Ramsey Ch 4 Post-Test

1) Banks and lenders use credit scores to determine...

the likelihood that someone is able to repay debt

2) A credit score is an indicator of how well someone pays off their debt, not how well they handle money (T/F)

true

3) Predatory lenders get their negative reputation from...

charging high fees for loans and targeting desperate people

4) your greatest tool to building wealth is...

your income

5) what is the best way to avoid falling into debt?

only buy things that you can purchase with cash

6) Credit card companies charge stores a 2-3% fee for every purchase made with credit cards. This is called a(n)...

merchant fee

7) Credit card companies make the most profit from...

Charging interest to customers who only pay part of their monthly debt

8) when a homeowner takes our a home equity line of credit (HELOC), that loan can only be used for home repairs and renovations (T/F).

false

9) When looking over your credit report, it's important to make sure...

no lines of credit have been opened under your name without your knowledge

10) Car lease agreements come with a stipulation that you may pay a penalty if you...

go over the pre-established mileage cap

11) Credit isn't a wealth-building tool, it's a business that makes money for...

credit card companies, banks, and lenders

12) There are certain things, like renting a car or booking a hotel room, that you cannot do without having a credit card (T/F)

false

13) Leasing a car is a method of financing where someone...

makes monthly payments on but does not own the vehicle

14) The ______ is the total amount of the car loan, plus taxes and fees.

principle

15) Something that credit card commercials don't show you is...

people making payments for months or years on those credit card purchases

16) Which of the following part of the formula that determines a person's FICO score?

the history of payments made to lenders

17) Which is an example of an appreciating asset?

a home

18) Loans that directly help you advance in life, such as student loans, are acceptable debts (T/F)

false

19) Making purchases with a credit card means that you're borrowing money with interest, and _____ pay much higher interest rates.

rich people

20) The debt snowball method involves...

paying off debts from smallest to largest

21) Credit cards that offer flashy rewards like airline miles often...

charge a high annual fee

22) ______ require the borrower to put up collateral for the loan

secured loans

23) The smartest way to buy a car is to _________

pay for it in cash

24) When you buy with credit, you typically spend more than you would with cash or a debit card (T/F)

true

25) A car is a depreciating asset (T/F)

true

26) While it may not always appear so, the majority of Americans live paycheck to paycheck (T/F)

true

27) When you finance a new car, you will end up paying more than the sticker price

true

28) Once you turn 18, you should regularly check your credit report...

for errors or signs of identity fraud

29) How you spend and give your money...

Is a reflection of your personal values

30) What is The Second Foundation?

get out and stay out of debt

31) Explain why debt and credit are a bad idea. How could they negatively affect your life?

Having debt is bad because you don't want to always be trying to pay someone back. It prevents you from saving and investing for yourself and giving to others. It also makes the process of growing your wealth a lot slower and sometimes impossible. You should stay away from credit cards because they can lead to debt.

32) What is the danger of putting up collateral for a loan?

If you're unable to pay the loan, you can lose the asset. Depending on what that asset was, you can lose a lot of money and maybe even a place to stay or a way to get around. If you put up your house or car for collateral.

33) Explain why the importance of a good credit score is a myth.

Credit score doesn't accurately show how successful you are with your finances because it just shows how you handle debt. You can still do a lot without having a high credit score. You can still stay in a hotel, rent/buy a car, buy a house, etc.

34) List three ways the credit card industry makes money off of customers.

Credit card companies make money from interest, annual fees, and other charges like late payment fees.

35) What is the difference between an appreciating asset and a depreciating asset? Give examples of both.

Appreciating assets increase in value after you purchase it. An example of one is a house. Depreciating assets decrease in value over time. An example of one is a car.

36) Describe marketing tactics that the credit industry uses to trick people into getting into debt

They make something sound really good and like you'll save money if you decide to apply for their cards. But then it's actually more expensive for you in the long run. One example is they have a really low APR rate. For the first few months of having the credit card, the APR rate is very low. But after that time is up, the rate spikes and becomes very expensive, therefore you're spending more money than you intended and the company is making more money.

37) Explain the debt snowball method. How can it help you get out of debt?

When you start small and work your way up, it becomes less overwhelming because you're not looking at all of the money you have to pay back. You're just taking it one debt at a time. It takes longer to pay off the larger debts than the small ones so to be able to afford more later, you get rid of the smaller debts first. And over time, you will pay everything off.