Types of Credit Review

Which statement is true of both debit AND credit cards

• 1. Both can trap you in an endless cycle of debt if you’re not careful

• 1. Both allow you to make purchases in a store or online

• 1. Both typically have interest rates between 10-30%

• 1. Both require you to pay a minimum monthly payment when your bill arrives

2. Felix opens a credit card with no annual fee, so he assumes that using the credit card regularly will be absolutely free for the next two years while he finishes grad school. Why is his assumption incorrect?

• 1. Unless he pays the whole bill every month, he will pay interest according to his APR

• 1. He will automatically pay penalty fees if he uses his credit card for more than 3 consecutive months

• 1. If his grace period is any longer than 10 days, he will have to pay fees

• 1. He will need to pay a separate student fee because he is still in grad school

3. If you buy a $1000 bicycle, which credit card payoff strategy will result in your paying the LEAST total amount?

• 1. Pay the minimum monthly payment

• 1. Pay $100 per month for 10 months

• 1. Pay $250 per month until it’s paid off

• 1. Don’t make any payments until you have the full $1000 saved, regardless of how long that takes

1. Which word represents the total cost of the item you’re purchasing on credit minus any down payment you make upfront?

• Principal

• Term

• Interest Rate

• APR

2. Each of the following represents an installment loan EXCEPT…

• 1. Home mortgage

• 1. Auto loan

• 1. Student loan

• 1. Credit card

3. Which of these actions would most likely decrease a person’s net worth for at least the next 6 months?

• 1. Use a loan to buy a brand new car

• 1. Work 10 hours of overtime each week and put all extra earnings into a savings account

• 1. Work 10 hours of overtime each week and use all extra earnings to pay down student loan debt

• 1. Open 3 new credit cards but don’t spend any money on them

1. As you move through your payment schedule on an amortized loan, what will happen to the interest portion of each month’s payment?

• 1. The interest portion will grow

• 1. The interest portion will shrink

• 1. The interest portion will stay the same

• 1. The interest portion will sometimes grow and sometimes shrink

2. It’s time for Roxanne to start repaying her student loans, which are amortized over the next ten years. Her first month’s payment due is $396. How much should she expect to owe next month?

• 1. Substantially less than $396

• 1. Slightly less than $396

• 1. Exactly $396

• 1. Slightly more than $396

3. You’re debating whether to buy a trendy fall jacket that costs a whopping $200! You have it sitting in your online cart, and you see there’s a “Buy Now, Pay Later” option available for the jacket. Which best describes an example of how that would work?

• 1. You pay the full $200 now, but they wait a month to send it to you, giving you the chance to cancel, penalty free, if you change your mind

• 1. You pay $100 right now, you receive the jacket, and you owe $100 more a year later on the anniversary of your purchase date

• 1. They ship you the jacket now, and you owe four $50 payments, once every 2 weeks, until the jacket is paid in full

• 1. You reserve the jacket now, you pay as much or as little as you want in each payment, and when you eventually get to $200, they send you the jacket

1. Antonio has $4000 saved to use for a down payment, and he’s about to buy a car that costs $29,000. How much would you expect his loan principal to be?

• 1. $4000

• 1. $25,000

• 1. $33,000

• 1. $29,000 x his interest rate