Financial Literacy: Credit Types and Home Equity

Questions and Answers

Which of the following is an example of closed-end credit?

Automobile Loans, Credit cards, and Overdraft protection on your checking account

Automobile Loans and Overdraft protection on your checking account

Automobile Loans (correct)

Credit cards

Overdraft protection on your checking account

When compared to , _ is often more difficult to obtain.

closed-end credit; open-end credit

______________ is more common and has a _ interest rate charged by most lenders.

closed-end credit; lower

All of the following are reasons mentioned for why homeowners obtain home equity loans, except:

To pay for family vacations Signup and view all the answers

All of the following are factors that individuals should consider before obtaining a home equity loan, except:

Location of home Signup and view all the answers

What is Landon's home equity credit limit available if the market value of the home is $200,000 and he owes $90,000?

$40,000 Signup and view all the answers

What is Rachel's debt ratio if her net worth is $132,250 and liabilities equal $38,650?

0.29 Signup and view all the answers

What does Lexi's debt ratio indicate if her net worth is $110,465 and liabilities are $24,735?

For every $1 of net worth, Lexi has 22 cents of liabilities. Signup and view all the answers

According to the video, the quickest way to improve your debt-to-equity ratio is:

To pay off some of your debts. Signup and view all the answers

Which of the following is mentioned as the top identity theft issue?

Credit Card Fraud, Government Documents, and Phone or Utilities Fraud Signup and view all the answers

What should you do if your identity is stolen according to the video?

Contact the creditors for any accounts that have been tampered with or opened fraudulently. Signup and view all the answers

Study Notes

Closed-End and Open-End Credit

Closed-end credit includes specific loans such as home mortgages and automobile loans.
Open-end credit is generally more challenging to secure since it relies on the borrower's promise to repay, unlike closed-end credit.
Closed-end credit typically has a lower interest rate compared to open-end credit.

Home Equity Loans

Home equity loans can be used for various purposes, including remodeling projects, paying family medical expenses, covering educational costs, or reducing debts.
Factors to consider before obtaining a home equity loan include interest rates, lender fees, high annual fees, and the costs and risks associated with the loan.
The location of the home is not a primary factor mentioned in relation to obtaining a home equity loan.

Calculating Home Equity and Debt Ratios

For an individual with a home valued at $200,000 and an existing mortgage of $90,000, the available home equity credit limit is calculated as $40,000.
Debt ratio is computed by dividing liabilities by net worth; for Rachel, this ratio is 0.29, indicating her financial leverage.
Lexi’s debt ratio is 0.22, meaning for every $1 of net worth, she has 22 cents in liabilities.

Improving Debt-to-Equity Ratio

The quickest way to enhance your debt-to-equity ratio is by paying off existing debts.

Identity Theft Awareness

The most common identity theft issues involve credit card fraud, government documents, and phone or utilities fraud.
If identity theft occurs, it is crucial to notify creditors and contact law enforcement to address fraudulent activity.

Description

This quiz explores the differences between closed-end and open-end credit. It also delves into home equity loans, their uses, and important considerations. Understand the implications of interest rates and debt ratios in managing personal finance.