Personal Finance & Credit Lecture Review

A comprehensive set of question-and-answer flashcards covering credit, loans, credit reports, debt management, investing, insurance, identity theft, and estate planning concepts.

What is a secured loan or secured credit card?

A loan or credit card backed by collateral or a cash deposit that can be seized if the borrower fails to repay.

Give one common example of a secured loan.

A mortgage or auto loan.

What is an unsecured loan or unsecured credit card?

Credit extended without collateral; approval and limits rely mainly on the borrower’s creditworthiness.

Define collateral in lending.

Property a lender can sell to recover money if the borrower defaults.

Between what two numbers do most consumer credit scores fall?

300 and 850.

What does a higher credit score signal to lenders?

Lower risk of late or missed payments.

What is a credit limit?

The maximum balance a cardholder is allowed to carry on a credit card.

What does APR stand for and measure?

Annual Percentage Rate; the yearly cost of borrowing, including interest and fees.

Explain a credit-card grace period.

The time between the statement date and due date when no interest is charged if the balance is paid in full.

Why is compound interest bad on credit cards but good in savings?

On credit cards it makes debt grow faster; in savings it makes your money grow faster.

What is a finance charge?

The total cost of borrowing, including interest and fees.

Define periodic interest rate.

The APR divided by the number of compounding periods in a year.

What is compounding?

Earning interest on the original principal plus previously earned interest.

What information is required in a Schumer Box?

Key credit-card terms such as APRs, fees, grace period, and penalty rates.

Define the prime rate.

The benchmark rate banks charge their most creditworthy customers; many variable rates are based on it.

What typically triggers a penalty APR on a credit card?

Violating the card agreement, such as making a late payment.

What is the purpose of the Consumer Financial Protection Bureau (CFPB)?

To protect consumers from unfair, deceptive, or abusive financial practices and handle related complaints.

What is a transaction fee?

A small charge assessed to process a financial transaction, such as a credit-card purchase.

Define installment credit.

A loan repaid in fixed monthly payments over a set term, e.g., car or student loans.

How does making only the minimum payment affect credit-card debt?

It lengthens payoff time and increases total interest paid.

Name one advantage of using credit instead of cash.

Ability to cover emergencies when cash is unavailable.

Name one disadvantage of using credit instead of cash.

Interest and fees can raise the real cost of purchases.

Give one advantage of paying with cash.

No interest or financing fees— you pay only the purchase price.

Give one disadvantage of paying with cash.

No fraud or purchase-protection benefits if cash is lost or stolen.

What is the main benefit of making a down payment on a mortgage?

It reduces the loan amount and total interest paid over time.

Define default in lending.

Failure to fulfill the obligation to repay a loan.

What does it mean when property is repossessed?

The lender takes back collateral—such as a car—because the borrower missed payments.

What is foreclosure?

A lender’s legal process of taking possession of a home after mortgage payments stop.

What responsibility does a co-signer assume?

Repaying the loan if the primary borrower does not.

What is wage garnishment?

Court-ordered withholding of part of a person’s paycheck to repay debts.

How does a fixed-rate mortgage differ from an adjustable-rate mortgage (ARM)?

Fixed-rate loans keep the same interest rate for the term; ARMs allow periodic rate changes after an introductory period.

Give one benefit of a down payment on a car loan.

It may lower the interest rate and the amount you need to finance.

What is the FAFSA used for?

Applying for federal financial aid such as grants, work-study, and student loans.

Define a subsidized federal student loan.

A loan on which the government pays the interest while the student is enrolled at least half-time.

What is student-loan forbearance?

A temporary pause in payments during which interest continues to accrue due to financial hardship.

What does need-based aid mean?

Financial assistance awarded according to a student’s financial circumstances.

What is federal work-study?

A need-based program providing part-time campus or community jobs to eligible students.

How does a 529 savings plan differ from prepaid tuition?

A 529 can pay broad education costs and grow tax-advantaged; prepaid tuition locks in future in-state tuition rates.

Name the three nationwide credit bureaus.

Experian, Equifax, and TransUnion.

What is a credit report?

A document summarizing an individual’s credit history, accounts, and credit score.

List the five factors that make up a FICO score.

Payment history, amounts owed, length of credit history, new credit, and types of credit used.

What percentage of a FICO score is payment history?

35%.

Where can U.S. consumers obtain a free annual credit report?

AnnualCreditReport.com.

Under the Truth in Lending Act, what must lenders disclose?

The true cost of credit, including APR, fees, and payment schedule.

What behavior does the Fair Debt Collection Practices Act forbid?

Harassing, threatening, or deceptive tactics by debt collectors.

Define debt load.

The total amount of money a person or household has borrowed.

Name two immediate steps to start paying down debt.

Destroy or stop using credit cards and pay more than the minimum each month.

What is a payday loan and why is it risky?

A short-term loan due on your next paycheck with extremely high fees and interest, often creating a debt cycle.

How does credit counseling help debtors?

Counselors create a debt-management plan and negotiate lower payments; the client makes one consolidated payment.

What is Chapter 7 bankruptcy?

A liquidation bankruptcy in which personal assets are sold to erase eligible debt; remains on credit for 10 years.

What does it mean to diversify an investment portfolio?

Spread money across multiple assets to reduce overall risk.

Compare conservative and aggressive risk profiles.

Conservative investors accept low risk for modest returns; aggressive investors accept high risk for higher potential growth.

Define a bond.

A loan from an investor to a government or corporation that pays fixed interest over a set period.

Why are U.S. Treasury bonds considered low risk?

They are backed by the full faith and credit of the U.S. government.

What is a mutual fund?

A pooled investment that buys a diversified portfolio of stocks and/or bonds, traded once per day.

What makes an ETF different from a mutual fund?

ETFs trade on stock exchanges throughout the day like individual stocks.

Define an index fund.

A fund designed to replicate the performance of a specific market index, such as the S&P 500.

What is an annuity?

A contract with an insurance company that provides regular payments in exchange for an upfront investment.

Is real estate generally a short-term or long-term investment?

Long-term, because property values typically appreciate over many years.

To what does a capital gains tax apply?

The profit earned when an investment such as stock or real estate is sold for more than its purchase price.

How does contributing to a 401(k) lower current taxes?

Contributions are made with pre-tax income, reducing taxable earnings for the year.

Key difference between a traditional IRA and a Roth IRA?

Traditional IRA gives tax deduction now and taxes withdrawals later; Roth IRA taxes contributions now but withdrawals can be tax-free.

Define cryptocurrency.

An encrypted, decentralized digital currency exchanged online via blockchain technology.

Give one advantage and one disadvantage of cryptocurrency.

Advantage: Fast, borderless transactions and user privacy. Disadvantage: High price volatility and limited regulation, leading to fraud risk.

What technology records cryptocurrency transactions?

Blockchain.

In insurance, what is a premium?

The periodic amount paid to an insurer for coverage.

What does liability coverage on auto insurance pay for?

Injuries or property damage you cause to others in an at-fault accident.

What is collision coverage?

Insurance that pays to repair or replace your vehicle after a crash with another car or object.

What is comprehensive auto coverage?

Protection against non-collision losses such as theft, fire, or hail damage.

Name two factors that influence auto-insurance premiums.

Driver’s age and driving record (others include vehicle type and location).

Differentiate a co-payment from coinsurance.

Co-payment: fixed dollar fee per service. Coinsurance: the insured pays a percentage of covered costs.

Which government programs provide income if you cannot work due to disability?

Social Security Disability Insurance (SSDI) and, for some low-income individuals, Supplemental Security Income (SSI).

Define identity theft.

The fraudulent use of someone else’s personal information for financial gain.

What is phishing?

Fraudulent emails or messages that trick victims into revealing personal information.

Give two online habits that help protect against identity theft.

Use strong, unique passwords and shop only on secure, encrypted websites.

Which federal act made identity theft a standalone crime with up to 15 years in prison?

The Identity Theft and Assumption Deterrence Act of 1998.

What is a fiduciary?

Someone legally obligated to act in another person’s best financial interest.

What does an executor do?

Carries out a will by settling debts and distributing assets to beneficiaries.

Why is it important to discuss financial goals with loved ones?

Shared goals reduce conflict and ensure everyone works toward common financial priorities.

Where can you review a broker’s licensing and disciplinary history?

FINRA’s BrokerCheck website.