Personal Finance Exam 2 (part 2)

Ch6: True or False? Consumer credit dates back to colonial times.

True. People have borrowed for hundreds of years; farmers used credit extensively in colonial times.

Ch6: True or False? Not all economists recognize consumer credit as a major force in the American economy.

False. Economists widely recognize consumer credit as a major force in the American economy.

Ch6: Which of the following is NOT an advantage of using credit?

It does NOT increase total purchasing power. Credit lets you buy sooner, not more.

Ch6: What is a disadvantage of credit?

Misuse can create long-term financial problems.

Ch6: True or False? Closed-end credit is used for a specific purpose and involves a specific amount.

True. You borrow a set amount and pay it back over time.

Ch6: Cardholders who pay off their balances in full each month are known as:

Convenience users. They use credit cards but don't carry debt or pay interest.

Ch6: What are the 5 C's of credit?

Character, Capacity, Capital, Collateral, Conditions

Ch6: Which federal law protects consumers with credit complaints?

Truth in Lending Act. It ensures transparency by requiring disclosure of the APR and finance charge.

Ch6: Credit bureaus obtain data from which of the following?

All of these choices are correct: banks, finance companies, merchants, and credit card companies.

Ch6: The information in your credit report is used by the credit bureau to calculate your:

FICO credit score (300 to 850; higher = less risk).

Ch7: What is a drawback of borrowing from parents or family members?

It can complicate family relationships.

Ch7: Where can you often obtain medium-priced loans?

Commercial banks, federal savings banks, and credit unions.

Ch7: What is a typical characteristic of loans from consumer finance companies?

They often make a higher percentage of small loans than other lenders.

Ch7: If you want to minimize borrowing costs, what might you need to accept?

Conditions that reduce the lender's risk.

Ch7: True or False? If you pledge collateral, you will pay a higher interest rate.

False. Collateral reduces the lender's risk, so it usually LOWERS your interest rate.

Ch7: True or False? You may be able to borrow at a lower interest rate if you accept a shorter-term loan.

True. Faster repayment reduces the lender's risk.

Ch7: What method is used when more than one payment is made on a simple interest loan?

Declining balance method. Interest is charged only on the principal that's left.

Ch7: With the add-on interest method, interest is calculated on what amount?

The full amount of the original principal.

Ch7: True or False? Inflation increases the purchasing power of money.

False. Inflation DECREASES purchasing power; your money buys less.

Ch7: True or False? You can deduct the interest paid on consumer loans on your income tax return.

False. Interest on consumer loans is NOT tax deductible.

Ch7: After a debt collector calls you, when should you expect written communication?

Within 5 days.

Ch7: How many days do you have to request verification of a disputed debt?

30 days.

Ch7: What are danger signals of potential debt problems?

All of these choices are correct: using up savings, borrowing to pay old debts, going over your credit limit, being denied credit due to a credit report.

Ch7: What can excessive indebtedness result in?

All of these choices are correct: heavy drinking, neglect of children, drug abuse (also marital problems, job loss, bankruptcy).

Ch7: What is bankruptcy?

A legal process in which a debtor's assets are distributed among creditors because the debtor is unable to pay his or her debts.

Ch8: What information is required on food labels?

Ingredients.

Ch8: Cooperatives are commonly organized to sell what?

Food. A co-op is a nonprofit store owned by its members.

Ch8: Private label products are those that:

Are sold by one chain of stores (store brand, ex. Member's Mark).

Ch8: What does unit pricing use to compare prices?

A standard unit of measure.

Ch8: When comparing prices, which statement is NOT true?

Large packages are always the best buy. Check the unit price; bigger isn't always cheaper.

Ch8: What is skimpflation?

Using lower-quality materials or ingredients while prices remain unchanged.

Ch8: What is a disadvantage of leasing an automobile?

Additional costs for turning the car in early.

Ch8: How can you gather reliable information about a product?

Use an independent testing organization like Underwriters Laboratories.

Ch8: True or False? Mediation involves a legally binding decision.

False. Mediation is nonbinding; arbitration is binding.

Ch8: What is the legally binding settlement of a dispute by a third party called?

Arbitration.

Ch8: Which statement about legal aid societies is NOT true?

They are a branch of the American Bar Association. (They are independent and give legal help to people who can't afford it.)

Ch9: True or False? Financial factors, in addition to personal preferences, should be considered when choosing housing.

True.

Ch9: What is an advantage of renting for a young, single individual?

Limited maintenance and offers mobility.

Ch9: What is an opportunity cost of housing choices?

Interest earnings lost on money used for a down payment.

Ch9: True or False? Renting a house or condo often means more space but greater maintenance responsibility.

True.

Ch9: What is the average historical price-to-rent ratio?

15.

Ch9: What is an advantage of renting a residence?

Lower initial costs, because a security deposit is much less than a down payment.

Ch9: True or False? A lease is a non-binding agreement.

False. A lease is a legally binding contract.

Ch9: What is a security deposit primarily intended to cover?

The cost of any damages done to the rental unit during the lease period.

Ch9: What is one financial benefit of homeownership?

Ability to deduct property taxes and mortgage interest.

Ch9: What is a drawback of homeownership?

Limited mobility.

Ch9: The front-end ratio divides the anticipated monthly mortgage payment by what?

Monthly gross income.

Ch9: What best describes a reverse mortgage?

A loan for homeowners aged 62+ that provides tax-free income based on home equity.

Ch9: When might refinancing your mortgage be financially smart?

When market interest rates drop at least 1% below your current rate.

Ch9: Which expenses are typically paid from an escrow account? (Select all that apply)

Property taxes and homeowners insurance.