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WorksheetsChapter 8 Review: Financial Pitfalls
Total questions: 53
Worksheet time: 27mins
In which of the following situations would it be MOST beneficial to hire a financial adviser?
I’m a senior in college, am about to graduate, and need to create a plan for paying off my student loans
I have a car loan, a large student loan, and a backlog of unpaid medical bills that I’m struggling to keep up with.
I’m having a hard time tracking my expenses and income, and want to establish a solid monthly budget to better manage my money.
I have a $1,250 credit card bill with a 22% interest rate that I’m trying to pay off..
Which is TRUE about the Habit Cycle?
It's relatively easy to identify the cue and reward for a habit you have.
The first step of the habit cycle is to identify the reward you're trying to satisfy.
The habit cycle includes a "reflection" step for you to determine why you developed the habit in the first place.
Knowing what reward your habit is satisfying is an essential step to replacing your habit routine with a new one.
Why can it be MORE difficult to think rationally and make wise decisions when you have LESS money?
You have a false sense of financial security when, in reality, you don’t have enough to make ends meet.
When you have less money, you are not able to handle stress and pressure well.
Having less money may make you focus only on the present situation and prevent you from making decisions that lead to a healthier financial future.
Having less money makes you extremely emotionally reactive, so you are more likely to make decisions that are financially sound.
Identify which of the following statements about financial advisers is TRUE.
All financial advisers are licensed and certified in their field.
Their services are offered for free to anyone who qualifies by opening a bank account.
Their financial compensation may NOT be tied to providing the best solution for their customers.
They’ll be able to reduce your debt substantially by applying for loan forgiveness from creditors that you yourself wouldn't be eligible for
Failing to invest your money is a financial pitfall, because...
The interest rate you can earn on your investments decrease with age, so the longer you wait, the less you'll be able to grow it.
Financial brokers may be less inclined to work with you in the future, because they use your investment history to decide whether or not to work with you.
You have less time to put in money on a regular basis and you lose the power of compounding.
Your employer may decide not to match the money you put in if you never invested any money before the age of 30.
Jeremiah wants to use his retirement savings, which have an average return of 7%, to help pay off his debts that have an average interest rate of 22%. What do you say?
"You should avoid doing this, because you're not only going to lose the money you would've made in interest, but you're likely to get hit with fees!"
"This is really financially smart, because you'll actually get to save the difference in interest!"
"Don't do it, because financial institutions will be less likely to let you open another retirement account in the future."
"Good idea - you'll likely be able to make up the money you lost by depositing larger amounts into a new retirement account in a few years."
What does it mean if a financial planner is a "fiduciary"?
Their license was revoked in the past and they earned it again by taking the certification exam.
Their standards are typically less than those of a certified financial planner.
They are working primarily on behalf of a bank, so their advice may be skewed to make more money.
They will make sure that what they are recommending is not just suitable for your situation, but is in your best interest.
All of the following explain why fraud is so prevalent EXCEPT...
Fraudsters can send the same message to multiple people anonymously at the same time.
Fraudsters often work alone and target a small number of people in their local regions.
Fraudsters can use many different types of fraud to get your money.
Fraudsters can be difficult to trace because they can be located anywhere.
Which of the following contact methods used by fraudsters would be MOST effective in getting your money?
Phone Call
Text Message
Which of the following is TRUE about fraud?
You are guaranteed to get your money if you report the fraud within 24 hours.
If you take steps to protect your personal information, fraudsters cannot steal your money.
Dealing with fraud can affect both financial and personal aspects of your life.
Fraud is always committed by people you don't know.
Samuel receives a letter in the mail saying he was entered into a drawing, he's won $10,000, and he just needs to send in the $150 he owes in taxes on the winnings in order to claim his prize. What should Samuel do next?
Ignore this offer altogether. Samuel shouldn't have to pay money to collect a prize, and taxes go to the government, not individual organizations.
Go to the organization's website and send his payment electronically, so he gets his prize more quickly.
Send the $150 in cash using the envelope provided, so that in case it's a scam, they don't get his bank account information.
Send a check for $25 with a note saying he cannot afford the full taxes now but that he'll send more later.
How do Multi-Level Marketing (MLM) companies and Pyramid Schemes differ?
Pyramid schemes are operated by a much smaller group of people while MLM companies are huge organizations.
MLM companies focus more on their sales than on recruiting new members.
MLM companies market a product using different strategies, or levels, to appeal to a broader audience.
Pyramid Schemes pay their newest recruits more money than at a MLM company.
Which of the following statements about Ponzi Schemes is FALSE?
Ponzi Schemes usually end when the organizers cash in their money and call the scheme off.
Some of the money made from a Ponzi Scheme may be paid off to early investors to give off the illusion of "profits."
Ponzi Schemes make money by convincing people to invest in something that doesn't actually exist.
Ponzi Schemes are often confused with Pyramid Schemes, but they use different tactics to scam people of their money.
Insurance fraud is when...
An insurance company refuses to cover an incident for one of its members.
An insured member takes more than 24 hours to file a claim for an incident.
Someone falsifies claims to receive benefits from the insurance company.
A person sets up a false insurance company and collects monthly fees from its members.
Which of the following sounds like a legitimate way the IRS would contact you?
You receive a phone call saying you have to pay your taxes within a certain timeframe.
You get a brochure in the mail that says you got a refund from the IRS.
You open an email saying that you are eligible for exclusive tax benefits.
You receive a notice in the mail that says you owe taxes by the federal deadline.
Danielle is trying to figure out if an email she received from her bank is legitimate. Which of the following would be a red flag?
They are offering her a $50 bonus if she calls or stops by to open a savings account there, too.
They've provided a link in order to re-verify her account information with them. When she clicks it, it asks for her account # and ATM PIN number.
They are offering a 0% intro APR on a credit card with a $1500 limit.
They are advertising their lowest rates of the season on personal loans.
What is the most common type of identity theft for people under the age of 19?
Bank Fraud
Credit Card Fraud
Employment or tax-related fraud
Loan or Lease Fraud
The following are reasons someone may try to steal your identity EXCEPT...
To apply for loans in your name and leave you responsible for their payment.
To pay down your loans or credit card debt without you knowing.
To use you identity to commit a crime or if they are arrested for a crime.
To remove money from your bank account.
Helen receives a phone call, in which an automated voice states that her credit card has been used fraudulently, and that she must enter her 16 digit credit card number, using the keypad of her phone, to clear up the error. What should Helen do next?
Push 0 or say “operator” to speak with a representative from the credit card company instead.
Enter the 16 digit card number, but don’t enter her PIN or the 3-digit code from the back of the card; without those, the 16 digits are pretty useless.
Comply immediately, as the longer a fraudulent charge stays on her credit card statement, the harder it will be to remove.
Hang up and call her credit card company using the 1-800 number on the back of her card to inquire about the issue or report the attempted phone fraud.
Which of these emails is MOST likely to be a phishing scam?
An email from your insurance company saying they’re verifying active accounts and need you to reply with the ID number from your insurance card
An email from your insurance company saying they’re verifying active accounts and need you to reply with the ID number from your insurance card
An email from your credit card company saying your monthly statement is now available online
An email from your auto loan servicer saying payment is due by the 23rd of the month
Your little sister wants to learn more about how to protect her personal information. Which step do you recommend?
Check her credit report every other year.
Look at her bank account balance six times a year.
Change her complex passwords for accounts frequently.
Communicate with her bank or credit union once a year.
Which of the following statements is TRUE about identity theft?
If you become a victim of identity theft, it is always easy to fix.
A person can be unaware that they are a victim of identity theft.
If you never use credit cards, it's impossible for your identity to be stolen.
Two factor authentication would eliminate all forms of online ID theft.
Jose has heard of many people having their identity stolen and is concerned that it might happen to him. What would you suggest he can do to keep his personal information secure?
Keep all of his credit cards in the same wallet.
Tell a trustworthy friend his passwords and bank account details in case Jose forgets them.
Secure a guaranteed promising sales by giving the company his routing and accounting number.
Discard any documents containing personal information in the recycle by shredding them.
Denise is headed to the grocery store and plans to buy her weekly groceries using her chip enabled card. What is a possible way that Denise could become an identity theft victim in this scenario?
Since chip cards are disposable, a thief could find her old card in the trash once the cashier finishes the transaction.
A skimmer on the card machine could steal her information.
When using her debit card, she accidentally clicks the "credit" option.
Another customer nearby could overhear her username and password and use it to buy their groceries.
Scenario: You've just realized that you left your wallet behind in the school gym after your volleyball game. You called the school's lost-and-found department, but they haven't found anything. You checked your bank account statement online this morning and saw that $75 have been withdrawn from your account. All of the following are good next steps EXCEPT...
Call the companies where you know fraud occurred.
Close any new accounts that may have been opened in your name.
Wait to get your credit report until you have more information.
Report a misused Social Security Number if applicable.
Which of the following represents a likely reason for a borrower to take out a payday loan?
A payday lender offers better terms and rates than their credit card.
They do not qualify for a personal loan or credit card due to poor or no credit.
Their paycheck covers all of their monthly bills and they want to go on vacation.
They want to build their credit score by going to store fronts for cash advances.
Which of the following statements about predatory loans is TRUE?
Rent-to-own total prices are comparable to those you'd find in a store.
Because payday loans have such high interest rates, they're typically used by high-income households.
Auto title loans are marketed as long-term loans, similar to a mortgage or student loan.
Many short-term lenders realize their borrowers will never be able to pay off their loans on-time, but they still lend anyway.
Jake takes out a payday loan of $300. In two weeks, he doesn't have the money to repay it in full. What is one way that Jake can escape the trapping cycle of repayment?
Jake uses his paycheck to pay the $300, and then immediately takes out another $300 at the same location to pay bills.
Jake goes to a different payday loan location and takes out a $300 loan there to pay the first payday lender back in full.
Jake sells his video game system and game ‘ and pays off the loan.
Jake pays a $45 fee for not paying his loan off and postpones the loan payment for another 2 weeks.
Which of these best represents a typical interest rate on a "predatory" loan?
0% for the first 12 months
10-25%
50-400%
Over 1000%
Jayla just moved into a new place and is looking to get a mattress and bed frame, but does not want to use a predatory loan. Which of the following choices would you recommend that she tries?
Pawn the pearl necklace her grandmother gave her.
Go to a rent-to-own store to start off with a more affordable starting price.
Use her credit card for now and pay it off after her first paycheck.
Take out a title loan on her car.
Your friends are discussing how pawn shops work and their claims are provided below. Which of your friends has a strong understanding of pawn shops?
Kennedy says that pawn shops hope you do not repay your loan so that they can sell your item.
Angie says that pawn shops offer you a fair market price for the item you are pawning and compares it to the original price that you bought the item for.
Chuck says that if you do not make your payments on time, pawn shops report you to the credit bureaus.
Aliyah says that they charge you an interest rate for each month you keep the loan and that you can reclaim your item once you've paid back the loan.
Your brother decides to get a car title loan to pay this month's rent. What kind of questions should he ask the lender?
What does my credit score have to be in order to take out this title loan?
What is the APR and how soon must I repay the money?
How many people are interested in buying a used car in this area?
Will you be able to pay my apartment directly?
Alex and Taylor are about to sit down to talk about their newly shared financial lifestyle. The following tips would be useful for them to talk about EXCEPT...
Have clear lines of communication about finances.
Keep pre-existing debt separate (such as student loans, outstanding credit card debt or car loans, etc)
Collaborate to make a written budget for joint obligations and household expenses.
Keep all money pools entirely separate.
Which of the following statements about co-signing for loans or credit is FALSE?
If the primary borrower doesn't make payments, you are responsible for making them instead.
If the primary borrower stops making payments, you can cancel the loan in order to release your obligation.
The credit score of both the primary borrower and the cosigner are impacted by the loan.
Co-signing on a loan for your family member could impact your ability to get future loans for yourself.
In which of these scenarios does cosigning for credit make the most sense?
Diamond cosigns a $50,000 loan so her neighbor can build a game room in his basement that both their kids can play in.
Elizabeth cosigns a $3000 loan for her brother, even though he's been unemployed for 3 years and has been arrested twice in the last year.
Sam, who's been struggling to make ends meet lately, cosigns a $1000 loan for his nephew to pay for books for college.
Rico cosigns a credit card with a $1000 limit for his college-age daughter, so she can start building her credit history.
You agree to cosign a bank loan for $2,000 for your sister, so that her son can get braces. Which of the following statements below is TRUE?
Your debt-to-credit ratio will go up, because you now have $2,000 more debt than you did before.
Her credit score alone will be impacted if she doesn't make payments on time.
This is the same as giving her a gift of $2000, so the loan doesn't need to be repaid.
Now you are both legally responsible for making half the payment each month.
Amelia lent her best friend, Meredith, $500 to help with bills while Meredith was out of work in October and November. They shook hands on the deal and agreed Meredith would repay Amelia by December. It's now February, and Meredith never repaid any of the money. The following options are possible for Amelia EXCEPT...
Remind Meredith about the loan, and demand she repay her by April.
Put Meredith on a payment plan, whereby she pays Amelia $50 from each paycheck until the debt is repaid.
Avoid loaning Meredith money in the future until she pays back the $500.
Report Meredith to the credit bureaus, so that this failed repayment affects her credit score.
Marcy and Victor are about to get married. Marcy unfortunately has $7,000 in credit card debt as well as $25,000 in student loans and $1,500 in a personal loan. Victor has outstanding credit and no debt other than $4,000 in student loans. Which option makes the most sense for Victor and Marcy?
Victor and Marcy can decide to combine their debt, which is a good idea, because his good credit will automatically get her better interest rates.
Victor and Marcy can decide to combine their debt, but that's probably not a good idea, because her bad credit history will decrease his score.
They will keep their debt separate, but Victor's name will have to be on any other future loan that Marcy takes out.
They will keep their debt separate, but Victor is now legally obligated to make contributions toward her monthly bills, so that the debt is repaid faster.
Which of the following statements about protecting yourself from family or friend identity theft is TRUE?
Giving your friend your Social Security number and credit card account numbers could be helpful for when you forget them yourself.
Using passwords with your birthday or address are strong ways to keep your accounts safe.
Keeping your bank statements, tax returns, and checkbooks in a locked filing cabinet is a good method to safeguard your information.
Leaving your computer on and unlocked when you have company over is useful just in case you need to access it quickly.
Your cousin Austin asks to loan money from you to pay for this month's bills. If you agree to lend Austin money, what should you do?
Get the agreement in writing with both Austin's and your signature.
Wait one year and then remind him of the amount he owes you.
Bring up the topic of giving back the money he borrowed during an argument.
Avoid talking about the loan with Austin, but talk about it with your other cousins.
Which of the following reasons why people play the lottery is FALSE?
The cost of playing is so low, compared to the huge amount of money one could win.
While the odds of winning are low, they are high enough that most people will eventually win a jackpot if they play every day.
Media representation of the lottery and its winners are one-sided, with almost no coverage of lottery losers.
There is a group mentality, where people want to play because they know that others are doing it; playing creates a sense of belonging.
Marisol has an extra $20 for spending each month. What would be the MOST financially beneficial option for Marisol's future?
Buy one lottery ticket a day in hopes of winning big.
Leave the $20 per month in her checking account, in case she needs it for monthly purchases.
Save up to buy lottery tickets every other month.
Invest $20 per month in a 401(k) or other retirement account.
Antwon is a 20 year old who just won $125 million in his state's lottery and is asking for advice on what he should do with the money. What should you say?
"Help out your family and friends by loaning them money."
"Now you can retire early and leave your current job."
"Make all of your large purchases, like a house or car, upfront, then focus on smaller purchases later."
"Create a monthly budget and consider investing your money."
Chandler justifies his lottery ticket purchases with the rationale, "Hey, I'm not wasting the money, because all the proceeds in my state go to education, and that's a worthwhile cause." What should you tell Chandler on why his lottery money might not be spent as he intends it?
States that devote lottery proceeds to education actually spend LESS on public education than states that don't use lottery funds for education.
Not enough people play the lottery to make the contributions meaningful to the state education budget.
Studies have shown that schools that receive this money spend it on unnecessary items like pizza parties and paid vacation for teachers.
The money typically goes to PRIVATE schools, not PUBLIC schools, which means that most students in the state do not benefit.
Why do many lottery winners become bankrupt after a few years?
They get caught cheating the lottery system and all of their money is taken back by the state.
They spend their money right away by gambling for more or buying luxury items immediately.
They invest their money into a savings account or 401(k).
They forget to pick up their prize at their local or state lottery office.
What happens when a lottery winner chooses to receive their prize through the annual annuity?
You receive about 60-70% of the total jackpot all at once.
Your prize has a lower face value than the lump sum because you choose to invest the money yourself.
You receive the total prize as smaller payments over 20-40 years.
You get half of your prize this year and the second half of your prize next year.
Why is there such a large difference between the estimated jackpot and cash value?
The large difference of money goes towards the state's public schools, roads, and bridges.
The estimated jackpot is the annuity option and helps protects the winner's lifestyle and purchasing power in periods of inflation, while the cash value is equal to the cash in the jackpot pool.
The large difference of money goes towards the next lottery round.
The estimated jackpot is the amount that the winner gets all at one time, while the cash value is the amount of money that the winner receives each year if they choose the annuity option.
Chapter 7 bankruptcy is when an individual or organization...
can sell their assets to pay some or all of their unsecured debts.
can pay off their debt in one, lump sum payment.
can construct a more affordable repayment plan to pay off their debts.
can keep their assets but get rid of all of their unsecured debts.
Which of the following types of debt can typically be discharged as a result of bankruptcy?
Student Loans
Mortgage
Child support payments
Personal loan from the bank
Your cousin has been struggling financially for a few years and is seriously considering filing for bankruptcy. However, he doesn't seem to have all of his facts straight. Which of his following statements reveals a common misconception about bankruptcy?
"I'm a bit worried to declare bankruptcy, because it will affect my credit score."
"Bankruptcy is a good option for me right now, because it's a free way for me to get rid of all of my debts."
"After my debts have been erased, I plan to get just one credit card a few months after I declare bankruptcy to reestablish my credit."
"I decide to declare bankruptcy, I know that it won't solve all my problems. I'll really have to focus on building better financial habits."
Chapter 13 bankruptcy is when an individual or organization...
can sell their assets to pay some or all of their unsecured debts.
can pay off their debt in one, lump sum payment.
can construct a more affordable repayment plan to pay off their debts.
can keep their assets but get rid of all of their unsecured debts.
All of the following are potential consequences of filing for bankruptcy EXCEPT...
Bankruptcy is a matter of public record, so friends, family, employers, and acquaintances could find out about your financial troubles.
You may feel emotionally or mentally like a failure.
Bankruptcy will remain on your credit report for 15-20 years.
You may be forced to give up your liquid assets, car, or valuable possessions to repay creditors.
You are trying to get a better handle on your finances and decide to see a credit counselor. What would be a red flag?
The credit counselor says that they are a certified counselor.
The credit counselor offers to give your free advice before you even make a payment.
The credit counselor tells you that they are not a debt settlement agency.
The credit counselor promises to make your debts go away without your involvement.
