Types of Credit - Vocabulary #1

What is an Adjustable-Rate Mortgage (ARM)?

• A mortgage with a fixed interest rate for the entire term

• A mortgage with an interest rate that changes periodically

• A mortgage with no interest rate

• A mortgage with a decreasing interest rate

Answer explanation

An Adjustable-Rate Mortgage (ARM) is defined as a mortgage with an interest rate that changes periodically, unlike fixed-rate mortgages which maintain the same rate throughout the term.

What is a 401(k) Loan?

• A loan from a bank with no interest

• A loan from your retirement savings account

• A loan from a friend with interest

• A loan from a credit card company

Answer explanation

A 401(k) loan is specifically a loan taken from your retirement savings account, allowing you to borrow against your own funds, unlike loans from banks or credit cards.

What does Amortization refer to?

• Paying off debt in a single payment

• Paying off debt over time in equal installments

• Increasing debt over time

• Ignoring debt until it is forgiven

Answer explanation

Amortization refers to paying off debt over time in equal installments, which allows borrowers to manage their payments effectively, unlike a single payment or ignoring the debt.

What is an Annual Fee in terms of credit cards?

• A fee charged monthly for using a credit card

• A fee charged yearly for having a credit card

• A fee charged per transaction on a credit card

• A fee charged only when you exceed your credit limit

Answer explanation

An Annual Fee is a charge that credit card companies impose yearly for the privilege of using their card. This distinguishes it from other fees, such as monthly or per-transaction charges.

What does Annual Percentage Rate (APR) represent?

• The monthly cost of borrowing money

• The yearly cost of borrowing money, expressed as a percentage

• The daily cost of borrowing money

• The total cost of borrowing money over the loan term

Answer explanation

The Annual Percentage Rate (APR) represents the yearly cost of borrowing money, expressed as a percentage. It provides a clear measure of the cost of a loan over a year, making it easier to compare different loan offers.

Who is an Authorized User on a credit card?

• A person legally responsible for paying the credit card bill

• A person who can use the credit card but isn't responsible for the bill

• A person who owns the credit card

• A person who issues the credit card

Answer explanation

An Authorized User can use the credit card for purchases but is not legally responsible for paying the bill. This distinguishes them from the primary cardholder, who is responsible for the account.

What is a Balance Transfer?

• Transferring money from a savings account to a checking account

• Transferring debt from one credit card to another

• Transferring a loan from one bank to another

• Transferring ownership of a credit card

Answer explanation

A balance transfer specifically refers to moving debt from one credit card to another, often to take advantage of lower interest rates. This helps manage and reduce credit card debt more effectively.

What is a Cash Advance?

• A service that allows cardholders to deposit cash into their account

• A service that allows cardholders to withdraw cash from their credit card

• A service that allows cardholders to earn cash rewards

• A service that allows cardholders to transfer cash to another account

Answer explanation

A Cash Advance is a service that allows cardholders to withdraw cash from their credit card, providing immediate access to funds, unlike other options that involve deposits or transfers.

What is a benefit of a credit card that pays the cardholder a small percentage of their net expenditures?

• Cash Back

• Interest Rate

• Annual Fee

• Credit Limit

Answer explanation

A credit card that pays a small percentage of net expenditures offers 'Cash Back' as a benefit, allowing cardholders to earn money back on their purchases, unlike options like interest rate, annual fee, or credit limit.

What type of credit card requires you to pay the balance in full each month and has no interest?

• Charge Card

• Debit Card

• Prepaid Card

• Secured Card

Answer explanation

A charge card requires you to pay the full balance each month, preventing interest charges. Unlike debit or prepaid cards, it does not draw from existing funds, and a secured card typically requires a deposit.