Unit 3 Types of Credit

1. Shira is trying to decide between getting a debit card, a prepaid debit card, and a credit card. Which statement is true?

• All 3 cards are completely different
• Debit cards and prepaid debit cards are the same
• Debit cards and credit cards are the same
• All 3 cards are completely the same

2. The average APR for a payday loan is closest to …

• 4%
• 14%
• 40%
• 400%

3. Which of the following statements comparing credit and debit cards is TRUE?

• Far more businesses accept credit cards than debit cards
• Credit cards pull money directly from your bank account, while debit cards get their money from Visa or Mastercard
• Credit card companies provide you with a monthly statement, while debit cards do not
• With debit cards, you're spending your own money at point of sale, but with credit cards, you're getting a loan that you need to pay back later

4. Which of the following is most likely to represent a fixed rate, secured debt?

• A student loan
• A credit card
• A prepaid debit card
• An auto loan

5. Which of these statements best explains why it's often a good idea to pay more than the monthly amount due on an amortized loan?

• Every time you pay extra, the lender will reduce the interest rate they're charging by a small amount
• The extra payment will be applied to the principal amount you owe, which will pay down your debt more quickly
• The extra payment will be applied to the interest you owe, which will reduce the overall cost of your loan
• Amortized loans typically have much higher interest rates than credit cards, so they're the best place to put your extra cash

6. If you are having trouble making auto loan payments and are really following a tight budget, which recommendation below represents the WORST advice?

• Find an extra source of income by taking a second job, working longer hours, or borrowing from family if they can afford to help
• Stop making payments on some of your debts so you can focus on getting the most expensive or largest debts under control
• Continue making all payments and call your lenders and see if you can negotiate lower monthly payments, lower interest rates, or longer terms
• Explore whether a free or non-profit credit counseling service could help

7. When loans are amortized, monthly payments are _______ , while the amount of your monthly payment applied to interest ________ and the amount of your monthly payment applied to the principal _______ over time.

• Constant, Increases, Increases
• Constant, Decreases, Increases
• Variable, Decreases, Increases
• Variable, Decreases, Decreases

8. Which of the following is true about fixed and adjustable-rate mortgages?

• Fixed-rate mortgages have a constant payment every month, but an interest rate that increases throughout the term of the loan
• Fixed-rate mortgages have a fixed interest rate for a few years, after which time the interest rate fluctuates according to general market conditions
• Adjustable-rate mortgages have a fixed interest rate for a few years, after which time the interest rate fluctuates according to general market conditions
• The two mortgages work the same way but are called different names depending if they come from a bank or a credit union

9. Which of these credit payback strategies would lead to the HIGHEST overall cost?

• Paying off your credit card bill in full every month
• Paying 20% of your credit card balance every month on time
• Making the minimum payment (3% of your credit card balance) every month on time
• Making the minimum payment (3% of your credit card balance) every month with an occasional late payment

10. Denise took out a payday loan for $300 in August. By February of the next year, she was able to pay back the loan, but she had spent a total of $750 doing so. What’s the most likely story of how this happened?

• The minimum monthly payment for payday loans is usually only $10 or $15, so a lot of interested accumulated
• Upfront, Denise knew there would be $450 of fees attached to the loan, but she took out the loan anyway
• Payday loans must be paid in full within two weeks, and if not, the only option is to renew the loan for a high penalty fee, which she did approximately 12 times
• Denise not only paid the $300 she owed, but she prepaid an extra $450 in case she needs another loan in upcoming months