bankruptcy.

D) basically dishonest people.

E) basically honest people.

116. The CCCS is basically concerned with

A) lending the money to destitute people.

B) giving debtors food and shelter.

C) helping destitute debtors to relocate in less expensive areas.

D) preventing and solving the problems related to credit overextension.

117. The CCCS aids families by

A) setting up a budget for them.

B) paying off their loans.

C) providing free basic necessities.

D) providing one month free shelter.

E) relocating them in less expensive areas.

118. The CCCS counseling is

A) quite costly.

B) usually free.

C) often useless.

D) fraught with red tape.

E) available only if you declare a bankruptcy.

119. The CCCS sometimes charges a fee if it

A) administers a debt repayment plan.

B) helps families manage their debts better.

C) sets up a realistic budget for them.

D) provides education to needy families.

 

120. In addition to the counseling services of the CCCS, nonprofit services are sometimes provided by

A) universities.

B) military bases.

C) credit unions.

D) state and federal authorities.

E) All of them may provide such services.

121. An organization that provides financial counseling is

A) Creditors Anonymous.

B) Alcoholics Anonymous.

C) Consumer Credit Counseling Service.

D) Dependents Anonymous.

E) The Internal Revenue Service.

122. Another organization that offers financial counseling is called

A) Spender Benders.

B) Spender Menders.

C) Spender Angels.

D) Spender Anonymous.

E) None of the above offers financial counseling.

123. A Consumer Credit Counseling Service (CCCS) is a

A) charity organization.

B) lending institution of last resort.

C) local, non-profit organization that provides debt counseling services.

D) governmental agency.

E) legal institution.

 

124. The Consumer Credit Counseling Service is supported by

A) Better Business Bureaus.

B) the federal government.

C) the state government.

D) the local authorities.

E) contributions from banks, credit unions, merchants, etc.

125. In a Chapter 7 bankruptcy, a person filing for relief is called a

A) bankrupt.

B) debtor.

C) dependent.

D) criminal.

126. Which bankruptcy allows a debtor with a regular income to extinguish his or her debts from future earnings or other property over a period of time?

A) Chapter 7

B) Chapter 11

C) Chapter 13

D) Chapter 15

127. During the past nine years, the personal bankruptcy rate has

A) remained constant.

B) increased annually.

C) decreased annually.

D) forced creditors to sharply curtail the number of loans. 

128. The Bankruptcy Act of 1978

A) was aimed to protect the creditors.

B) was later declared unconstitutional by the U.S. Supreme Court.

C) prevents dishonest people from declaring bankruptcy.

D) made personal bankruptcy easier.

E) made personal bankruptcy difficult.

129. In a Chapter 7 bankruptcy, a debtor

A) is required to draw up a petition listing all assets and liabilities.

B) does not have to pay a filing fee.

C) is called a "bankrupt."

D) is absolved of alimony and child support payments.

E) does not have to repay educational loans.

 

Essay Questions

 

130. What are the major sources of consumer credit?

131. What are two key concepts to keep in mind as you shop for credit?

132. What are the various methods used to calculate interest?

 

133. What are the two most common methods of calculating interest?

134. What are the four variations of simple interest formula?

135. What are the various systems creditors use to calculate the balance on which they assess finance charges?

136. What can you do if you are unable to meet your credit obligations?

137. What are the two choices in declaring personal bankruptcy?