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Credit Unit Review

Explore the world of credit including types, terms, and responsibilities. Learn how credit works for personal financing needs.

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Credit Unit Review

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  1. Credit Unit Review

  2. The use of credit for personal or individual needs. Consumer credit

  3. The periodic charge in exchange for the use of credit. Interest or Finance Charges

  4. A one-time loan paid back over a specified period of time with payments of usually somewhat equal amounts. Closed-end credit

  5. An entity such as a bank, finance company, credit union, business or individual to whom money is owed. Creditor

  6. A right to borrow up to a specified amount of money, and where you are billed periodically based on the actual amount borrowed. Open-end credit

  7. An arrangement to receive cash, goods, and services now and to pay for them in the future. Credit

  8. True or False: A mortgage is an example of closed-end credit. True

  9. The maximum amount of money the creditor will make available to you. Line of credit or credit limit

  10. Acredit card that requires you to maintain funds in a savings account from which the credit card bank will take money if you fail to pay your card balance. A secured credit card

  11. True or False: A credit card is an example of closed-end credit. False (not borrowing a specific amount)

  12. True or False: A home equity line of credit is an example of open-end credit. True

  13. Which of the following is considered an unsecured form of credit? • A mortgage • A car loan • A computer purchased with a credit card • A home equity loan C. The computer since it was bought with a credit card

  14. The effective annual rate of interest on a loan based on a specific calculation as set forth by law. Annual Percentage Rate (APR)

  15. What is the term for someone who pays their credit card balance in full each month. Convenience user (or to banks: a deadbeat)

  16. What is the term for someone who does not pay their credit card balance in full each month, and instead incurs finance charges. A revolver

  17. Name two features a convenience user seeks in a credit card. No annual fee A long grace period

  18. What percent of your new balance do most credit card companies require you pay as a minimum each month? 2 %

  19. The minimum grace period (in days) allowed by the C.A.R.D. Act (i.e. the new credit card law) 21 days

  20. Name the single most important feature a revolver seeks in a credit card. A low interest rate

  21. What is one reason why you should check your own credit report? • To watch for identity theft • To identify errors about your credit history before you need to borrow money

  22. By law, banks cans charge whatever fees they want on credit cards, but they can’t charge more than 30% on any credit card. False (they can charge whatever fees and rates they want)

  23. What is the difference between a credit report and a credit score? • A credit report is a very detailed document about your credit history. • A FICO or credit score is a 3-digit number which provides your overall credit worthiness.

  24. What is the maximum FICO Score? 850

  25. According to the C.A.R.D. Act, how much notice must a credit card company give its customers when changing the terms of the cardholder contract? • 15 days • 45 days • 60 days • They can’t change the contract B. 45 days

  26. According to the C.A.R.D. Act, among the various credit card statement disclosures banks need to include, they must state how much must be paid each month to pay off the balance in ___ years. • 3 C. 10 • 5 D. 15 A. 3

  27. A clause in the cardholder’s contract that enabled the credit card company to increase your APR if they believed you became a higher risk. The C.A.R.D. Act now outlaws this practice. Universal Default

  28. True or False: Under the new C.A.R.D. Act, a bank must apply your payments to your balances that have the lowest rate of interest. False

  29. How many years does it take to pay off a $5,000 credit card bill at a 15% APR if you don’t incur any future charges, and pay only the minimum payment each month? • 5 years • 10 years • 15 years • 20 or more years D. Actually about 30 years (on the test the answer will always be the maximum years)

  30. How much in finance charges would you have paid on that $5,000 credit card purchase over the 30 years? • $1,500 or less • $2,500 • $3,500 • more than $4,500 D. Actually $4,800 (on the test the answer will always be the maximum amount)

  31. If your credit card is stolen or lost, and someone makes illegal charges on your card, what is the maximum amount for which you are liable if you report it in a timely fashion? $50

  32. True or False: Under the new C.A.R.D. Act, a bank can only increase your rate on future purchases not any balance outstanding before the rate increase. True

  33. True or False: The C.A.R.D. Act makes it easier for college students to obtain a credit card. False

  34. True or False: Phishing is the practice of looking through or stealing people’s garbage to find confidential personal information. False (that’s dumpster diving)

  35. True or False: There is no legal limit on the amount of interest or fees that banks can charge for a credit card. True

  36. The C.A.R.D. Act requires which of the following to be disclosed on your credit card statement? • The number of years it will take to pay your balance if you pay only the minimum. • The cumulative interest you’ll pay in that time if you pay only the minimum. • The monthly amount you’d need to pay if you want to pay off your balance in 3 years. • Whom to contact if you need credit counseling service • All of the above must be disclosed E. All of the above

  37. Let’s Play Final Jeopardy

  38. Name all the advantages and the disadvantages of having access to credit

  39. Advantages of having access to credit: • Allows you to have something now and pay for it later (e.g. home) • You can combine several purchases into 1 monthly payment • May be the only way to pay for or reserve something (hotel, car rental) • It enables you to carry less cash

  40. Disadvantage of having access to credit: • There is a cost associated with it: finance charges, late fees, etc. • The temptation to overspend • Failure to pay on time damages your financial reputation • Using some credit (such as credit cards) may be very problematic in a financial crisis such as loss of a job • More likely to be identity theft victim

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